“To Refinance or Not to Refinance?” — That is the question

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Whether or not to refinance your home can be a difficult decision. Refinancing can sometimes save you hundreds of dollars each month, and let’s face it; we could all use a little extra money in our pockets.  However, before you decide to refinance, it’s important to look at the big picture and ask yourself, is it worth it to refinance now, or will the upfront cost of refinancing hurt more than the monthly savings will help? 

There are key questions that need to be answered in order to determine if refinancing is worth your while. The best way to start the process is by doing your homework and getting as much information as you can in order to help you make the decision that’s right for you.

At 1st Atlantic Mortgage, we are dedicated to helping our customers figure out what’s best for them both today, as well as in the future. Our expert staff has the knowledge and experience in the marketplace to help homeowners make qualified decisions about their home and home finances.  We hope you’ll find the following both informative and useful in helping you make your refinancing decision:

Why Refinance?
Does a low interest rate equal an automatic “yes” to refinancing?
What will it cost me to refinance?

Why Refinance?

Mortgage Rates are at historic lows.  Does that propel people to want to refinance — yes. Is it always the right course of action — definitely, no.  When you refinance, you are essentially taking out a new mortgage and replacing the old one. From there, you have a decision to take out a loan on a fixed rate with monthly payments or take a loan with changing rates and payments.  The key is finding what best suits your needs.  

The following are things to consider when deciding how to refinance:

1. If your current interest rate is high and the rate being offered is lower, refinancing might be right for you. However, if you have paid a lot on your mortgage and you are currently paying down your principle, taking out a new mortgage and starting over again may not be right for you.
2. Decide what is more important to you — having some more money in your pocket now, or paying off your mortgage sooner. If you have only a few years left on your mortgage, refinancing could lower your payment but will increase the amount of years of paying off your home.
3. Consider the immediate cost of refinancing. How many points will you have to pay? Closing costs? (See below for more details)

Does a low interest rate equal an automatic “yes” to refinancing?

The bottom line is that you are not recommended to refinance unless the new interest rate is at least two percentage points lower than your current rate. Many lenders offer are zero point loans and low-cost refinancing. Therefore, even if your rate change is less than one percentage point, you are still able to save some money by refinancing. In most cases, the lower the interest, the more points the lending institution will charge.

Most lenders offer a wide range of interest rates at different amounts of points. One point is equal to one percent of the loan amount. For example, four points on a $100,000 mortgage loan would add $4,000 to the refinancing charges.

It’s important to remember all of the costs associated with refinancing. (see below)  Once you’ve taken into account what refinancing will cost you, then it’s time to determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by the following equation:

1. Amount of closing costs divided by
2. Difference between your old and new payments (the money you would save per month)

equals

Time in money it will take you to recover the costs of refinancing.

The best thing to do is determine what you can pay upfront versus what you what to pay per month — this will help you determine which way to go is best for you —a lower rate versus lower points — money in your pocket per month versus money you’ll have to put out up front.

A lower interest rate should not always be the driving force behind refinancing. You must determine if it is financially beneficial to you now, as well as in the future.

What will it cost me to refinance?
When you refinance, you essentially will have to pay the same costs that you paid when you bought your home in the first place.  These include application fees, appraisal fees, survey costs, homeowner’s hazard insurance, credit check, Lender’s Attorney’s review fees, Title search and insurance fees, home inspection fees, points, and so on.
In general, you should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, including any prepayment penalties and the costs of paying off any second mortgages that may exist.  ($100,000 mortgage could mean between $3,000 and $6,000 in refinancing costs.)
The total cost for refinancing a mortgage depends on the interest rate, number of points, and other costs required in attaining a loan.  See our refinancing calculator for personalization.

As you can see, it is extremely important to have all of the facts when deciding to refinance. A lower interest rate does not guarantee that refinancing is the right course of action for you and your family. It is important that you get all of your information together to see if you will truly be saving money by refinancing.