Wondering if you otter refinance?

Unlike a home purchase, most refinances require little to no money out-of-pocket. Although there are closing costs and other fees involved with a refinance, these are typically rolled into the new loan to avoid any funds owed at closing.  The one exception is the cost for the home appraisal, which will be collected during the refinance process.  However, depending on your credit score, loan-to-value, and other factors, even this cost can be waived in many cases.

If you are just looking to lower your rate and/or payment, a good rule of thumb is to lower your rate by at least 1% from where you are now.  However, depending on the loan size and other factors, there may be good reasons to refinance with a smaller reduction in rate, and cases where savings of 1% or more would not justify the cost of refinancing.  One common tool we use is to look at your “break even” time frame.  This can be calculated by dividing the total cost of the refinance by the monthly savings to determine how long you would need to hold the new loan to recover the costs of the refinance.

If you are looking at a cash out refinance, the assessment can be a little more complicated.  Debt consolidation is the most frequently used application of this product, and there are multiple factors to consider to include the new mortgage balance and rate, interest rate and terms of the debt(s) being paid off, and your personal comfort level with your current monthly budget vs your post-refinance debt payments.  But in almost every case the goal here is to end up with significantly lower TOTAL debt payments after the debt consolidation refinance is closed.  So even if your mortgage payment increases, this could be a viable solution if you are eliminating substantial non-mortgage payments.  Lucky for you, we love spreadsheets.  Give us a call and we can walk through all of the options.

Here’s something a lot of lenders won’t tell you… you may not need to refinance to drop your mortgage insurance.  If you have a conventional loan (Fannie Mae or Freddie Mac), you can reach out to your current loan servicer (the people you make monthly payments to) and request to have your PMI dropped.  In most cases you will need to have made at least 12 payments, and have at least 20% equity in your home to justify the removal of PMI.  Note your loan servicer may request payment for an appraisal or automated valuation to confirm the value of the property.

If you have an FHA or USDA loan, mortgage insurance is typically paid for the life of the loan (there are possible exceptions if you made a 10% or greater down payment when you purchased).  With these types of loan, it is not unusual to refinance into a conventional loan assuming your new payments will be substantially lower.