Whenever mortgage rates drop, many homeowners begin contemplating refinancing their home mortgage. But with so many variables, how can a homeowner be sure if refinancing would be beneficial? The first question you should ask is, “Will I stay in my home long enough to recoup the closing costs with savings on my monthly payment?”
For example, if you have a $300,000 mortgage with a 30-year fixed rate of 4.5%, if you refinance to a rate of 3.8% you would cut your monthly payment of principal and interest by $145, to $1,375, and you’d pay for your total closing costs (estimated at 2% of the loan balance) with monthly savings in 41 months.*
Borrowers with adjustable-rate mortgages (ARMs) may choose to refinance with a fixed rate loan to lock in a low rate they’ll never need to think about again. If you want to build equity more quickly or pay off your mortgage sooner, you can refinance into another, cheaper 30-year mortgage and use the monthly savings to prepay your mortgage.
Bankrate.com offers a refi breakeven calculator to help you determine if refinancing is right for you.
Five tips to consider before refinancing:
- Gather your information. You can find an estimate of the market value of your home by going to Zillow or Trulia. To find a home, First Bank’s partner NestReady, a real estate company committed to simplifying the home buying journey, offers a fully-guided home buying experience from home search to home mortgage. Start your journey here.
- Check your credit. The stronger your credit rating, the lower the interest rate you’ll be able to get. Rates will be higher if you take cash out or are refinancing a multi-unit or investment property. Check your credit reports from Equifax, Experian and TransUnion, the three major credit-reporting agencies to ensure that no errors reduce your score. You can also request a free report from Annual Credit Report.
- Consider fees. Lenders will typically charge you from 1% to 3% of the loan balance to refinance for closing costs which will cover the lender’s origination fee, third-party costs (including the cost of an appraisal, title search and so on) and recording costs. You could pay the closing costs out of pocket. Or you could pay a higher interest rate in exchange for a lender credit that offsets closing costs.
- Have documentation for everything. Before a lender can approve your loan, it must document and verify your employment, income, assets and more. You will need an appraisal of your home’s value. Your lender may accept an automated valuation, but if it can’t access enough data or you’re taking cash out, the lender probably will send an appraiser to visit your home.
- Consider service. If you want proactive service and guidance, check with your local bank.
If you’re ready to refinance, contact First Bank of the Palm Beaches. 100% of our loan customers who responded to our service survey, said they would recommend us to others.
*Black Knight, a mortgage data, analytics and software provider