When is the Best Time to Refinance?
With interest rates at an all-time low you may be thinking of refinancing your home mortgage. But is it the right time for you? Well, that depends on a few things, according to Rob Hoffman, President, New Foundation Savings Bank. “For instance, is this your forever home or do you plan on selling within the next year or two?”
If you plan on selling soon, refinancing may not be the right move. So how do you know when it is right? Rob says, “When the savings on interest over a two-year period or less is greater than the cost of refinancing, then refinancing typically makes sense. For example, say you have a $100,000.00 loan and the interest savings is 1% which is roughly a savings of $2,000.00 over two years, and the cost of refinancing is $2,000.00 or less, then you should probably refinance at that point.”
“There are some exceptions to this rule,” Rob goes on to say, “For instance if you are in your forever home and any time the interest rates have hit rock bottom and start to trend back up, probably jump in on that.”
How much does the interest rate have to change to make it feasible to refinance? Rob says. “Smaller loans require a greater change in interest rate in order to justify the cost of refinancing. If, however, you have a mortgage loan of $400,000.00, a drop of just 0.25% in the interest rate would save you $2000.00 over a two-year period which would be enough to justify the cost of refinancing.”
How can you determine the cost of refinancing and the amount you would be saving in interest? Rob says, “Each case is individual, and we are able to do the calculations. Come into New Foundation Savings Bank and let us run the numbers for you. There is no fee upfront or credit check fee.”
Once you are given the information and it makes sense to refinance, you will have an opportunity to sign a written “Intent to Proceed”. While New Foundation Savings Bank
doesn’t charge points for refinancing, there will be closing costs for the refinanced loan beginning with an appraisal fee for the appraisal of your house and property. If you are a current New Foundation Savings Bank customer, you may get a break on some of the closing costs. If you are a new customer, our local loan decision making and processing make it advantageous for you to come to us for a refinance loan rather than deal with a larger impersonal bank.
Some of the information the bank will need to proceed with the refinancing process include the same documents you had to produce when first applying for your home mortgage these include:
- Proof of Income in the form of two-years-worth of tax returns and pay receipts
- Information about outstanding debt for instance, house, car, or boat loans and credit card debt
- Proof of Identity including driver’s license and Social Security number
- Relevant checking and savings account information
- Any loans currently in deferral status
When refinancing is it better to apply for a 15-year loan? 30-year loan? “This depends on your cash flow and if the difference in interest rate would be significantly beneficial,” says Rob. “If cash is tight, it may be better to get a loan for 30 years. You can always pay it off in 15 years and we are happy to make those calculations for you. But that way, if cash gets tight down the road, you won’t miss payments and have it affect your credit score.”
Ok, you’ve decided to refinance, should you consider a cash-out loan? Is it better to pay off everything else with the proceeds too? “While it’s not a good idea to pay off short-term loans with a long-term house loan, such as a car or credit cards,” says Rob, “It may be advantageous to use the loan to pay off other long-term loans such as an RV or boat loan if the interest rate is significantly lower.”
“We are always happy to run the numbers for you,” says Rob. Call for an appointment to come into New Foundation Savings Bank and see if the right time for you to Refi is now.
Each person’s financial situation is different and the information contained in this article is for general guidance. Please consult a mortgage professional to discuss your unique situation and determine the best option for you.