Should I Refiance My Home Mortgage?
Interest rates are lower today than they have been in nearly 20 years.
What is the interest rate you are paying on your existing loan?
Is it worth it to refinance, or is now the time to build your dream home?
Whether you should refinance your mortgage depends on a variety of factors. You probably should not refinance if your current loan is less than two percentage points higher than the rate at which you could obtain a new loan. You also need to consider how long you intend to stay in your current home. If you plan to move during the next couple years, you may not be able to recoup the cost of the various fees your lender will charge for the new loan.
The U.S. Federal Reserve Board says that refinancing can be a good idea for homeowners who:
- Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan (knowing exactly what the mortgage payment will be for the life of the loan)
- Want to convert to an ARM with a lower interest rate and/or more protective features (such as a better rate or payment cap)
- Want to build up equity by converting to a loan with a shorter term
- Want to draw on the equity built up in their house to get cash for a major purchase or for their children's education
If you choose to refinance, you will have to pay many of the same fees you paid when you obtained your original loan. For instance, your lender will ask for an application fee, which covers the cost of processing the application and verifying that your credit is still good. This fee usually runs about one percent of the loan amount. Likewise, you will have to have your home reappraised so that your lender will know how much it has changed in value. If the appraised value has increased substantially, you may have a greater amount of equity to tap.
A title search will have to be done so that the lender will know that nobody has established a claim to your property since the original search was done. Often, you can save a considerable amount of money if you hire the same firm that did the original search. When all the application documents have been processed and all the searches and checks are complete, you can then go to closing, which will be similar to the closing on your original loan. Generally, the lender will charge a fee to cover the cost of the fee charged by the attorney who oversees the closing ceremony and makes sure that all of the necessary documents are properly signed.
The largest single cost of a refinance is likely to be discount points. These generally run from one to three percent of the loan amount and are imposed by the lender to raise the yield on the loan. For a simple refinance that does not involve any home improvement, these points are not entirely tax deductible in the year you refinance. Instead, you must deduct them evenly over the life of the loan.
If you are considering refinancing, shop carefully, because costs may vary significantly from lender to lender or from area to area. And before you make a final decision to refinance, consider the option of building your dream home at today's low interest rates. Be sure to check out the professional builders in your area and the option of building your dream home.
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