There may come a time when refinancing your home mortgage makes good financial sense. You might consider refinancing to secure a lower interest rate as a means of reducing your house payment. You may also desire to cash in on the equity that may have accrued in your home. Ultimately, you have to decide whether a new, lower interest is worth the closing costs and other fees associated with refinancing.
Considerations
Refinancing a house is basically paying off your first mortgage with a new loan that most likely has a lower interest rate. It can be a way to switch your mortgage from an adjustable to a fixed rate loan. Although you're not obligated to refinance your house with your current lender, it may be easier and less costly to maintain the status quo, as a new lender may require another property appraisal. Keep in mind that lenders won't allow you to refinance your home if your current mortgage is less than 12 months old.
Lower Interest Rate
The amount of your monthly mortgage payment is linked directly to your interest rate. When your interest rate drops, so does your mortgage. According to the Federal Reserve, you may qualify for a lower rate if your credit score has improved since you obtained your previous mortgage. Sometimes interest rates drop due to fluctuating market conditions.
Equity
The amount of equity you have in your home is the dollar value difference between what you owe on the mortgage and what your property is worth. If you choose to refinance your house for a larger amount that what you owe, you may qualify for what's dubbed as "cash-out" refinancing. This might be a good choice if you need money for home repairs or renovations or to help fund your child's education.
Eligibility
The process of refinancing your home is comparable to the steps you went through to secure your initial mortgage. Your lender will review your income, assets, debt and credit score, along with the current value of the property and the amount you would like to borrow. If the value of your home has declined, it may be worth less than what you owe. In that case, there would be no equity to cash out.
Fees
There are a number of fees incurred when refinancing a house. The specific fees and costs will vary from state to state. The standards include an application fee ($75 to $300), property appraisal fee ($300 to $700) and home inspection fee ($175 to $300).
Closing Costs
The loan origination fees charged by your lender is typically 1 percent of the loan amount. What's referred to as points are tacked on at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. Points generally amount to 1 to 3 percent of the sum of the loan. If you plan on selling the house relatively soon, the lower payments associated with refinancing your house probably won't cover these closing costs.
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