LOVELAND – Refinancing involves obtaining a new home loan and paying off your existing loan. It can allow you to access some of the equity in your home or reduce your monthly mortgage payments. If you have been thinking of refinancing, here are a few ways to evaluate whether it’s a good time to do so.
Interest rate changes
Take a look at the interest rate on your existing home loan. Is it 1% or more higher than the current mortgage rates? If so, then it may be a good time to refinance. Since there is a cost to refinancing, it does not make sense to incur the charges involved for only a small reduction in your mortgage payments. Typically, a 1% difference in rates has a decent impact and makes it worthwhile.
For example, on a $400,000 loan, the difference between a 4% interest rate and a 5% is $237.63. That applies over the life of the new loan. So within a year, it’s a savings of $2,851.56 (or $85,546.80 over a 30 year term).
Market changes resulting in higher equity
In many areas across the country, the market has improved dramatically. This means that homeowners now have more equity built up. Refinancing is one way that you may access that equity.
For example, let’s say your home was originally worth $400,000 and you obtained a mortgage for $320,000 (80% loan-to-value). If the market has increased and your home is now worth $470,000, that’s an additional $70,000 in equity. You may be able to refinance for up to $376,000 while retaining the same 80% loan-to-value ratio. After paying off your previous loan of $320,000, that leaves $56,000 available as a cash-out.
By refinancing, you may use the equity in your home for other purposes. You can pay off credit cards, which are likely at much higher interest rates than your home loan rate.
Renovations are another common use. Just remember that this is still borrowed money that you will need to pay back in the form of a higher mortgage payment each month. Avoid squandering it on frivolous expenses!
Other refinance considerations
The type of loan that you currently have, the type of loan you plan to obtain, your home’s value, your mortgage balance, your personal finances, and your future plans all play a role in your refinance costs and options. It is important to consult with a mortgage loan officer to get the facts and to run accurate numbers. Only this way can you make an education decision on whether refinancing makes sense for you. The good news for homeowners is that the interest rates are pretty low right now, so it’s a good time to evaluate this option.
By Suzanne Plewes, RE/MAX Alliance in Loveland.