So, What Did the House Sell For?
Last month we discussed the importance of good information when it comes to buying or selling a home. I presented an example of a home that 3 online Real Estate Brokerages had valued, and they all were very different. My point was that there is a human factor that needs to be considered that no online brokerage can fulfill. The home was listed at $3,195,000 and ultimately closed at $3,500,000. The offer was cash, closed in 10 days and sold for $1320.75 SqFt. No one could have predicted this and moving forward this one house cannot foreshadow the price for the home next door. There is a human factor in Real Estate that needs to be considered!
So now let’s move on to this month’s topic of refinancing. With the interest rates so low, refinancing is a great option for those who have mortgages with higher interest rates. It’s not for everyone and several factors need to be considered when contemplating whether to refinance or not.
Is Refinancing a Good Idea?
Everyone is talking about the incredibly low interest rates and jumping on the bandwagon feels good right bow. I have seen refinancing rates as low as 2-1/8%. For many homeowners, there are large benefits to renewing the mortgage process on an existing home. Typically referred to as mortgage refinancing or a second mortgage, reapplying for a new loan can help you save money, earn cash, and lower your monthly payments. Rather than blindly starting the refinance process, it's important to break down the different factors to truly see if a mortgage refinance is right for you.
Can I Lower My Interest Rates?
One of the common reasons to refinance a home is to obtain a lower interest rate. This is one of the easiest ways to save money on your monthly payments. When you initially purchased your home, you may have been stuck with higher interest due to your financial situation or the state of the market at the time of your original application. Lowering your interest rate by 2-3% can make an enormous difference in your monthly payments. As you browse through the best mortgage lenders, you have the ability to use online refinancing calculators to compare your potential monthly savings. Quite often, the reduced interest can result in thousands of dollars in savings each year.
There are many types of mortgage terms that are available for initial loans. What worked for you in the beginning may not be the most viable option for your current situation. For example, you may have an adjusted rate mortgage (ARM), where the mortgage lender can change the interest rate annually. If you're currently on a tight budget, you have the option of establishing more consistent, affordable payments through refinancing. You may refinance to a 30-year fixed mortgage that will give you a stable interest rate and the same payment throughout the duration of the loan.
If your financial situation has drastically improved, you may want to refinance your home to a shorter mortgage term. A 15-year fixed rate mortgage can yield much lower interest rates and allow you to pay off your home quickly. A balloon payment mortgage features fixed payment for a set amount of years and then one large final payment at the end of the set term.
House Value & Equity
Typically, one of the first steps in refinancing your home is to receive an appraisal from a qualified refinancing lender. The current home value can have a major impact on the type of refinancing that you apply for. If your home value has increased, you may want to refinance in order to increase the home's equity. The equity amount represents the value of the home that you actually own. For example, if your home was valued at $200,000 and you already paid $50,000, you would have 25% equity on the property. If the home's value has increased to $250,000, your equity value would now equal $100,000 or 40%. After you refinance, the extra equity and value can be paid to you once the house is completely paid off.
If your home value has gone down, you may want to reconsider the refinancing process. You may not have as many benefits and could actually lose out on some of the equity that you currently have. This is why an appraisal can give you a clearer picture of the current market and your available options.
Closing Costs & Living in the Home
In the world of refinancing, it takes money to save money. If you are in a short-term living situation and plan on moving soon, now may not be the best time to refinance on the home. If you plan on living in the home for 2 years or more, refinancing can help you save money and allow those savings to grow after a period of years. Just like a regular mortgage, refinancing comes with multiple closing costs.
While some of these costs may be negotiated lower or waived completely, the total amount can end up being thousands of dollars. These costs will eventually offset, but it's important that you stay in the same living situation to make it worthwhile. For example, if your closing costs are around $3,000 and your new mortgage payment saves you $200 monthly, it will take 15 months to offset the closing costs. Another option and the one I would prescribe to is one where you pay no closing costs. If you can save $200-300 dollars per month minimum, then it makes complete sense! Go for it. Finally, if you have equity in the home (this is very important) and you are confident you will be selling the home prior to the length of the arm. Arms can be very attractive for saving monthly mortgage costs.
Credit Scores Still Come Into Play
When you initially applied for your home loan, your credit score was an important factor. The same thing applies to mortgage refinancing. Your current credit situation can be an important determining factor as to whether or not you should apply for refinancing. If you've been on time with all of your monthly payments, your credit score should be the same if not better. Along with the mortgage payments, other bills and debt will be considered into the overall credit score. If your credit score has lowered significantly, it may not be worth refinancing. A mortgage company will also look at bank accounts, tax returns, and other financial statements to help qualify you for the refinancing and lower interest rates. In some cases, it may be a good idea to wait a few months and take steps to raise your credit score, thereby improving your refinancing prospects. Mortgage refinancing can save you money and provide you with more affordable payment options.