When market interest rates dip, it may be a good time to consider refinancing your existing home loan. But simply comparing interest rates is not enough. Here are some other factors to consider before you refinance.
* Compare apples to apples. Always request a good-faith estimate from any lender. This report should disclose all the fees and closing costs, such as points, credit report fees, inspection fees, private mortgage insurance, and appraisal fees. Use this information to evaluate competing loan proposals.
* Calculate your breakeven period. This is the length of time it takes you to recover the costs a lender typically charges to refinance your mortgage. To do this, divide your closing costs by your monthly savings (your current loan payment minus your new loan payment). If you plan on selling your home in the near future, refinancing may not save you money because it usually takes several years to recover your closing costs through a lower monthly payment.
* Read the loan agreement. Before you pay off your existing mortgage, check your loan for an early payment penalty clause. In addition, make sure you read and understand the terms of your new loan. For example, watch for restrictions against renting out your property without your lender’s consent.
* Evaluate the risks of debt consolidation. When you refinance, it may be tempting to consolidate high-interest personal debts into a single lower-interest home loan. Securing a consolidation loan with your home may turn your interest into a tax deduction, but be aware of the risks as well. Also, there are limits on the deductibility of home equity interest. Finally, if you can’t make the payments, you could lose your home.
Whether refinancing makes sense in your particular situation depends upon a number of factors. Call us; we can work with you to review your financial situation and help you select the loan that best fits your needs.
Written by: Doug Rodrigues