7 Questions To Ask Before You Say Yes To Mortgage Refinancing

According to the Federal Housing Finance Agency, total refinance volume in February 2017 fell, perhaps due to the increase in mortgage rates.

By, Susan Ranford | Exclusive To Corridor News

Fact: not everyone can afford to buy a house in cash. Oftentimes, you turn to banks that will help finance the purchase of your dream home. Apparently, market changes and the interest rate you once agreed on could be higher compared to the rate prescribed at present.

When that happens, you resort to mortgage refinance. Simply put, this means swapping an old loan for a new and better one.

According to the Federal Housing Finance Agency, total refinance volume in February 2017 fell, perhaps due to the increase in mortgage rates. This leads you to the next point: when should you say yes to mortgage refinancing?

Below are some of the questions you need to ask first:

What Is The Purpose Of Refinancing?

In fact, this is the first question you need to ask yourself. While it sounds good in theory, this type of transaction has disadvantages too. Before you say yes, ask yourself why you want to refinance in the first place.

There are three common reasons cited:

• The current interest rate in the market is lower than your existing mortgage interest rate.
• Lower monthly payment is preferred.
• A fixed interest rate is more appealing to you.

These reasons are valid. Before you decide, do the math and compute how much difference will it be if you stick to your current mortgage plan versus the refinanced one.

Do I have The Time To Understand How Refinancing Works? This sounds like a simple question, but the impact is great. Refinancing your mortgage requires time and effort to understand how it works in order to make it advantageous for you. If you don’t have the time or always stressed out to read and understand everything up to the fine print, then don’t proceed – yet. You might get caught in situations that you can be aware of IF you read and understood what you were signing. How Much Is The Mortgage Refinancing Fees? Every transaction equates to cost, including refinancing your mortgage. This is why it is advisable to “shop around” to allow you to compare fees charged by lenders. Don’t hesitate to ask an estimate of the fees such as prepayment penalty involved from your top three choices of lenders. This allows you to compare rates and be able to choose a plan that is most suitable and affordable for you. Speaking of fees, closing costs are important. Surprisingly, closing costs are expensive, usually one to three percent of the mortgage balance. Make sure this amount is disclosed because this could be too much for your pocket. How Long Will I Stay In The Mortgaged Property? Did you know that during the first few years of your mortgage, the majority of the payment goes to interest? As you approach the end line, interest payments are lessened and a big chunk goes to the principal amount. This is why before you refinance, ask yourself about your long-term plan on the property subjected to the mortgage. If you plan to move to a new house every five or 10 years, then mortgage refinancing is not a good idea because you won’t benefit too much from amortization. Has The Interest Rate Dropped To More Than One Percent? The truth is market changes every day based on what’s happening in the market. The interest rate may be at one percent now but the next day, it could go higher and lower. Don’t get too excited. If the mortgage interest rate dropped, then this doesn’t mean you should go for refinancing immediately. In fact, a decrease in rates does not always justify mortgage refinancing, especially when you have smaller outstanding balance. Does this mean more than one percent decrease is worth refinancing? Not necessarily. There are instances when interest rate remains the same but refinancing is advisable such as changing from variable rate to fixed rate on your mortgage, especially when the market is volatile. Is The Mortgage Term Shorter? Refinancing means lower interest rate, but does this mean shorter loan term as well? If yes, then this means bigger savings, although this could equate to higher monthly amortizations. Why not maintain the existing term or aim for a longer one? That is possible, but this defeats the purpose of refinancing. Even if there is a decrease in interest rate, longer term increases the overall costs instead of giving you more savings. How Is My Credit Standing? Getting your housing loan approved does not automatically mean you will qualify for refinancing. In fact, your credit score could also dictate not just the approval or rejection of your refinancing application but also a good mortgage rate. This means the higher your credit score is, the lower the mortgage rate will be and more opportunity for you to negotiate refinancing terms, especially interest rate. Otherwise, qualifying for such facility might not be approved because lenders see that you are not a responsible borrower. Refinancing your mortgage might be a good idea because it allows you to save more on interest and at the same time, enables you to pay your mortgage on time, if not earlier. Before you do, make sure you answer these questions first to determine if it’s the right strategy for you.

---