How to Know the Best Time to Refinance?

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.

What is Refinancing & How Does It Work?

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.

  1. Rate & Term – with this type of refi, you’re replacing your current mortgage with a new loan, and you’re not getting any cashback. If current rates are lower than what you have, you can save money with a “Rate and Term” refinance. You can also choose a different term (length of loan). For example, if you have a 30-year fixed but want to pay it down faster, a 15-year fixed could be a great option for you.
  1. Cash-Out – when you have equity in your home (usually more than 20%), you can get a new mortgage and cash back to use however you choose. For example, if you’ve accumulated some high credit card debt, it might be a smart financial move to refi – get cash out and pay off your cards. In this scenario, your new mortgage payment would be less than your old mortgage payment and credit cards combined.

When To Refinance Your Mortgage?

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.

Remove Private Mortgage Insurance

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.

Get Some Needed Cash

Besides lowering your payment, if you have enough equity, you could get some cash to help you reach other goals like:

  • Debt Consolidation – Pay off your high-interest credit cards and get your budget under control.
  • Home Improvements – Are you dreaming of a new swimming pool or a modern gourmet kitchen, or maybe you need a new roof or want to put in solar?
  • Remodeling – more homeowners are staying in their current homes and remodeling; you could add a second level, granny unit, or remodel to “age in place.”
  • Remove a Co-signer – if your financial situation has improved, you might be able to qualify on your own without a cosigner.
  • Buy a Rental Property – You can take out some of your equity and use that money for a down-payment on a rental.

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.

How Much Does it Cost to Refinance?

You might hear – there are no closing costs. That’s a favorite line for salespeople. But the truth is – there are costs. These include:

  • Appraisal (in most cases)
  • Inspections
  • Title & Escrow Fees
  • Origination Fees

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:

  1. Have a little higher interest rate to get a “rebate” you can use towards closing costs.
  1. Wrap the costs into your loan. When you do that, you’ll be using some of your equity to pay the expenses, so your loan amount will be higher.

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.

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