by HRRC Financial Counselor Keesha Allen. Are you curious about whether to refinance your home? Do you see mortgage interest rates and APR’s that are far lower than yours? Has making your mortgage payment become more difficult due to the unstable economy? Maybe it’s time for you to contact your mortgage company and find out if you can reduce your mortgage payment.
When you refinance, you obtain a new mortgage loan in an effort to get a lower monthly payment, reduce your interest rate, take cash out of your home for a large purchase, or change mortgage companies. Refinancing can have advantages, but can also involve risks.
One of the main advantages of refinancing is reducing your interest rate. Often, as people continue in careers and make more money, they are able to pay all their bills on time and thus increase their credit score. With this increase in credit comes the ability to procure loans at lower rates. A lower interest rate can have a profound effect on monthly payments, potentially saving you hundreds of dollars a year. The rule of thumb used to be to wait to refinance until interest rates dropped at least 2 percentage points below the rate of your current mortgage. Now, however, many lenders offer no-cost and low-cost refinancing packages that reduce or even eliminate out-of-pocket expenses (by charging slightly higher rates or including some of the costs in the amount that is financed). With these newer programs, it can be worth refinancing even with a small reduction in interest rates. Other advantages can include avoiding balloon payments or adjustable rates, banishing private mortgage insurance (PMI), and cashing out a portion of your home’s equity.
Although there are several good reasons to refinance, many homeowners today are facing foreclosure because they refinanced their loan to tap into their equity. Think very carefully before refinancing. Market values are not guaranteed to increase; in fact, in our area many property values are decreasing. Another risk of refinancing is the penalty you may incur for early pay-off of your existing mortgage. You can also incur fees when refinancing, including application fees, title fees, lender attorney fees, and points and fees from loan origination. To counteract or avoid these fees entirely, it’s best to shop around or wait for low or free refinancing offers.
Selecting the right refinancing option means considering a number of variables. Before you decide which option is right for you, do some research and shop around — like your finding your first mortgage all over again! Keesha Allen, HRRC’s certified homeownership counselor, is available to discuss your options and help you decide if the time is right for you to refinance. Call Keesha at (216) 381-6100, ext. 13.