Should I Refinance My Home Mortgage?

Brent Pittman —  08/29/2012
Housing Question

Is it time to refinance your home mortgage? Credit nikcname

If you have a home mortgage it may be a time to think about refinancing. Who wouldn’t want to reduce their monthly mortgage payments? Is it a good time to refinance?

In general, Yes! As I write this in the end of August 2012 mortgage rates are hitting historic lows every other week. This could be the best time to get a home mortgage for generations to come.

The better question is should you refinance now? A deeper look into your personal financial situation to determine if now is the right time to refinance your home mortgage.

Should I Refinance My Home?

Several factors should be considered when considering if you should refinance. It’s not always a cut and dry situation, but these factors will help in your decision.

1 . Do you intend to stay in your home? If you’re considering moving in the next few years, then you’re not likely to break even with a refinance. You’ll have to do the math to figure out your break even point (see below).

2. What percentage of your take home pay is your mortgage? If your mortgage + PPI  is more than 30-40% of your take home pay, you’re probably having trouble making ends meet. It could be that you’ve got too much house. A refinance might help slightly, but you need to look at your overall financial picture to see if you can afford to stay in your home.

3. Are you underwater or do you have equity in your home? If you the value of your home is less than the amount of your mortgage, then you’ll be stopping in your tracks quickly. It is very unlikely a refinance is going to go through. Lenders like to see at least a 20% equity in the home for a refinance to go through smoothly.

4. Can you affording closing costs up front? Closing costs can be 2%-3% of your total loan. There is an option to roll those costs into your loan, but paying up front in best to avoid extending your debt any longer than you have to.

5. How long until you break even? This is the one of the biggest questions. How long until you recoup your costs involved (home appraisals, closing costs, points, etc)?

Use several refinance calculators to see how they compare:

  • The Mortgage Professor- very detailed for your situations and has the ability to roll in closing costs or pay upfront.
  • Bankrate.com- calculator that lets you factor in closing costs.
If you determine that your break even point is longer than you intend to stay in your home, then it may not be worth refinancing. Also, if you’re in debt and fighting to make ends meet–you’ve got bigger fish to fry than a home refinance. Get your cash flow and debt under control before attempting a refinance.

Common Mistakes When Refinancing Your Home

Extending the mortgage- If you originally had a 30 year mortgage and you’re 5 years into that mortgage, there is no reason to sign up for a 30 year again. You’re trying to get out of debt, not stay in debt longer. Sign up for a shorter time period like a 25, 20, or 15 year mortgage if you can afford the payments.

Not shopping for the best rates and closing costs- Don’t just refinance with your current lender. Shop around and compare mortgage rates with multiple lenders.

Overestimating your home’s value- Most homeowners overestimate the value of their home, especially if they’ve upgraded or done extensive remodeling.You’re probably overestimating by 5%-10%.

Use several sources when getting an estimate to use for your calculations. You home will be worth what the appraisal says it is, unless you can justify with valid information.

Being unprepared and slow to respond- You’ll want to keep on top of everything during this time. Don’t head off for a month long vacation after you start and expect a refinance to happen without a bit of effort.

Be ready to answer any emails, send documents, and be ready to sweet talk any appraisers. This process could take a few months due to the high volume of refinances happening, don’t delay your closing date by being unprepared.

Other mistakes include taking on new debt before or during your refinance, applying for refinance with bad credit, not challenging a bad appraisal, and many more I’m sure. Did you make any mistakes with your refinance?

A Fixed Mortgage is Best

You’ll want to avoid the adjustable rate mortgage, since they’ll start adjusting up at some point in the near future. When will this happen? No one knows, but these low rates won’t be around forever.

Lock in these low rates with a 15 or 20 year mortgage. With a fixed mortgage, you won’t have to guess about your payments from year to year. The rates won’t change!

Have you thought about refinancing your home? Go ahead and see if a refinance will save you money in the end. 

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
  • http://www.CFinancialFreedom.com Dr. Jason Cabler

    We refinanced about a year ago. Our lender was offering a no cost refinance, so we scored bigtime! We now pay about $400 less than before so it was a sweet deal all the way around.

    I also wrote a post a while back on refinancing that might be of interest: “Should You Refinance Now?” – http://www.cfinancialfreedom.com/CFFwordpress/should-i-refinance-now/

  • http://clubthrifty.com/ Greg@ClubThrifty

    We refied our home AND our two rentals. In each instance, we were able to keep the payments at about the same level each month, PLUS we moved them into a 15 year instead of a 30. If you can do it and are planning on staying in your home for a while, NOW is the time.

    • http://www.ontargetcoach.com/ Brent Pittman

      Wow! I bet you’re a pro with refinancing! In 15 years you’ll be sitting pretty financially

  • krantcents

    I love to refi, but my mortgage is small and many lenders won’t refinance. I can do it with my credit union, but I would have to pay closing costs. It may not be worth it.

    • http://www.ontargetcoach.com/ Brent Pittman

      I bet you refi more times than I care to think about with your rentals.

  • AverageJoe

    I like the “no point/no cost” mortgage in this scenario. You won’t have to calculate any breakeven costs (because there are no fees, only a slightly higher rate). It’s a good, flexible option for people who don’t know what the future will hold for them and their home.

    • http://www.ontargetcoach.com/ Brent Pittman

      I’ll have to do more research on this option. I assume that with no points and no costs the % is higher?