Are you an Oregon homeowner considering the option of a refinanced mortgage? Likely, you have been in your home for a few years. Maybe you’re coming to the end of your fixed low interest rate on your ARM or have built up some equity in your home value. You have already gone through the challenge and research of getting approved for your initial home loan and now need to decide if a refinanced mortgage is right for you.
At Rivermark Community Credit Union we want to help make that decision easy by providing you with five things we think you should know beforehand.
1. Know Your Goals
The first thing we recommend is to have a solid grasp of what your goals are when considering a refinanced mortgage. There are various reasons to refinance. Understanding your own motivation will help you shop around, compare, and prepare to refinance. Knowing your goals also helps determine if moving forward with a refinance is the optimal decision or not after you’ve calculated and compared all options.
Refinanced mortgages don’t guarantee savings. Savings are based on your break-even point—the point at which your refinancing costs are recouped by the savings from your lower payments. Determining your break-even point requires calculating how much the refinance will cost (i.e., the fees) compared to how many months of lower-payment savings it will take to even out.
For example, if it costs you $5,000 to refinance your loan and you save $150 a month on your mortgage, you’ll start saving on the cost after 34 months. If you’re considering moving within one to three years, refinancing likely isn’t an optimal decision. However, if you plan to live in your home for another five or more years, a refinanced mortgage could be a benefit.
Direct savings are also not always the goal for a refinance. Sometimes the goal is to save on total costs and refinance for a shorter payment timeline. Others refinance their mortgages for cash-out loans. A cash-out loan is when a homeowner refinances their mortgage for a higher amount than their current loan. This gives the homeowner the ability to pocket the extra money for their own use—for example, to remodel areas of the home, which could increase the home’s equity. No matter what your reason is, just make sure it’s clear before starting the process.
2. Resetting Your Clock
When considering whether or not to refinance your mortgage, it’s important to take into account that you’ll be resetting the clock on your loan. Refinanced mortgages aren’t your original mortgage with a few adjustments; they’re completely new loans. If you have already been paying on your mortgage for 5 to 10+ years, refinancing for another 30-year mortgage is going to extend your payment timeline. Depending on your individual situation, you may not want to reset that clock.
For example, the current retirement age is 67. If you’re less than 30 years away from retirement, a refinanced mortgage will push those payments into years where you could be on a fixed income. This could make payments harder to cover. This is assuming you plan to stay in your home forever. However, if you’re planning to move within a few years, resetting your clock may not make much of a difference to you.
3. Be Prepared
When making any major financial decisions, it’s always recommended to be prepared for what’s coming. There are a few ways to be prepared for refinancing your mortgage: know your home’s equity, improve your credit score, and have a low debt-to-income ratio.
Your home equity will be determined by the market value of your home and how much you’ve paid off your current mortgage. Ideally, you want to have at least 20 percent equity in your home, meaning the value of your new loan would be for less than 80 percent of its total value. This helps avoid additional charges, like private mortgage insurance, or can possibly eliminate it if you already have it. As for your credit score, the better your score, the better your annual percentage rate (APR). Lenders will look at your credit score when calculating loan and interest options. So working to increase your score can go a long way in preparing for a mortgage refinance.
Similarly, lenders will also review your debt-to-income ratio when reviewing your loan options. Ideally, you want to target 36 percent or less on your debt to income ratio. This improves your chances of better refinance rates. If your debt exceeds this ratio, focus first on paying off some loans, like a car or student loan, before proceeding with your refinanced mortgage. Also, don’t make the mistake of making any large purchases while in the process of refinancing. Just like when you initially applied for your home loan, it can have a negative effect, and it’s better to be safe than sorry.
Just like when you applied for your initial home loan, be ready for fees. Common fees for refinanced mortgages include application fees, appraisal fees, inspection fees, preparation fees, loan origination fees, and so on. The total cost of these charges can vary and will factor into the break-even point we discussed earlier.
While you want to be conscious of everything encompassed in refinancing your mortgage, there are also plenty of benefits as well. A common benefit, if the calculations work out, is you could be decreasing your monthly payments. Refinancing can also change the duration of your loan, effectively decreasing the timeline if you opt for a 10- or 15-year period. It can reduce the total interest over the life of your loan. Also, if you weren’t able to put a 20 percent down payment on your initial loan and had to get an additional PMI, refinancing can be your ticket to getting rid of it, as long as you have enough equity built up.
Overall, the benefits and tradeoffs depend on how, when, and why you’re deciding to refinance your mortgage.