When Is The Right Time To Refinance?
Mortgage rates have reached historic lows week after week with the Federal Reserve doing what it can to keep interest rates low. If you are a current homeowner the dropping rates could potentially save you thousands of dollars over the life of your loan. It is always smart to review your mortgage refinancing options to determine whether or not refinancing is a financial move you should take at this time. But how do you know when you should refinance your mortgage?
As cheap as mortgage rates have become, there is not much you can do to refinance your home if you do not have enough equity in your home. New lending standards have impacted the ability of loan officers to get your loan through underwriting, the days of 100% financing are gone. The easiest path to refinancing your home is to have at least 20% equity in your home. That places your loan-to-value (LTV) at 80%, which is a standard for new and refinanced mortgages. If your loan-to-value is higher than 80% you can still see if you have the option to refinance your home, but the odds are slimmer with less equity in your home than 20%.
If you have recently bought a home and financed the purchase with a 4.5% mortgage, you already have a great rate. If you refinanced to a 4.125% rate you would, eventually, save money on the mortgage, but it would take years to make up for the closing costs. A common rule of thumb to keep in mind is to refinance when the new rate you can get on the refinanced mortgage is more than 1% different than your current mortgage. For example, if you have a 5% mortgage and could refinance into a 4% mortgage, it probably makes sense to move forward.
A critical piece of refinancing that many people miss is the time it will take to payback the closing costs on the refinanced mortgage. Dropping your interest rate is almost always a good thing, but if you pay $2,000 in closing costs to refinance and sell the home in 12 months, you have lost a lot of money. If you are not going to live in the home for more than 5 to 10 years, it doesn’t make much sense to continue with the purchase, since the costs incurred with buying the home such as closing costs, maintenance, and selling the home wipe out any growth in the value of the home.
To know if refinancing makes sense in your situation, contact The Law Offices of Georgette Miller and Associates, P.C. We deal directly with your mortgage lender to modify your existing loan. Since the process can be complex, we are here to offer guidance and support to ensure you are receiving the maximum benefits. The legal team at The Law Offices of Georgette Miller and Associates, P.C. fights to get you what you deserve.