Thursday, 7 May 2015

Interest rates remain at historic lows, and experts have warned of rate hikes for years.

But if you're thinking about refinancing your home, there are more factors to consider than just the rate. Here are 8 questions you should ask yourself.

How long have you been in the home?

 Most banks require you to have lived in the property for at least two years before qualifying for a refinance.

How long will you stay in the home?  

While refinancing may save you in the long-run, short-term the process is not cheap. According to Bankrate, the national average for closing costs on a $200,000 loan was $2,539 in 2014. Calculate how long it will take you to recoup that expense with lower monthly payments. Also of note: Experts urge homeowners to pay points now to lower interest rates over the loan term. Again, that extra expense on the front-end only pays off if you stay in the home long enough to recoup the fee.

Example: If you are refinancing $300,000 and reducing your interest rate by 1 percentage point to 4 percent, you will save $68 per month in payments, which will take 52 months to recoup.

What are your mortgage terms now?

  In general, it is worthwhile to refinance if you qualify for a fixed rate at least 1 percentage point lower than your current terms. Furthermore, experts say that if you have an ARM, piggyback mortgage, or interest-only mortgage that is about to come due, it's likely favorable to refinance to a fix-term loan now.

Consolidating debt? Do the math.

 If you're refinancing so you can roll credit card, car loan, or student debt into a lower-rate payment, think twice. Yes, the rate may be lower (especially considering that mortgage interest is tax deductible), but do some careful calculations first. Factor the terms of these various debts at their interest rates, and determine how much interest you would pay over the length of those loans. Now do the same with the new mortgage terms—the most common of which is still 30 years. What is the actual interest payment you will make over those new, longer terms?

Are the extra years worth it?

 If you have 25 years left on a 30-year mortgage, refinancing means you're actually paying for the home over 35 years. Even if monthly payments are slightly higher, it may make sense to refinance at a 10 or 15-year term, which typically have lower interest rates.

In the example of the $300,000 refinance, adding another 5 years at the lower rate will save you $65,608 in interest, but the payment extension will cost you $81,660 in monthly payments.

Are you underwater?

If you owe your lender more than your home is worth—and you are current on payments, you may qualify for a Home Affordable Refinance Program, or HARP, a federal government program that helps families refinance at an attractive, fixed rate.

Would those savings make a difference?

 If you've lost your job, are facing a serious illness, or are otherwise in a situation where the money you'd save by refinancing would mean keeping your home, then you should do it.

Does a home equity loan make more sense?  

For home improvement and debt consolidation, a line of credit on your mortgage may be a better deal than a cash-out refinance. Rates tend to be comparable with current mortgage rates, and the money is tax-deductible. However, home equity rates are usually variable, which means they are more likely to increase in the current economy. But since these credit lines are short-term, they may cost you less in the long term.

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