Is It the Right Time to Refinance Your House?
Consider these rules of thumb when determining if a mortgage refinance is the best financial move for you.
Mortgage bankers are often asked the question, “Does it make sense for me to refinance right now?” The answer to that question depends on several factors, including your current interest rate, potential new interest rate, closing costs and how long you plan to stay in your home. Homeowners should also identify their financial goals and objectives and how a refinance might affect their plans.
Refinancing isn’t for everyone, but there is a chance it’s right for you. Ross Farr, Zions Bank mortgage officer, offers four general rules of thumb to guide you as you contemplate whether to refinance.
Mortgage Refinance Rule #1: Consider Your Costs
Many homeowners choose to refinance to save money on their monthly mortgage payment. When calculating your potential savings, it’s crucial to consider the costs associated with the refinance transaction, such as appraisal fees and closing costs. If these expenses offset the savings related to your lower monthly payment, a refinance may not be advantageous.
“In many cases, a refinance may produce a decrease in the monthly mortgage payment;” says Ross Farr, Zions Bank mortgage officer. “However, homeowners should also calculate whether transaction fees, which are usually added to the final loan amount, will offset their monthly savings.”
Farr explains that if the cost associated with your refinance “pays for itself” within a few years, then a refinance is likely worthwhile.
Long-term savings are possible if a homeowner can recoup the costs of a refinance within a couple of years. He adds that if you are planning to move in the next five years, it is unlikely that you will see the savings associated with refinancing, so start by asking yourself how long you plan to stay in your home.
Refinance Rule #2: Review Interest Rate Opportunities
The current interest rate environment may have you wondering if you should refinance for a lower rate. Rates are indeed low, but be sure to review all your interest rate options as you approach a refinance.
Every loan program has a range of rates available with the lowest rates sometimes requiring additional fees, called “points” to “buy down” the rate. But the opposite also exists: higher rates that come with a “rebate” can be used to pay for closing costs. Understanding which rate option is right for you will help you determine how to proceed with your refinance.
“For some homeowners, the lowest rate available may not be the best fit,” Farr suggests. “Accepting a higher rate can be a better fit in some circumstances because it comes with a lender credit, or rebate, that can be used to offset the costs of the transaction, such as origination and title fees.”
In addition, it’s important to understand that several factors may impact the interest rate you qualify for, including your credit score, finances and the lender you choose. Homeowners should meet with a mortgage professional who can explain their interest rate options and help them to identify the best financial fit for their situation.
Refinance Rule #3: Assess Your Home’s Appraised Value
Since an appraisal plays a key role in the refinance process, it’s wise to research how your home’s value and equity will impact your refinance opportunities. “Refinances often hinge on what the home’s appraised value is,” states Farr. “Some refinances will only be successful if the property value is high enough.”
In the current market, many homeowners are experiencing an increase in appreciation; however, Farr warns that homeowners should maintain realistic expectations when it comes to their appraisal. An appraisal will help a lender determine your loan-to-value ratio and the terms and interest rate for which you qualify. If your loan-to-value isn’t optimal, consider waiting to refinance.
Refinance Rule #4: Compare Your Debt Consolidation Options
For some homeowners, refinancing is a great way to consolidate non-mortgage debt. “This is commonly called a ‘cash-out refinance’ and for some homeowners, it can be a good opportunity to get rid of high-interest debt,” explains Farr.
Keep in mind that a cash-out refinance replaces your current mortgage with a new loan for an increased amount. In some cases, a home equity loan or home equity line of credit may make better sense, depending on the terms and interest rate associated with a cash-out refinance. Both utilize the positive equity you’ve accumulated to provide you access to needed funds, so speak with a mortgage professional and review your options if you’re considering a cash-out refinance.
If you have questions about whether a mortgage refinance* is right for you, talk to a Zions Bank mortgage lender or visit the Zions Bank Home Loan Learning Center to find additional mortgage resources.
*Loans are subject to credit approval. Terms and conditions apply. See a banker for details.
Ali Hardy is a freelance writer for Zions Bank.