Should I even consider refinancing?
The prospect of saving possibly hundreds of dollars per month is enough to make any homeowner’s wallet burst with joy. When interest rates dive and your neighbors whisper about how much money they just saved on their real estate loans, you probably think, “Hey! Refinancing – what a great idea!”
For many homeowners, refinancing is a great idea. But unless you’re planning to stay in your house for a long time, you have accumulated a significant equity stake in your home and refinancing is part of a long-term plan for financial security, it may not be wise.
When you bought your home, you likely spent thousands of dollars in fees and, while refinancing isn’t as costly as purchasing, it is still expensive. Don’t let lenders or brokers that advertise “no-fee” refinance loans fool you – they simply bump up the interest rate or add the cost of refinancing onto the loan.
If you’re planning to move in the next year or two, your monthly savings must exceed the cost of refinancing. For example, if refinancing costs $4,000 and you will only save $3,200 on the new monthly payment over two years – and you think you may move – it’s not worth it.
Also, you may not get approved. Most lenders appraise the home before agreeing to refinance and want borrowers with at least 15 or 20 percent equity. Are you willing and able to bring cash to close? If not, you may be out of luck.
The best refinance deals lower interest but shorten the length of the loan by maintaining existing payments, or save thousands of dollars with lower interest but maintain the same term (in other words, without restarting the 30-year clock).
Keep in mind that these are basic guidelines. Don’t lose hope if you don’t meet them. Contact your lender – especially if you’re struggling – because it may be able to help you anyway.