To refinance or not to refinance: That is the question
If you’re a homeowner, you might consider refinancing, or trading in your high interest rate mortgage for one with a lower rate. Refinancing down to, say, 4.5% from 6% can save you tens of thousands of dollars over the course of repayment.
Keep in mind if you’re considering refinancing that it will probably take more paperwork than you expect. Lenders are more cautious than ever, so expect multiple requests for documentation throughout the process. Says Keith Gumbinger of mortgage consulting firm HSH, “In this kind of marketplace, patience is not only a virtue, but a necessity.” And loan fees—including appraisal fees, title search fees, and more—tend to add up to between 2% and 3% of the overall loan.
To see if refinancing is worth it, try the easy calculators at sites like HSH, Bankrate, and Mortgage Grader. In the meantime, here are some rough guidelines for when it might make sense to refinance, and when you might want to stick with what you’ve got:
When to refinance
- If you have a fixed-rate mortgage that’s significantly higher than the rate you could get now and you’re not planning to move anytime soon, refinancing probably makes sense. Aim for at least a 1% difference. And remember, refinancing is workable only if you’ll be able to recoup the added loan fee expenses.
- If you have an adjustable-rate mortgage (ARM) and you’re going to be in your house long-term. ARMs, as opposed to fixed-rate mortgages, are loans in which an interest rate is stable for a few years and then resets periodically (often annually) for the remaining repayment period. People who could afford their initial interest rates are often stunned when their mortgages reset and their bills skyrocket. However, at other times, they may be pleasantly surprised by a lower rate. It’s a gamble. If you’d rather play it safe, switch to a fixed-rate mortgage while the rates are low.
- If you qualify for help. A lot of people would love to refinance, but they can’t afford the fees, or their banks won’t let them because the value of their home has dropped so much. If you’re having trouble, you may be eligible for help from the federal government’s Home Affordable Refinance Program (HARP). To qualify, your mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac (go to FannieMae.com/loanlookup and FreddieMac.com/mymortgage to find out), you must be up-to-date on your current mortgage payments, and you must prove you have enough income to make the new mortgage payments, among other requirements. Go to makinghomeaffordable.gov for more information.
When not to refinance
- If you’re planning to move in the near future. If you won’t have time to save enough in monthly payments to recoup the loan fees before you move, there’s no incentive to refinance.
- If you’re a gambler. If you truly think that rates might drop even more, or even that they will stay low for an extended period of time, you may want to hold onto your current ARM before locking in a new fixed-rate loan. Or, you may not want to go through the cost and extraordinary hassle of refinancing. After all, if refinancing were easy and cheap, everyone would do it every time rates dropped .01%.
- If your goal is to be debt-free. Refinancing your home resets your payment time-table to zero. If you refinance a new 30-year mortgage and you pay it off on schedule, that means it will take you (drumroll please) 30 years to pay it off. If your main goal is to pay down your mortgage by retirement or some other specific deadline, refinancing may not be for you.
Are you thinking of refinancing? Tell me your stories.