You own a house here in Fairfax County with a 7% 30-year mortgage, and you want to know should I refinance my mortgage. You must be an unusual person to have been paying on the $150,000 mortgage for 20 years without refinancing. Rates are currently below 4%. Your friends are aghast that you haven’t refinanced.
Refinancing means adjusting the terms of your mortgage. You can adjust your mortgage to pay more per month so that you shorten the life of your loan. Or you can adjust your mortgage to pay less per month so that you lengthen the life of your loan. Some refinance to take out money for special projects, finance education, buy a second home or pay off debts. Because of our low interest rates, depending on the original rate and the time you have been in the house, you can take out money, extend the term of the loan and end up with the same payment as before. If you have 15 years left on the mortgage there’s no need to take out a 30-year mortgage; you can refinance with a 15-year mortgage.
Chase writes on their website, “When interest rates drop, or home values rise, it may be a good idea to refinance your loan. Refinancing can help you lower your monthly payments, reduce your total payment amount or even put your home equity to good use.
Whatever your reason for refinancing, you will have to apply for new credit through a bank or mortgage broker or real estate investor.
Here are the elements that will determine the rate you will receive
- Loan size
- Your FICO credit score
- Paid points
- When is the closure of the loan?
- Fixed or floating rate
- Debt to income ratio
Keep in mind that refinancing involves closing costs that can soak up some of the savings from a lower mortgage rate.
Know the costs associated with refinancing.
It probably doesn’t make sense to refinance if the costs and fees associated with refinancing are bigger than the amount of money you would have saved after refinancing. Figure out up-front how much you’re likely to be charged for refinancing. It is not uncommon to pay between 3% and 6% of your principal in fees. Some possible fees you could face include:
- Application fee: $100 – $300
- Appraisal fee: $300 – $700
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