Is It Necessary To Refinance?
In the recent past, mortgage interest rates have been oscillating near their historical lows. Does this mean it is necessary to refinance?
Before rejoicing over an interest rate reduction, there are some factors you should consider to determine if it is necessary to refinance. A reduction in the interest rate does not necessarily mean that you will pay a lower monthly installment. As much as this sounds strange and unbelievable, it can happen when you refinance. This does not mean that you should not try your best to get the least interest rate possible.
Here are some facts that you should be aware of to help decide if now is the right time to begin your refinance application.
Appraisal amount
Refinancing for a primary residence differs from an investment property. For a primary residence, it is possible to get a loan amount worth 80% of the appraisal amount. For the case of an investment property, you may be required to take a loan amount of 70% of the property’s assessed value. The appraisal value of your home may be lower than the expected value regardless of property values in your area. The appraisal captures what is happening in the market in the meantime. This explains why a sale from, say six months ago, may not have the impact you anticipate. Sales for under three months within a mile from your home normally bear the most accurate values. The greatest barrier you may face in your refinance is getting your property to be assessed at the value you are looking for.
Closing Costs/Property Taxes
The greatest difference between a refinance and a purchase is the manner in which the costs are paid. Closing costs in a purchase are brought to the closing. While in most refinances, they are added to the new loan amount. You may bring the funds to the closing although very few people do so. In both cases, the closing costs are identical. Prepaid property taxes usually cost the highest during closing. The new lender then restarts your escrow account and holds a sizeable amount of property taxes. This can be as much as six-month taxes depending on the time at which you close it. Under this scenario, the new loan ends up being very high compared to the previous debt.
Decreased Equity
Equity offers various options in a pinch. For example, if you need to sell in a short period’s notice, equity allows you to go on without worrying about your bottom line. It also lets you refinance and pull out cash on the way. Considering the higher loan amount and a decrease in equity, you may have to stick to the property in case the market shifts.
Loan Terms
The most common loan term is 30 years. Before refinancing, you should consider the number of years remaining on your mortgage. If you still have a long way to go, say 22 years, you can add to this term and save money per month at the expense of more years. You, therefore, need to weigh the extra years vs monthly savings to consider a refinance.
Monthly Savings
Lower interest rates do not equal monthly savings. The higher the loan, the lower the interest rate needed to increase monthly savings. Any savings need to justify both the increase in term length and the closing costs. You also have to weigh the savings realized with your long-term plans for the home.
Short Term/Higher Payment
You may consider it necessary to refinance for a shorter term. A short-term increases your payment and reduces the rate. You may also keep the longer term but make an extra principal payment each year.
If you are considering a refinance, find an online mortgage calculator and work out your case. Use a
conservative interest rate with the estimated value. Also, get an idea of the current property values, knowing you need a higher value for an investment property. If all these check out positively, go ahead and refinance.
Summary
The aforementioned topics will help you determine if it is necessary to refinance.