When the majority of homeowners refinance they don’t look at the whole picture. This episode will help you decide if refinancing is right for you and what process you can take to reach that decision. Ultimately, its about making the right decision for you and your family given your particular situation so your money can work better for you.
In this episode, you will learn:
- The reasons people consider refinancing
- What you should consider and steps to take prior to refinancing
Reasons people refinance
- Decrease interest rate
- Decrease monthly payment
- Getting cash-out (cash-out refinance) (Pause on this)
- Increase or decrease mortgage period (i.e. 15 years or 40 years)
- Move between variable and fixed interests rate
Points to consider before you refinance.
- Equity in Home
- Closer to have 20% or more paid off will make it easier to qualify.
- Credit Score.
- Aim for 760 or above
- Debt-to-Income Ratio
- Aim for less than 36%. Aim for 25% or less in total mortgage payments. (includes principal, interests, taxes and insurance costs).
- Refinancing Cost
- Interests Rates vs the Loan-Term
- Know what your goal is.
- Refinancing Points
- Points, equal to 1% of the loan amount, are often paid to bring down the interest rate.
- Break-Even Point
- If, for example, your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs.
- Staying vs Moving in the Future
- If you may sell the property soon, don’t refinance. Most refinance take between several months and several years to break even and begin saving you money
- Private Mortgage Insurance (PMI)
- Are you paying it now and will you be paying it if you refinance. Know the answer to both.
- Current interest rates vs new interests rate
- At least a 1% difference.
Quick Calculation for Break-Even Point:
- (Current interest rate – new interests rate) x outstanding loan amount = annual interest savings
- Ex: (4.125 – 2.625) x 157,900 = $2,329
- Total Cost / Annual Interest Savings = Years to break even
- Ex: 1760 / 2329 = ¾ of a year
Call to Action:
- Perform the quick calculation break-even point if thinking of refinancing. If it looks good from there go through the process of still making sure it is the right move as explained in the episode. Think big picture and long-term.