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By Oliver Jones
Who wouldn’t want to jump on a low interest rate or reduce a monthly mortgage payment? But how do you know if a refi really makes sense for you?
First, you have to know your goal.
“A lot of people stumble into the office and say, ‘I want to refi,’ and haven’t really thought it through,” said Ruben Lopez, a veteran loan officer based in Santa Barbara, California. “Some people are really looking to pay off their houses faster or need payment relief today. Some are scared their adjustable rate mortgage will start climbing upwards. Some need extra cash for really good reasons. So that’s always the very first thing you have to do when you refinance: Identify your overall goal."
Then, whatever your goal, similar rules of thumb apply.
Treat your refi like the big purchase it is. Too many people think that the mortgage is the big purchase and that a refi is nothing more than a minor retooling—the equivalent of taking your mortgage to the shop. The truth is, there’s nothing minor about a refinance.
"Like mortgages, refis are expensive,” said Cary Carbonaro, author of The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear. “I always run and rerun numbers for my clients before we say it is a go. It is not a decision to be taken lightly.”
The biggest thing to remember about a refi is that it’s essentially a brand new mortgage on your existing home; it comes with closing costs, appraisals and various fees that can add up quickly, not to mention that it restarts your 30- or 15-year loan timeline. Refis deserve the same careful consideration that you give any other major purchase—and that includes walking away.
Find your break-even point. According to Carbonaro, a key calculation to make when refinancing is your break-even point. Estimate the costs of refinancing your loan and compare them to your estimated monthly savings. That’s the number you should keep your eye on when deciding whether to move forward on a refi—not a seductively low rate.
Pay attention to your credit. Refinancing is a key time to get your credit in order. If you have been putting off paying down existing credit cards or clearing up any erroneous problems with your credit report, it’s time to put the putting-off off.
A credit score in the low 600s may leave you in refi limbo, but good or excellent credit opens up a world of possibilities when refinancing.
“It’s possible to pay the same monthly rate on a shorter term mortgage,” explained Carbonaro. “In some cases, if you have paid down a large amount of your mortgage and you are going from a 30- to a 15-year, the rates can be substantially less. Just make sure you have grade A credit.”
Seek out help if you need it. It’s been nine years since the mortgage meltdown, but for the homeowners who still owe more than their home is worth, it feels like yesterday. If you’re in that situation, you will want focus on paying down the principal before refinancing.
Mary Hurlburt, a counselor for Lifespan, a member agency of the National Foundation for Credit Counseling, learned this when she and her husband purchased their third home together in 2006, shortly before the market crashed.
“Our house was underwater, so in the beginning we added more to our payment because we didn’t want to owe more than what it was worth,” said Hurlburt. “As soon as we got it down to where it was no longer underwater, then we refinanced. A year later the interest rates dropped two points and we were able to refinance again.”
It is important to remember that for people underwater on a mortgage, there are programs like the Home Affordable Refinance Program, which has been extended through September 2017, that can help.
Fire up the paperwork. If you’re on the other side of the spectrum—swimming in income and equity—don’t expect to cut to the front of the refi line. Be prepared for the same arduous document gathering you faced when you got the loan in the first place. If you are paperwork averse, refinancing may not be for you.
“In the current lending environment, everybody has to be treated equally,” said Lopez. “Sometimes I get the impression that people who think they clearly qualify for this loan four times over also think they are above all the paperwork. But that is not how it works. By law, everybody has to go through the same process, regardless of how wealthy or well qualified they are. You still have to be supported.”