Many homeowners think of refinancing as the ultimate win over their lenders. It is like the secret opportunity to reduce their mortgage payments to improve their monthly cash flow, or for more savvy homeowners a quicker way to pay down their mortgage. However, there is just as much to lose during the refinancing process as there is to gain if you aren’t careful.
In fact, there are many situations where refinancing could backfire and end up costing you more money in the end. Fortunately, refinancing is not the only way to tap into your home’s equity. Depending on your situation, selling Home can often prove to be the better option, providing you with the cash you need and the opportunity to find a more affordable home.
Rates Based on Credit and Income
The first thing to keep in mind is that lenders look at your credit and income to determine the interest rates they are willing to offer you. If you are retired, have started your own business, or there are other reasons your income might appear less stable, you might not be eligible for a lower interest rate than you currently have.
As well, if your credit score has suffered over the years, lenders will consider this during the refinancing process, and it will work against you. The only way to determine where you will end up is to compare your current mortgage rates to the latest rates. And this is no easy task. Every lender has their own rates, which means it could take up a lot of time to review what is available.
It’s also important to keep in mind that the rates posted by each lender are then going to be available only to some clients. As mentioned, if your credit or income has changed for the worst, so too will the interest rates lenders are likely to offer you. If you make more money and are carrying less debt, then lenders are apt to offer you a better deal when you refinance.
Rates for Refinancing Are Higher
Adding to the confusion of interest rates, what you see posted by lenders is going to be basic rates for mortgages on a new home. This can be misleading, as what they offer for new home purchases are very different from what they offer for refinancing situations. They are not necessarily drastically higher, but every point affects your bottom line and how quickly you will pay down your mortgage. As well, if there are changes to your income or credit rating, you could actually find you no longer qualify for the type of mortgage you are seeking.
Rates Aren’t the Only Consideration
Most people have been brainwashed to believe that the only important thing for their mortgage is the interest rate. However, there are so many different types of mortgages available that the interest rate is only one element of the loan. So, while you might be offered a better interest rate, you have to look at all the other factors to determine if you really are saving in the long run.
For example, your rate might be lower, but it is only available on a variable rate. While rates might be low at the time you sign, each incremental raise will cost you more and more money. You also have to consider any possible fees you might face for “breaking” your current mortgage agreement. This will vary based on your existing mortgage, so it is important to discuss penalties with your lender before signing on the dotted line with a new lender, or for a refinanced mortgage with your current lender.
The most dangerous impact on refinancing would be a change for the worse in your loan-to-value ratio. If you have been paying down your mortgage and your home has been increasing in value, your loan to value ratio (which considers the amount owed on your mortgage versus the market value of your home) will be reduced which is good. However, if the current ratio turns out to be higher or over 80 percent, you will be charged higher interest and also be required to pay mortgage insurance.
How Long You’ve Lived in Your Home
If you haven’t lived in your home very long AND you are planning to sell soon, chances are refinancing could end up costing you money instead of saving it. Because the first five years or so of your mortgage goes towards interest, you are looking at least a few years to pay off your closing costs. Therefore, you really should only consider refinancing if you are planning to stay in your home for at least five years or so.
On the flip side, if you’ve been paying into your mortgage for at least 10 years, it also doesn’t make sense to refinance. If you have a 30-year mortgage now and have already been paying it off for a decade or so, by refinancing another 30-year mortgage you will stretch out the time it will take to finally pay off your mortgage. This costs you money in the long wrong.
Home equity determines how much money you receive when you sell your home. For example, if you have a mortgage for $250,000 and your home is now worth $400,000 the equity in your home is $150,000. When you sell your home for its full value, you receive $150,000 from the sale. So, the longer you’ve owned your home, the more home equity you have built up. If you have less than 20 percent equity in your home, you will probably run into issues qualifying for conventional loans, as lenders will view you as a higher risk.
When it comes to refinancing a mortgage, you have to consider your “break-even point.” You divide your mortgage closing costs by how much you will save each month. So, if you will have to pay $5,000 in fees and you’ll save $200 each month, it will take 25 months for you to break even. If this is beyond how long you plan to live in your home, it won’t be worth your while. You want to see that $200 each month landing in your pocket faster.
If you are asking yourself, “Should I sell my house for cash or should I refinance?” sometimes it’s best to run the numbers to see what makes financial sense. When you give Property Sales Group a call at 916-990-7374 today, we will walk you through the pros and cons of each scenario, so you feel comfortable with your decision and get the best possible results.