Should I Refinance?

Most borrowers are attracted to refinancing for two main reasons: 1) to save money on a monthly mortgage; or 2) to save money on interest over the life of the loan. These are both great incentives for refinancing, but if you aren’t getting a significantly better interest rate, at least one percent or lower than your existing rate, it probably just isn’t worth it. 

Refinancing packages offer borrowers many different options. Choosing a refinancing package that will leverage your current situation depends on your current and future goals. Are you considering moving to an adjustable-rate mortgage, or to a fixed-rate loan that has a steady monthly payment. Is your goal to shorten the term of your loan from a 30-year to a 15-year and save on interest charges? Maybe you are considering refinancing to eliminate the need for private mortgage insurance now that you have achieved 20 percent equity in your home. 

Most homeowners are interested in a straight rate-and-term refinance to lower a current interest rate and solidify a good repayment term.  

Before refinancing a loan, perform this quick checklist: 

• Check your credit score.  Will you be able to obtain a better interest rate than the rate you have now? Interest rate–and the amount you will be allowed to borrow–are determined by your credit scores.
• Make sure your debt-to-income-ratio (DTI) is low.  Your DTI is your total monthly debt payments divided by your gross monthly income. DTI is one way lenders determine your ability to repay the money you’re borrowing. (Most lenders require a DTI of 50% or lower.  A DTI that’s too high could disqualify you from refinancing or limit your refinance options.)
• Consider your current home equity. Do you have at least 20 percent equity in your home? Check neighborhood property values to discover how much your home might appraise for now. Online home value estimates are often skewed, but online sites can show recent sale prices for similar homes near you. Counsel with a local real estate agent to get a better idea of what your home’s worth. Why do you want to make sure you have at least 20 percent equity in your home? Lenders usually require mortgage insurance if you have less than 20 percent equity to safeguard their financial interests if you default. Mortgage insurance can be pricey and when tacked onto your monthly payment it could sabotage your calculations about potential savings.
• Evaluate what you will gain/lose with your lender. Refinancing will have a loan origination fee, closing fee and other loan fees.  Also, check whether you face a penalty for paying off your current loan early. Make sure refinancing will really save you money in the long-term.