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Should You Refinance Your Home?
30/09/10
Whether ‘tis nobler in the hearts and minds of men to suffer the slings and arrows of refinancing your home?
That’s a great question. With interest rates at a four-decade low for the last nine weeks should you and more importantly can you refinance your current mortgage? Although it’s not as easy to get a loan as it had been, the banks are lending. Lending requirements are more stringent than before and lenders are making it difficult to get approved.
Eighteen months of financial history, including tax returns and pay stubs used to be sufficient. Now everyone is requiring 2 years worth of documentation and proof. Only borrowers with clean credit histories and high credit scores can get those super low interest rates. There are those who just won’t be able to take advantage of low rates because they’ve suffered a job loss or their income has been reduced and it now falls below the minimum required to qualify.
Many people think that if they owe more than the current value of their home, they can’t refinance. It certainly isn’t easy, but it is possible. If your loan is owned by Freddie Mac or Fannie Mae, as most are, you may be able to refinance through the Home Affordable Mortgage Program, or HAMP. This program was specifically designed to enable those homeowners with no equity to refinance their mortgages to a more affordable interest rate.
What if you’ve already refinanced? What if you just financed a new home in San Marcos or Detroit?Some people that refinanced just last year are refinancing because of the drop in rates. Is that a good idea? It depends on how long it would take you to recoup the refinance closing costs, including title insurance, points and escrow and appraisal fees. Refinancing an average loan costs about $3000. Compare your old mortgage payment to the new proposed mortgage payment. How many months of savings will it take to “get back” the closing costs?
Remember that just because you have new lower monthly payments does not mean that you have really lowered your costs. Every time you refinance, you are restarting the clock on your loan. If you’ve been paying on your current mortgage for 10 years, you probably have another 20 years until it’s paid off. You refinance and now you have a new 30 schedule. All that money you’re paying for the years when your house otherwise would have been paid off could outweigh the amount you save with a lower interest rate. Consider refinancing in to a 15 or 20 year loan.
You have to do your homework on mortgage financing, just like any other major purchase. Ask around. Talk to friends and family and see what rates they have been able to obtain and who they went to for their loan. Before the housing meltdown, people were in a buying frenzy. They borrowed without really doing their homework. You must understand the terms of the loan now and in the future. You have to pay back the loan according to these terms or you could lose your home as so many people are doing right now. Read all the documents that come with your new loan. If you don’t understand something then ask questions.
If you educate yourself, do the research to know what you’re getting into and think about the decision sensibly, you could save a lot of your hard-earned money in the long run.
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