Should you refinance your mortgage?
The Mortgage industry is still experiencing a historically low rate environment even though we are in constantly changing economic times. If you are thinking about refinancing, there are some factors to take into consideration:
- What's the true purpose for refinancing?
- Reduce payments, reduce term, reset term, take cash out?
- Is your income stable and will it continue to remain stable?
- Is your credit in good standing?
- Do you have established assets and savings?
- Will you continue to own your property for enough time the recapture your refinancing costs?
1. Cost of refinancing
If the new interest rate can save you the cost of refinancing in one year, you should probably refinance your mortgage. The difference in interest rate is more dramatic on larger loans. For example, a 1% difference in rate on a 100,000 mortgage is $1000 in the first year. A ½ % interest rate difference on a $400,000 mortgage is $2,000.00 in the first year. A mortgage professional can run the numbers for you.
2. Loan to value
Do you have equity? Falling values have affected all property. You still need to be 80 % or less, loan to value. That would include lines of credit. Sites such as zillow.com are helpful tools to help you determine the value of your home. Also, if you know a local realtor, they have great experience and data, and can be a resource.
3. Debt to income ratio
Is your income verifiable and sufficient to cover the underwriting standards? Combined debt to income ratios are very strict. Again, a mortgage professional should be able to walk you thru the guidelines that apply now.
4. Personal credit
Is your credit still OK? Underwriting is much stricter than it was just a few years ago, and credit scores play a big roll in the pricing of loans. If your credit was dinged, you may be subject to additional fees at closing that are risk based. You can check your scores at annualcreditreport.com This will give you the scores that the bank will use in the underwriting process. Or, we at Webster can do a pre-approval and check the scores for you and explain the risk pricing that may apply.
5. 15-year term
Another thing to consider is to switch to a 15 year loan. Check out our rates here, or Bankrate's here. This would do two things. First the rate is probably lower than your current rate, and second you would be done in 15 years. Your equity grows much faster, and the overall interest paid on the loan is significantly less.
Should you consider an adjustable rate mortgage? Are you planning to sell or move in the next five to seven years?. Many people plan to downsize once the kids are grown, or when the market stabilizes. An adjustable loan would lower your payments for that time period. A 7/1 ARM is a 30 year loan with a fixed rate for the first seven years. After that, it adjusts annually.
If you have sufficient equity and wish to consolidate debt, add a pool, or purchase an investment property, or second home, you can get a new loan to include some cash out for these or other reasons. Again, rates are currently low, so if you have plans, now would be a good time. As you can see, saving money each month is like getting a raise in pay. With the current favorable rate environment, it is worth considering a refinance.
Talk through your options with a local Webster Mortgage Banking Officer.