Refinancing can be a smart financial move if you’re looking to reduce your monthly mortgage payment or adjust the term of your loan. However, as with any major monetary decision, there are plenty of pros and cons to weigh while closely examining your unique situation. Answer the following three questions to help you make an informed decision.
Why would refinancing be beneficial to me?
Depending on your current mortgage situation, refinancing could ultimately mean more money in your pocket. Primary reasons to consider refinancing include securing a lower interest rate, lowering the monthly payment, or changing from an adjustable rate to a fixed rate.
If the existing mortgage has an interest rate notably higher than current averages, it may be wise to explore locking in a lower rate to save money both in the short- and long-term. While lower monthly payments in the immediate future have a lot of appeal, it’s essential to evaluate the bigger picture before making this sort of financial move. Consider this, if you’ve been paying the existing 30-year mortgage for 10 years and refinancing to a lower monthly payment will mean another 30-year mortgage, this means you’ll be in debt for a total of 40 years. If the math breakdown shows it's cheaper to stick with a higher rate loan over a shorter time period, staying with your current loan may be the better option. A mortgage lender can discuss different scenarios to help you understand the options to make a decision that is most beneficial for your situation.
As for swapping an adjustable-rate mortgage for a fixed-rate mortgage, this can be a good option if you intend to own the property for a longer period of time. The initial appeal of an adjustable-rate home loan is the low rate at the beginning of the loan, but the catch is the rate will begin to fluctuate after a few years. Committing to a low, fixed rate home loan takes the uncertainty out of monthly payments and may even help you save money in the long run.
Is my credit in good shape?
Before you proceed with the refinancing process, you’ll first need to qualify. This means that a lender will evaluate numerous factors including your credit score, debt-to-income ratio, and the loan-to-value ratio. In order to qualify for the best refinancing rates, it’s important to have a healthy credit score. Credit scores can be checked by requesting a credit report from each of the three credit reporting agencies - Equifax, Experian and TransUnion - or visiting annualcreditreport.com. You can also use Credit Sense within online and mobile banking to regularly monitor your score, review your full credit report, access personalized tips and learn tools to build your credit. Based on what is learned from reviewing the findings, steps may need to be taken to up your score before applying to refinance. Here are several ways to boost your credit score.
What are my financial goals?
The process to refinance is comparable to what you had to do to get approved for your current mortgage. In addition to closing costs, other expenses may include an appraisal fee, title fee, recording fee, and underwriting fees. Closing costs will be approximately two to five percent of the total value of the loan, so a sizable amount of money may be needed upfront in order to finalize the new home loan.
If the plan is to keep the home for at least five more years, refinancing is likely worth the initial cost. However, if moving within the next two years is more likely, it may not be worth it. Check out this calculator to see if refinancing might be right for you. If you think it is, a mortgage lender can help calculate your breakeven point so you can make the best financial decision for financial goals now and down the line. They can also discuss any discounts that may be available for closing or other costs.
Keep an eye on current mortgage rates to see if they are declining. If you own a home with a rate higher than the current average, now may be the time to reach out to a mortgage lender to see if a refinance can help you save some money. While it isn't necessarily the right step for every homeowner, it is important to determine which course of action is best for your situation.
Lakeland Bank offers several mortgage solutions including fixed rate loans, jumbo mortgage loans, adjustable rate (ARM) loans, first-time homebuyer programs, and renovation loans. Our mortgage experts can walk you through the application process, explain all available options and help you make the best choice. Contact a mortgage representative in your neighborhood to request a consultation.
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