Mortgage refinancing could be a great opportunity for you to improve your finances. It can also be a lot of work for no benefit. How can you tell the difference? How can you find the best mortgage insurance provider? Is a refinance too good to be true?
Your head might be spinning when it comes to refinancing. But the process doesn’t have to be a headache. Read on for expert tips on when to refinance your home mortgage.
When is a good time to refinance?
If you need money to invest in a new property or take care of needed home repairs, look into refinancing. If you’ve been in your house for some time and have paid down your mortgage, a cash-out refinance can give you usable cash.
Because a cash-out refinance is considered a loan, your chunk of change won’t be taxed. In addition, a cash-out refinance is often used to consolidate debt at a lower rate than other loans.
You might use your cash-out to improve your property value in landscaping or much-needed renovations. Reinvesting is a worthy cause to refinance for.
Another reason to refinance is to get rid of your mortgage insurance (PMI). Mortgage insurance is money down the drain for the homeowner. Of course, it’s justifiable from the bank’s perspective, but the sooner you can stop paying it, the better.
Get Out of an FHA
Maybe you were able to use a Federal Housing Administration (FHA) loan to buy your first home. This gave you the kickstart you needed, but the sooner you can get out of that loan, the better. Conventional loans typically have better terms, lower PMI rates, and lower interest rates.
When Not to Refinance
There are plenty of reasons not to refinance. There’s a reason why most financial advisors don’t advise serial refinancing.
You Might Move Soon
The most obvious time to not refinance is if you plan to move within a few years. Refinancing involves closing costs, usually taking at least two to five years to recoup those. If you move within that time frame, you won’t reap the benefits of a refinance.
Refinancing Makes Little Difference to Your Monthly Payment
Refinancing takes time and energy. If interest rates are sky high and you got your current mortgage in better days, it likely won’t improve your loan to refinance. If there is little difference in monthly payments, it’s probably not worth the change.
You Want to Fund a Vacation
There are good uses for a cash-out refinance, and there are bad uses. When making long-term financial moves, money saved in the process will serve you best by being reinvested. While it might be tempting to spend a cash-out refinance on a dream vacation, remember you are still paying interest on a loan to do this.
Hidden Costs of Refinancing
Make sure you understand that there are costs of refinancing. Refinancing might not be in your best interest if you plan to move out of your home within five years.
Rolling Closing Costs into Your Mortgage
When you refinance, you pay closing costs, just like you would with a new home purchase. You’re paying off your current home loan and purchasing a new loan. This process doesn’t come about for free.
Understand that lenders offer to roll closing costs into your new mortgage. If you choose to do so, you will be paying interest on the closing costs as well.
Beware of ‘No Fees Upfront’
Even if a mortgage lender advertises “no fees upfront,” this does not mean your process will have no fees. In your loan, there will be a Box A. That’s where you will find the actual extra costs. All loans involve prepaid taxes and interest, so don’t be alarmed. Make sure you know how much of these will roll into your new mortgage.
Once you have the figures you need, you can make the most of mortgage and real estate calculators to help you decide if you should refinance.
How To Find a Lender
Word of mouth is sometimes the best way to find a good mortgage broker. Knowing someone who has had personal experience with a lender can help you bypass a lot of subpar lenders.
Get Multiple Quotes Within a Short Time
To compare quotes accurately, you need to gather those quotes within the same window of time. Getting quotes on the same day is ideal. Because of fluctuations in the market, you may not get accurate comparisons if you wait a week.
Don’t be afraid to compare agents. If an agent can’t answer questions or explain things in a way you understand, don’t go with them. Experience shows when you dive into a refinance conversion with a lender.
Conversing with multiple mortgage lenders will help you understand the process better and give you a bigger picture of what you’re looking for.
The quotes you compare should all come within a reasonable range. Remember that cheaper is not necessarily better if it means working with an inexperienced lender who could complicate the process. Be suspicious if a quote is well outside the range of other offers. If a deal sounds too good to be true in mortgage refinancing, as in many other areas of life, it probably is.
Maria Hanson writes and researches for the insurance comparison site, TheTruthAboutInsurance.com. She is passionate about empowering homeowners to find their best insurance options.