Interest rates on mortgages are dropping and many people are debating whether or not refinancing their existing mortgage is a good idea. Here's what you need to know when looking at your own mortgage and whether or not you should act on the low rates or wait for a little longer.
What does it mean to refinance a mortgage?
When interest rates drop, you can refinance your mortgage to get a better interest rate than you currently have. This can lower your monthly payments or shorten the length of the mortgage term from 30 years to 15 years, for example. You can refinance with the same bank or with a completely new lender that you find through a refinancing broker. Choose whoever is giving you the best rate.
When should you refinance?
Experts say that you should refinance whenever you can reduce your interest rate by at least one percent, preferably two percent. The lender will check your credit and employment history again so you still need to be in a financially stable position.
What is a refinancing broker?
A refinancing broker is a person who works in the mortgage industry as a freelancer. They do not work as an employee for any one bank or credit union but rather they work with many lenders. Their goal is to find the best deal for their clients, which requires working with a multitude of lenders and underwriters.
Are there fees involved in refinancing a mortgage?
There are fees involved when you refinance a home. You will have to pay to have the house appraised again as well as to record the new deed with the county. There are also origination fees, which is basically a service fee paid to the bank or mortgage refinance broker for their time.
Another type of fee you may see is called a mortgage point, discount point, or sometimes just point. You can purchase a mortgage point to lower the interest rate. You will often see this advertised as "2.75 percent with 1 point", which means that you can receive the 2.75 percent interest rate if you pay one mortgage point at closing. One mortgage point is equal to one percent of the cost of the loan. A point would cost $2,000 on a $200,000 loan.
What is a break-even point?
A break-even point is a term used to describe when you break-even on the cost of refinancing after all points, fees, and miscellaneous expenses. This is different for each situation, but you ideally want to break-even in two years or less.
Whether or not now is the right time to refinance depends on your personal circumstances and is best discussed in detail with your mortgage refinancing broker.
