4 Questions to Ask Before Deciding if You Should Refinance (Part 2)

In part one of this blog post we discussed two important questions that you should start with before deciding whether to refinance your mortgage:

• Why are you considering refinancing right now?
• How long will you be living in your home?

These two questions can help you decided whether it’s a good financial decision to refinance, but they’re not the only questions you need to ask. Here are two additional questions to consider in the process.

3: Do you qualify for the loan?

A final consideration before refinancing is whether you can qualify for the new loan. If your economic situation is different, you have more debt, or your credit score is lower, it might be difficult to get approved. If you can’t qualify for a new loan, there may be other options available to you. You can talk to your lender about whether they have mortgage relief programs. By law, your lender must offer some options for federally-backed loans (FHA, VA, USDA, Fannie Mae, and Freddie Mac). Other lenders may have their own programs to help if you need assistance making payments, or may be willing to restructure your loan to help you through a difficult time and avoid foreclosure.

4: Can you pay cash for closing costs?

You have a couple options for closing costs on a refinance – you can pay them out of pocket if you have cash, or you can finance them into your loan. If you have the cash, it’s usually advisable to pay them up front. Financing them into your loan means adding to the principal balance with no added value to your home, and you will pay interest on that amount for the life of the loan. Financing $3,500 in closing costs into a 30-year loan at 3.5% interest will actually cost you more than $5,600 in added interest over the life of your loan.

Other Considerations

Refinancing isn’t always the right choice, so make the decision carefully. Mortgage loans are front-loaded so you pay more interest at the beginning. As time goes on you pay a much larger part of your monthly payments toward principal. The exact time that your payment switches depends on your interest rate, but typically it’s between years 10 and 15 of a 30-year loan. While refinancing might save you money on the total payment, you “reset” your loan back to 30 years at that time. If you’ve already made payments for 12 years, you go back to paying more interest and your total mortgage will now extend to 42 years (12 years of your first loan and 30 years of the refinanced loan). In that case it might be a worse financial decision to refinance than to keep your higher interest rate.

To learn more about refinancing, find current interest rates, and get started on your loan, talk to our experienced mortgage loan professionals at Integrity First Lending.