Thinking of Refinancing? Here are 3 questions you need answers to

Here are questions you need answers to before you commit to refinancing your home:

Is there a prepayment penalty involved with your existing loan? A prepayment penalty may make refinancing cost-prohibitive. Look at your Notes Payable document to see if one exists and, if so, how much the penalty is. Then decide if adding the penalty amount to the balance owed is worth it.

1.  What is your current interest rate? It is usually stated that a difference of 1% may warrant refinancing. However, the loan amount you’re refinancing and the length of the term should also contribute to your decision. Replacing an ARM with a fixed-rate product is another good reason to refinance, but you still have to qualify for the loan. Knowing your rate will stay fixed for the long haul is certainly more comforting than the unknown of an adjustable-rate product, so some people choose to refinance away from an ARM even if they’re not saving a lot of money with a lower interest rate.

2.  What do you currently owe on the property and what is the current market value of your property?  There are certain areas in which home values are rapidly deteriorating and you will find it almost impossible to get your home refinanced. In order for a home to be refinanced the lender must see that the new appraised value meets or exceeds the new loan amount, which is the current loan amount plus closing costs. Lenders often conduct reviews of all appraisals. They’ll have an independent third party go over the appraisal to make sure the property’s market value is accurate.

3.  How much longer do you expect to continue owning the property?  Obviously, the longer you plan to stay in the property, the better. It would not make too much sense to go through the expense of refinancing if you plan to stay in the home for only another year or two. You should calculate the payback period for all out-of-pocket costs by dividing the monthly mortgage payment savings into the total cost of refinancing. For example, if your new loan reduced your payments by $100 per month and the total cost to refinance was $4,800, the payback period would be 48 months, or four years. There are tons of mortgage calculators on the internet that can help you with this decision from a financial standpoint.

Most of us get caught up in chasing the lowest rate. But remember, just because there’s a lower rate, it doesn’t mean you qualify for it. The market has changed recently and it may not be as easy to refinance as it was in the past. The good news is that rates have dropped, but the bad news is many homeowners can’t meet the new lender guidelines for refinancing.

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