Thinking About Refinancing Your Home?
Mortgage rates are still near their all-time lows, so this is still a good time to consider a refinance. Here are some things to consider as you contemplate refinancing your home. First of all, remember that refinancing to eliminate credit card debt may be a smart move, but refinancing in order to borrow more for consumer purchases (car, vacation, etc.) could set you back significantly. Also, make sure to read the fine print about your existing mortgage to find out whether or not you’ll be assessed penalties or fees for refinancing early.
When you meet with your loan officer (…us….) you’ll already have a pretty good idea of how much money you owe to the lender on your home. If you don’t, check the last statement from your lender and then add a 1/2 months payment to that. A payoff will include any unpaid interest, so the 1/2 month payments will help you get to what an estimated payoff would be. You don’t need to know the outstanding principal balance exactly…a close enough estimate will be good enough.
Then you need to estimate how much the house is worth. If you’ve been paying attention to home sales in your neighborhood, you probably have a general idea. We have an excellent tool that we provide to our clients called the SOLD HOME report. It emails you once a month a report of every home that sold in the preceding 30 day period. If you’d like to be added to our client list to receive that report, just click here and let us know. We’ll make sure to send it to you every 30 days.
You could also ask a real estate agent for an estimate. They typically call this a Comparative Market Analysis. Or you could get an idea of your homes value by going to Trulia or to Zillow to get a rough idea what your home my be worth.
Once you’ve determined a rough estimate of what you owe versus a rough estimate of what your home might be worth, you’d then divide your home’s value by the amount you owe on it. If you owe $160,000 and the house is worth $200,000, then you owe 80% of the home’s value. If you owe $200,000 and the house is worth $160,000, then you owe 125% of the value of your home.
Should you refi or not?
The old rule of thumb said that a refi only makes sense if you can lower your interest rate by at least two percentage points for example, from 7% to 5%. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you are aware of the amount of time it will take for the savings created by the refinance to compensate for the cost of the refinance.
Consider this: If you had a $200,000 30-year mortgage with an 7.25% interest rate, your monthly payment would be $1,364. If you refinanced at 5.875%, your new monthly payment would be $1,183 a savings of $181 per month. Assuming that your new closing costs amounted to $3,500 it would take 19 months to break even. ($181 x 19 = $3500). If you planned to stay in your home for at least 19 more months, then a refi would be cost-effective under these conditions. If you planned to sell the house before then, you might not want to bother refinancing.
So…here you are….you’ve figured out the value of your home and you think that with where rates are at currently it might make sense to refinance. So, how do you take the next step:
You’ll need to document everything….employment history, income, assets,etc……
You’ll have to provide information about your assets anyway. But you must be especially thorough if you owe more than the house is worth. If that is the case, then we’ll be talking to you about your current refinancing opportunities available through the Obama adminstration’s Making Home Affordable program.
The list of assets that your loan officer will want to document will include retirement accounts, mutual funds, stocks, bonds, and money in savings and checking accounts. There are essentially no stated income loans in existence anymore, so you’ll need to load up the shoebox and get your loan officer all the information that an underwriter will need to make a decision. Here’s a more exhaustive list we ask our clients to bring to an application.
