Refinancing is when you get a new mortgage to replace your current one. The purpose is to obtain a better term or interest rate, and of course - to save money. If you have a high interest rate, use these ground rules to determine when it’s a good idea to refinance in the Redding real estate market.
HOW LONG DO YOU PLAN ON STAYING IN YOUR HOME?
Since the goal of refinancing is to save you money in the long run, you’ll need to consider how long you will be staying in your current home. To decide whether a refinance makes sense, calculate the break-even point, or the time it will take for the mortgage refinance to pay for itself. Use this simple formula:
Break-even point = Total closing costs / monthly savings
Example: 30 months to break even = $3,000 in closing costs / $100 a month in savings
If you plan to keep the house for more than the break-even time, you should consider refinancing.
HOW MUCH EQUITY DO YOU HAVE BUILT UP?
Homeowners need to have at least 20 percent equity in their home to qualify for a new loan without paying private mortgage insurance. Adding PMI to the cost of a new loan could cancel out the cost-savings from refinancing, so knowing your equity in the Redding real estate market is important.
"Homeowners today need to be triathletes to qualify for a loan, with great income, great credit and great value in their home," says Anthony Hsieh, founder of LoanDepot.com. "Homeowners should still apply for a refinance even if they have low equity, because there are some Fannie Mae and Freddie Mac programs and FHA loans that may accept them," Hsieh says. "The best way to find out if you fit into a program is to go to a lender."
WHAT ARE THE TERMS OF YOUR CURRENT LOAN?
Know the terms of your current loan before moving forward with making a change. Do you have an adjustable-rate or fixed-rate mortgage? What is the term? What’s your current interest rate?
One of the most popular reasons to refinance is to lower the interest rate on your existing loan. Generally, the guideline is that it’s worth the cost of refinancing if you can reduce your interest rate by at least 2%. Today, many lenders say just 1% will still result in significant savings.
Another reason for refinancing is that borrowers with adjustable-rate mortgages or interest-only loans should consider the potential benefit of switching to a fixed-rate loan. But as you can see, refinancing is a bit of a numbers game.
SHOULD YOU TAKE CASH OUT?
Lastly, people often refinance to take cash out to use towards debt, remodeling a home, or to pay bills. This could be a good idea if for example the interest rate on your credit card is greater than the interest rate on your mortgage.
Keep in mind that your credit score is perhaps the largest factor that will determine what rate you get on your new loan. Before deciding to refinance in the Redding real estate market, get a copy of your credit reports and make sure everything looks ready to roll.