Financially Fit Homeowners Answer These 10 Questions Before Refinancing
Remember the Choose Your Own Adventure books? This quiz reminds us of those, but instead of an audience of pre-internet kids, this is geared towards homeowners deciding whether or not to refinance their mortgage loan.
Financially Fit Homeowners Answer these 10 Questions Before Refinancing
The conversation continues... 16 months and counting since the Fed lowered rates to record levels at the onset of COVID-19. Rates are low and property values are high. Lots of homeowners have already refinanced, with many more on the brink.
Here are some questions we like to ask (and you can ask yourself) to make your decision a little clearer.
1. Are you planning on staying in your home for at least 3-5 years after refinancing?
YES - Great! This will help you recoup the cost of a refinance. Move on to Question 2. 😊
NO - It's probably not the best idea for you to refinance your mortgage. Since it costs approximately $2,500-$3,000 to pay for a mortgage refinance, it’ll likely take more than a couple of years for you to break even on this financial move.
2. Based on your current interest rate, do you think you can lower your current rate by at least 1%?
(Check current rates)
YES - A mortgage refinance may be a great option for you! Refinancing has upfront costs, but a lower rate can save you big money in the long run.
NO - Hmmm, the rate is a big factor in the refinance decision! Without lowering your rate, you'll have to have some pretty solid alternate reasons to justify a refi. Move on to Question 3!
3. Do you want to shorten the length of your mortgage term to save on total interest paid?
(For example: Switching from a 30 year mortgage to a 20 year term)\
YES - A mortgage refinance may be a great option for you! Refinancing has upfront costs, but a shorter term can save you big money in the long run. You may want to check out questions 5-10 to see if any of those factors impact your decision.
NO - Let's keep talking. Move on to Question 4!
4. Have you reached 20% equity in your home and are looking to eliminate mortgage insurance?
(FHA loans require a refinance to Conventional in order to drop the mortgage insurance premium.)
YES - A mortgage refinance may be a great option for you! Refinancing has upfront costs, but dropping that monthly mortgage insurance premium can save you big money in the long run. If you have a conventional loan with mortgage insurance, you may be able to just call your mortgage servicing company once you reach 20% equity and have them remove it, without doing a full refinance. Before you commit, check out questions 6-10 to see if any of those has an impact on your decision. 👍
NO - You may want to wait to refinance until you've reached that equity position where you have 20% 'money down' so that you can take advantage of dropping that insurance. But it's worth talking to a professional about it! Move on to Question 5.
5. Are you looking to make a switch from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage, or vice-versa?
YES - Depending on current rates and the details of your current situation, refinancing may or may not be a good option. Consider chatting with someone at Copper State Credit Union to talk through the details.
NO - Onward to Question 6!🏃
6. Do you currently have more than one mortgage-type lien on one property that you want to consolidate?
(For example: having a first mortgage and a home equity line of credit)
YES - Sometimes, this is a great reason to refinance! Other times, not so much. It can be helpful to talk through the details with someone regarding your specific situation! Contact a mortgage specialist and start the conversation. Or, simply start by reading the Empower Your Money tips below.
NO - Keepin' it simple! Go on to Question 7.
7. Do you want to lengthen the term of your mortgage in order to lower your monthly payment?
(For example: from a 20 year mortgage into a 30 year mortgage)
YES - For some people, this is a good idea. But sometimes, it can do more harm than good. It really depends on whether extending the term and paying more interest overall is worth it, in your specific case. Read the Empower Your Money tips below and know that an experienced mortgage lending specialist can help you weigh the pros and cons.
NO - You'll probably save on total interest paid if you avoid lengthening the term. Move on to Question 8. 😘
8. Do you want to consolidate high-interest debt with this mortgage refinance?
(A high interest rate is generally considered to be 15% APR or higher)
YES - If you have a plan in place to prevent the creation of new debt, and you have a realistic budget plan in place, a mortgage refi may be a good option for debt consolidation - but in some cases it can make things significantly worse. Our Cash Out Refi course goes into more detail on this topic. Read the Empower Your Money tips below and know that an experienced mortgage lending specialist can help you determine whether your specific situation is a good fit for a mortgage refi. Contact one here.
NO - Keep on going! Question 9 is next. 👇
9. Is your total monthly unsecured debt payments more than 42% of your total monthly income?
Exclude auto and mortgage loan payments when you're calculating monthly debt payments.
For example: if you make $10,000 per month [gross - before taxes/deductions], is your total monthly payments towards all unsecured debt less than $4,000?
YES - You'll have a harder time qualifying for a mortgage refinance loan with more than 42% of your yearly income in unsecured debt balances. This percentage is known as your Debt-to-Income ratio and you can learn more about using a refinance with a high DTI here. You may also benefit from a free credit counseling session with GreenPathTM which is included as a benefit of membership with Copper State Credit Union!
NO - Great! This means your debt-to-income ratio is in what lenders consider a healthy range. This doesn't necessarily mean you should refinance, but it's a good indicator. Take a look at all the information, and then decide. 👌
10. Are you wanting to take cash out of your mortgage refi for a reason other than debt consolidation/payoff?
(For example: Home improvements, college tuition, medical bills)
YES - Our Cash Out Refi course goes into more detail on this topic. A mortgage refinance may be a good choice for your needs, but it's not always the right option! It really depends on your personal situation and overall financial picture.
NO - Ok! Hopefully the info above has given you some insight. Read the Empower Your Money Tips below, and happy refinancing 🙃 (if that's the route you choose!)
If you answered YES to any of the questions #6-#10, consider these Empower Your Money Tips.
Empower Your Money
1. Make a budget. No, really - using your home’s equity is serious business, and you want to make sure you have a realistic spending plan in place to avoid going into unmanageable debt. Download our free spreadsheet, watch the budgeting webinar how-to, or take a look at our free budgeting eBook.
2. If debt is an issue, cut up credit cards but leave the accounts open to avoid a hit to your credit score.
3. Use caution when deciding to utilize your home’s equity. Get counsel from an expert and do your research before making a decision.
These ten questions are key to understanding your own motivations for refinancing, potential pitfalls you could come up against, and when a mortgage refi is truly a great idea! We hope it helped and that you're one step closer to your financial goals.
Maybe you're in the market to buy, not refinance! We've got you. Check out our How To Buy A House in Arizona: A Complete Guide or download it for free.
Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.