Refinancing your home may be a way to lower monthly mortgage payments and reduce the amount of interest you will pay over the life of the loan. However, before you begin the refinancing process, you will need to determine if refinancing will be a benefit or not. There are five questions you can ask when exploring the option of refinancing.
What will be the new monthly payment and interest rate? For a refinance to be beneficial for your budget, you have to consider what the new monthly payment will be. If it only reduces your monthly payment by a few dollars and doesn’t help you pay off your loan any sooner, it may not be worth the expense of refinancing.
Is it an adjustable or fixed rate mortgage? According to the Federal Reserve, an adjustable rate mortgage, or ARM, “is a loan with an interest rate that changes.” ARMs can help lower monthly payments more than a fixed-rate mortgage; however, there are other factors to consider. With an ARM, your monthly payments can change, sometimes going up. Penalties may be incurred for an early loan pay-off with an ARM, and, depending on the type of ARM, you may end up owing more money than you originally borrowed even after making every payment on time. A fixed-rate mortgage has an interest rate that doesn’t change.
Do we have to pay points? When refinancing, you may choose to pay discount points to receive a lower mortgage interest rate. Typically, the more points paid, the lower the interest rate. However, you need to decide if it will be beneficial to spend the extra money up front. The Federal Reserve states that one point is equal to 1 percent of the principal amount of a mortgage loan.
How much do we have to pay at closing? A refinancing closing will incur several fees, including lender’s fees, fees for the title insurance, appraiser, and potential fees for a credit report and recording fees. In addition, a closing fee is paid to the attorney or title company that facilitates the actual closing. Depending upon the terms and type of mortgage, upfront mortgage insurance and an escrow deposit may be due. Private mortgage insurance has to be paid as well if you own less than 20 percent of your home.
Should we shop around before refinancing? Just because one bank has held your mortgage loan for the last 10 years does not mean you have to refinance through that same bank. Your current bank may offer a lower interest rate and will work with you because it does not want to lose your business. However, it is wise to look for a refinancing rate that works best for you. The Federal Reserve offers a mortgage refinancing worksheet to help you get organized when looking for the best interest rates and refinancing deals. Shop around and never be afraid to ask questions.