Everywhere you turn, you hear refinance commercials. “Rates have never been better.” “Refinance and save.” or our favorite, “Refinance with no closing costs.” As a local lender for over 35 years, we’ve heard all the sales pitches on why a borrower should refinance. Yes, when rates are down, it’s probably a good idea to refinance. But, not always. And we like to do the right thing for our borrowers, counsel them honestly, and give them all the data to help them make the best decision for their circumstances.
First of all, if you’ve never refinanced, you might not know what it is or how it works. Here’s the Oxford Dictionary’s definition:
“finance (something) again, typically with a new loan at a lower rate of interest.”
See – it’s relatively simple. When you refinance, you’re merely paying off (or replacing) your existing mortgage with a new one. There are two basic types of refinancing.
You’ll base your decision on your current rate and financial situation. If you bought in the last few years when interest rates were higher, now it would be a great time to take advantage of lower interest and save money every month.
If you’ve had your mortgage for several years, you don’t have to refinance into a 30-year loan and start all over. In addition to the 30-year term, there is also 15 and 10 year. And, some loan products have even more flexibility. For example, if you’d had your 30-year loan for eight years – you might be able to get a 22-year mortgage and pay it off in the same amount of time as your current one, and you’d be able to take advantage of a lower rate.
Many first-time homebuyers take advantage of low down payment loans so they can get into a home. Popular government FHA loans only require 3.5% down. But, there’s a catch, and it’s called (PMI) private mortgage insurance. On FHA loans, PMI remains for the life of the loan and protects the lender in case of default. It’s in your monthly payment. And, depending on your loan amount, you might be paying $150 or more a month.
Refinancing into a conventional loan can remove the PMI if you have enough equity. Your loan originator can go over this with you to see if it’s an option.
Besides lowering your payment, if you have enough equity, you could get some cash to help you reach other goals like:
But with the advantages, there are some drawbacks to refinancing, so it’s important to weigh everything. Despite the commercials stating otherwise, there are costs to refinance. We’ll go into those more in-depth below, so you can weigh those costs with the benefits you’re getting.
You might hear – there are no closing costs. That’s a favorite line for salespeople. But the truth is – there are costs. These include:
Our loan officers can give you a loan estimate that breaks out the costs.
There are ways not to have to pay out-of-pocket expenses. Here are two:
As you can see, there are quite a few things to consider when refinancing. The best way to decide is to contact a trusted lender like San Diego Funding. The advantage of working with a local lender is you can walk into our office and get all of your questions answered face-to-face. We can go over your refinancing options and do a comparable market analysis to see what your home is currently worth. Contact us today.