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Key Questions to Ask Yourself Before Deciding to Refinance Your Mortgage

April 12, 2016

Key Questions to Ask Yourself Before Deciding to Refinance Your MortgageIf you’re looking to reduce your interest payments or get more favorable loan terms, there are lots of ways you can change your mortgage. But one of the most effective ways to take advantage of low interest rates is with a mortgage refinance. That said, refinancing typically comes with a variety of costs and may not be a good solution or all homeowners.

So how can you tell whether it’s a good idea to refinance your home? Here are three questions you need to ask yourself if you want to find out.

How Much Equity Do I Have?

If you have less than 20 percent equity in your home, your lender can require you to get private mortgage insurance. While refinancing could get you a lower interest rate and better terms, extra PMI costs will usually devour any savings you may have had. Before you decide to refinance your mortgage, determine how much equity you have in your home and how close you are to the 20 percent mark – if you can pay down enough of the balance to drop your PMI, refinancing may be a viable option.

How Long Do I Plan To Live Here?

When you refinance your home, you’ll pay administrative costs ranging from 3 to 6 percent of the loan’s value. You’ll need to do some calculations to determine your break-even point – the point in time when the money you save from a lower interest rate is equal to the amount of money you paid in administrative costs. If you’re close to paying off your entire mortgage or if you plan to move before you hit the break-even point, a refinance will only cost you money.

Is It A Good Time To Refinance?

Refinancing creates a new loan based on your home’s current value – and if your home has increased in value since you bought it, you can cash out your equity. However, refinancing may also lose you money. For example, if you have $300,000 worth of equity in a $750,000 home, refinancing allows you to cash out your $300,000.

But if your property value has decreased in recent years – for instance, if it’s dropped to $500,000 – then a refinance can change your equity status. Equity is your home’s current value minus your remaining loan balance. If you owe $450,000 and your property value drops to $500,000, then your equity is only $50,000 instead of the $300,000 you had before.

The key lesson? Always check market conditions before refinancing a home.

Refinancing is a complex issue with a variety of nuances. That’s why it pays to consult your local mortgage professional to learn whether a refinance is right for you.

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