Should you refinance now or not?
As we start 2012, the average rate for a 30-year fixed rate mortgage is 3.95 percent according to Bankrate.com, the financial rate aggregator website. Rates on shorter term loans and for adjustable rate mortgages are even lower, even below 3 percent for certain adjustable rate mortgages.
Alas, refinancing is not a good idea for everyone. Let’s take a look at some reasons why you should put off refinancing and not pursue this option at all:
1. Your credit is weak — If your credit rating has dipped in recent months or years, then you’ll find that refinancing is more difficult than you had imagined. Those scores offered by Bankrate.com and others are for people with very good credit — if you have poor credit then you’ll pay a higher interest rate if you’re approved at all. Solution: work diligently to repair your credit and apply for refinancing only when your score is very good or well above 700 points.
2. You plan to move — If you plan to stay in your home for the long term, then refinancing may make sense for you. However, if you plan to put your home on the market within the next one to two years, then you may never recoup your refinancing costs. You’d be better off keeping your current home loan and then finding a great deal on a new loan if you plan to buy another house.
3. Your current rate is already low — When should you refinance? When rates drop a full percent? 2 percent? Most anyone who has refinanced over the past few years already has a low rate. Use our sister site’s mortgage calculator to compare your current monthly payments to your proposed monthly payments. If that difference is just $20, it could take you about 15 years to recoup your closing costs. If the difference is $100 per month and your closing costs are $2,000 or less, than you’ll make recoup your costs within approximately 20 months. Is time on your side?
4. Your home’s value remains down — If you’ve owned your home for at least five years, you may be battling a problem that is affecting millions of American homeowners: reduced home values. If you’re particularly unfortunate such as its value having dropped 20 percent or more below what you paid for your home, then you’re barely staying afloat. You may be underwater too: owing more for your home than what it is worth. The good news here is that your local market may have stabilized and begun to rebound. Only time will help you ride out this storm — refinancing may not only be unavailable to you, but may cause worse problems.
5. You have just a few years left on your loan — Why refinance now when you have very few years left on your mortgage? You’ll be hard pressed to find a loan that is for fewer than 15 years, thus if your pay off is within that time, do you really want to extend it? Tip: Consider refinancing if you need to take out some of your equity to pay for a home renovation. You’ll end up with a longer term mortgage, but you will gain a renovated home that could increase in value.
If you’re still not sure whether refinancing makes sense for you, then discuss your options with a financial advisor. There may be certain tax advantages to refinancing that were not discussed here.