Refinancing 101: Basics Everyone Should Know


How do you know when it’s the right time to refinance your mortgage? Well, that depends: Before making a decision, you’ll want to consider several factors, including these key points.



Interest Rates Matter

If you can lower your mortgage interest rate by 1 to 2 percent, refinancing may be a sound financial move. A lower interest rate has the potential to reduce your monthly payment, freeing funds for other uses. It also means you could save a significant sum on interest payments over the life of your loan. And it may help you build equity in your home faster.

Example: A 30-year fixed-rate mortgage of $250,000 

Interest Rate

Monthly Payment (principal and interest)

6.5%

$1,580

5.0%

$1,342

Savings

$238/month, $2,856/year, $85,680 over 30 years

         

A Shorter Term May Be Possible

A refinance gives you the opportunity to change the length of your loan. For instance, with a lower interest rate, you may be able to shorten your mortgage term without dramatically changing your monthly payment. In addition, a shorter term could allow you to meet other financial goals, such as paying off your mortgage before retirement. 

Example: 

$150,000 Mortgage

Monthly Payment (principle and interest)

Total Interest Paid (over life of loan)

30-year fixed, 8%

$1,101

$246,233

15-year fixed, 5%

$1,186

$63,514

Difference

+$85

$182,719 saved

                 

You Could Change Your Mortgage Type

Perhaps you have an adjustable rate mortgage (ARM) and are nervous about potentially rising interest rates. Refinancing into a fixed rate mortgage can give you peace of mind by locking in a stable interest rate for the full term of your mortgage. 

On the other hand, if you’re in a fixed rate and expect to be in your home just a few years, refinancing into certain ARMs may allow you to take advantage of a lower introductory rate for a fixed time period. 

Refinancing Isn’t Free

While refinancing can save you money, it does involve upfront expenses. On average, you can expect to pay from 2 to 6 percent of the new loan amount in closing costs. Typically, this includes fees for your application, appraisal, inspection and establishing a new escrow account. Over time, though, you may be able to recoup those costs through savings. 

Caution: Rabobank does not have a prepayment penalty on its mortgages, but some lenders do. This fee may equal 1 to 3 percent of your outstanding balance, so read your original loan paperwork closely. 

You Still Need to Qualify

You’ll need to apply for a refinance. Your lender will take into account your income, credit score (take time to review your credit reports) and other factors. 

In general, you’ll probably also need to have at least 5 to 10 percent equity in your home to qualify for a refinance. And, due to new laws, if you don’t have at least 20 percent equity, you’ll probably be required to pay private mortgage insurance, which can cost from 0.5 to 1.5 percent of your loan amount per year. 

Look Before You Leap

Refinancing can be a sound way to manage your current cash flow and put some breathing room in your monthly budget. But it’s still a serious financial move that should be carefully considered. Your local Rabobank Mortgage Representative can answer your questions, help you evaluate your current situation and provide insight to help you make the best decision for your needs. 
Request a no-obligation consultation today

Ready to take the plunge? 
Follow these tips to ensure you get the best interest rate possible on your purchase or refinance loan. 
• Improve your credit – A higher credit score will help you land a lower interest rate. Make credit card and other payments on time, keep old accounts open to establish credit history and maintain a healthy debt-to-credit ratio. 
• Keep debt low prior to purchase – Numerous credit inquiries or large purchases may cause lenders to question your ability to make mortgage payments on time. 
• Make a large down payment – The larger your down payment, the more equity you will have in the home from the beginning. More equity means a lower risk for the lender, and you'll be rewarded with a lower interest rate.




Sources:

  1. “New Rules for Refinancing Your Home,” Pat Mertz Esswein, Kiplinger’s Personal Finance, February 2013, http://www.kiplinger.com/article/real-estate/T010-C000-S002-new-rules-of-refinancing-your-home.html, accessed Sept. 26, 2013
  2. “When (and When Not to) Refinance Your Mortgage,” Investopedia.com, posted April 27, 2011, http://www.investopedia.com/articles/pf/05/033005.asp, accessed Sept. 26, 2013
  3. “Is it time to refinance?” AnnaMaria Andriotis, MSN.com, http://realestate.msn.com/article.aspx?cp-documentid=26310805, accessed Sept. 12, 2013




The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.