Wondering about the right time to refinance a mortgage? It's important to take the time to make sure it is the prudent decision.
Q: Should we refinance? How do we know if it’s the right thing to do, or the right time to do it?
A: Many people wonder about the right time to refinance a mortgage. There are expenses involved in the refinance process, so it is important to take the time to make sure it is the prudent decision.
The following information can help you see your own situation more clearly.
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To see if refinancing makes sense, first start by determining the approximate break-even point or the number of months that it will take for you to recover the costs of refinancing. For example, let’s say you have a $200,000 fixed-rate mortgage at 5 percent with good credit, and you can refinance to a 4 percent fixed-rate loan. Let’s also assume that it will cost you $4,000 in closing costs to refinance.
In this case, you are saving approximately $2,000 a year so you would recover your costs in about two years. If you plan on keeping your home for more than two years, in this case it may make sense to refinance.
Keep in mind, however, that this is just a rule of thumb and does not factor in such things as the tax implications of mortgage interest.
To make sure you do not end up paying more in the long run, consider matching the term of the new loan with the number of months you have left to pay on your current mortgage, or an even a shorter term if you can handle the payments.
Other reasons you may want to refinance are if you have an adjustable-rate mortgage or home-equity loan that will adjust upward when interest rates rise, or if you have an FHA loan with mortgage insurance.
Perhaps you are prepping for a kitchen remodel or other project around the house; whatever the situation, in order to get cash out during the refinance process, you are going to have to have enough equity in your home. For your primary- and secondary-home properties, the maximum loan amount relative to the value of your home is 80 percent, while on investment it’s 75 percent.
For example, if you owe $100,000 and your home is appraised for $200,000, you may be able to get approximately $60,000 in cash through refinancing.
If you have purchased or refinanced a home, you know that understanding actual costs or the specific terms of your mortgage can be difficult. That, however, has changed.
The Consumer Financial Protection Bureau has established new requirements commonly referred to as “know before you owe.” Under the new requirements, you will get a loan estimate when you start the process and a closing disclosure when you close, both in a similar format. The good news is that you will easily be able to compare offers and it is much easier to understand, so don’t be afraid to shop around. With mortgages, all inquiries made within a 45-day window will only be counted as one for credit-reporting purposes.
The new regulations do have a mandatory three-day waiting period from the time the closing disclosures are delivered until you can close, so be sure to speak to a mortgage specialist about how this may impact your closing date.
Rob Walworth is the director of mortgage sales at BECU and a member of the Master Builders Association of King and Snohomish Counties, and HomeWork is the group’s weekly column. If you have a home improvement, remodeling or residential homebuilding question you’d like answered by one of the MBA’s more than 2,800 members, write to email@example.com.