You’ve heard about refinancing, you’ve seen Joe and Mary down the street pull out $20,000 for a kitchen remodel, which you know they didn’t have in the bank and you’re wondering if refinancing is a good option for you? As a loan officer, I’ve heard just about every question out there and these seem to be the four biggest.

#1. How does refinancing actually work?

Refinancing is not a modification of your existing loan but a completely new loan with new terms. If you took out a 30-year mortgage five years ago on your home and now you want to refinance to another 30-year mortgage, you basically start over. If after five years of paying on the 30-year mortgage you want to refinance for a 15-year mortgage, you’ve basically saved yourself 10 years of paying your mortgage.

Just as with any refinance or home loan you want to shop around for the best option. If you’re trying to pull money out or lower your monthly payment you want to look for an interest rate that is at least 1% lower than what you have now. Also, many people the started out with an adjustable rate mortgage may refinance to a fixed rate mortgage.

#2. Is refinancing right for you?

Now that you know what refinancing is, is a smart decision for you and your family?

You want to consider your current mortgage, the terms, and the interest rate. You’ll also be paying additional closing costs, which can be rolled into the new loan, but if it takes you several years to recoup the cost it might not be worth it. You need to run all the numbers and talk to a loan officer about the different options and interest rates that are currently available. Learn more about a no closing cost refinance

#3. How much will it cost?

As we previously mentioned, you’ll need to pay closing costs in order to replace the original mortgage with the new one. This is anywhere from 3% to 6% of the principal cost including any prepayment penalties you might incur. There are low-cost refinancing options but very few “no fee” options as these are typically just a way to put the costs somewhere else. All of these costs can be built into the new loan so it usually ends up costing you nothing other than perhaps an appraisal. Often times, depending on how the new loan is drawn up, you may be able to skip one or even two monthly payments, saving you a little bit of money that you can put towards principle for use for other resources.

#4. Is refinancing ever a bad idea?

Refinancing is a great option but it may not be for everyone at every time. You’ll need to be eligible for the new loan just as you were for the initial loan and it helps to have some equity in the home and a decent credit score. All of these issues can prevent or excel your chances of refinancing your home. You’ll also want to verify that there’s no prepayment penalty on your original mortgage, which can negate the potential savings of a refinance.

For more information contact me today to get started on refinancing options or to talk about what’s available to you and your situation.