By September 29, 2020 Home loans
So, you’re thinking about refinancing your mortgage. Great! It’s certainly a good time to take advantage of the falling rates. But how do you know if you’re in position to refinance, or if now is the right time? And what questions should you be asking as you start the process? Below are 5 things to consider when contemplating the refinance process and if it fits into your financial goals.
1. How do I know if I should refinance my mortgage?
Unfortunately, there is no easy answer, as everyone’s situation is different. However, there are some good rules of thumb to follow to help you decide if now is the right time to refinance. First and foremost, if the refinance rate is at least 0.50% lower than your current mortgage rate, it is definitely worth a conversation with a mortgage expert. If the rate difference is even more, that is additional incentive to look into refinancing in the near future.
2. Should I pay closing costs out of pocket or roll them into the new mortgage?
The answer here will depend on your individual goals. If you have enough liquid assets to pay for the closing costs out of pocket, that is a good option. But remember, you don’t get this money back. If you’re emptying your savings account, you may want to consider rolling the costs into the refinanced mortgage. If you do this, the additional amount of closing costs won’t affect your monthly payment by more than a few dollars, as the total costs are spread out over the course of your loan. But, you will end up paying slightly more because of the interest associated with a higher loan balance. Therefore, it is key to closely examine your finances and short- and long-term goals before completing the refinance process.
3. How long do I have to live in my home after I refinance to recoup the associated costs?
An excellent question, especially for those individuals thinking of life changes (new job, starting a family, etc.) in the near future. There are always costs associated with refinancing your mortgage, so your payment savings and rate change will determine the actual time—you should have a conversation with a mortgage representative for more detailed information. However, a good rule of thumb is that you should plan to be in your home for 3 years to recoup the expense of refinancing. Having a good idea of what the next 2 – 4 years look like for you will help inform your decision on if a refinance is financially beneficial for you at this time.
4. Can I use refinancing my mortgage to restructure other debt?
Yes, you certainly can. How much will depend on the equity currently available on your home. Some individuals choose to roll a second mortgage (like a HELOC or other secondary mortgage product) into the refinance process, combining all of their debt into one monthly payment. Other individuals choose to roll medical debt, credit card debt, or other personal debts into the refinance process. But this can be a tricky situation, because paying off credit cards opens up the possibility of reacquiring that debt and paying even more in the long term. Also, it is generally not advised to roll auto loans or student loans into a mortgage, due to the longevity and rates of a mortgage versus the relatively short auto loan terms and the rates and terms associated with student loans. But, again, each situation is unique, so having this conversation when starting the refinance process will provide more insight into your particular situation.
5. What additional questions or information should I ask myself or know when thinking about refinancing?
- What are your current goals? If you’re planning to retire in the near future, do you want to pay off your home before you retire, or can you afford to keep making mortgage payments in retirement? You can also ask: Where do you see yourself in 3 years? 5 years? 10 years? Do you plan to start a family soon? Do you have children leaving the house soon and need to downsize?
- Have a good idea of your credit score. Many financial institutions offer some sort of credit monitoring system with score information, and there are also websites that can provide a credit score. But be aware that these might not be a true picture of your credit score, which could be higher or lower than what these services provide. Also, when you apply for a mortgage, they pull a tri-credit score, combining all three bureaus, not just one, which can change your credit score, too.
- Make sure you understand the refinance options available to you. This is a great opportunity to change your loan type, if you want. For example, if you currently have an Adjustable Rate Mortgage (ARM), now may be a great time to get a 30-year fixed mortgage instead. Verity offers multiple mortgage loan options to meet a variety of needs. Visit our Home Mortgage loan page (link: mortgage page) to learn more about how Verity can help you reach your goals.
Each individual’s situation is slightly different, so there is no one answer for everyone. The best thing you can do if you believe you’re ready to refinance your mortgage is think through some of the above information and reach out to a mortgage expert and start a conversation. You can stop by any Verity Credit Union branch or call us directly at (206) 440-9000 and we can set you on the path to refinancing your mortgage.