They say it’s good to be king…not so sure the same can be said about being President. President Obama has been paying well over $4,500 per month on his Chicago home since he’s been in office. Yet, considering Mr. and Mrs. Obama are still paying 5.625% on a mortgage they took out in 2005, they could likely cut that mortgage payment drastically if they refinanced.
But of course, being President comes with a lot of perks and a lot of drawbacks too, and refinancing isn’t that simple for the First Family.
Sadly by the time President Obama is finally able to do it, interest rates will likely be back to normal and there goes the potential savings. Fortunately for you, you don’t have to wait.
However, before you jump in head first, there are more things to consider than just a lower interest rate. Refinancing isn’t a smart move for everybody. So who should be refinancing in the current market? Our friends at WiseBread have a great post on this topic, and we’re going to look at some of their points and others.
Here’s what you need to know:
- The costs associated with refinancing need to be weighed against your personal financial goals.
- You should consider how long you plan to stay in your home.
- There are programs that could make refinancing much easier for you if you qualify.
- New advances in technology and online platforms give homeowners more options.
Costs Associated with Refinancing
When you refinance, you may not realize how many costs are associated with it. In total refinancing fees could end up costing you up to 6% of the value of the loan and it’s important to calculate the break-even point in which it is economical for you to undertake a refinance. The costs often include:
- Appraisal Fees
- Title Insurance
- Credit Check
- and Closing Costs
It’s important that you factor these associated costs into your personal financial goals to ensure you’re ready to refinance. If you need help setting attainable financial goals, the folks at the Simple Dollar dive into the subject a little deeper.
It’s also important to remember that if you sell your home before you’ve recouped these costs, you haven’t really saved any money from the low-interest rate you’ve secured.
How Long Will You Stay in Your Home?
That leads nicely into the second consideration; how long you will stay in your home. Don’t forget, when you refinance your home, your debt is going to increase. Your payments get lowered but your principal goes up.
But the absolutely worst thing you can do - no matter your situation - is to refinance on a home that you may sell before recovering the closing costs. Whether or not you intend to stay in your home for the long haul is perhaps the most important thing to consider.
The same goes for those of you who are almost finished paying off your home. You likely won’t have enough time to recoup the cost of your refinance if you have less than 5 years on your mortgage.
Reasons for Refinancing
Okay, don’t get discouraged; there are downsides to everything. Now let’s talk about why you should refinance. Here are some of the most common reasons people choose to refinance:
- Because Interest Rates Are Low
- To Reduce Interest Costs
- To Consolidate Mortgage Debts
- and To Get Cash for Home Improvements
When interest rates are lower than the rates you are paying on your current mortgage it could be a good time to refinance. You pay more in interest on your home loan than almost anything else. It’s only logical that you would want to knock that down as much as you can. Some experts, like Ben at Money Smart Life recommend refinancing when rates are at least 2% below your current rate.
Interest rates over the last few years have been lower than they have ever been since 1971 when those records first started being kept. Less than a decade ago interest rates on home loans were over 6%. Today, they are just over 4%.
If you qualify for special programs or have excellent credit, you could get it down to under 3.5% like Vice President Biden did two years ago. Jack Lew, the U.S. Secretary of Treasury, also reduced his interest rate in 2013 from 4.1% to 2.6%.
Refinance Programs You Could Use
The U.S. government has created several programs to help homeowners to reduce their payments, even those who are underwater on their mortgages. Here are some of the refinance programs you could use to get a good rate even if you have poor credit:
FHA Streamline Refinance: If you already have a mortgage issued by the Federal Housing Authority you can reduce your monthly payments without having to go through the hassle of paperwork. You can’t pull cash out of your home, but you get all of the other benefits without having to produce appraisals, inspections, or meet certain credit score criteria.
VA Interest Rate Reduction Refinance Loan (IRRRL): Unlike an FHA Streamline Refinance, if you refinance using this program you may have to produce credit reports and appraisals. But if you already have a VA loan you can use it to reduce your interest rates or convert your ARM into a Fixed Rate Mortgage.
HARP: Homeowners who owe more on their home than what it’s worth can use this program to refinance. Our friends over at Smart on Money offer additional details on what’s required for HARP qualification.
Simple Calculations to Determine Whether or Not You Should Refinance
You can ballpark the benefits of refinancing for your particular situation using one of these simple calculations:
If by refinancing you could reduce your interest rate by 1%, it may be worth it. Make sure to factor in the closing costs too!
Add up the total amount of closing costs then calculate how many months it would take you to pay it back. If closing costs add up to $4,800 and you can afford to put $400 aside each month, you could recoup your closing costs in a year.
If you are extending your loan for 5 years in your refinance, calculate your monthly payment on the new loan if you paid it off 5 years early. Take that number and divide it by the amount you paid in closing costs. That will tell you how long it will take you to recover your closing costs.
Decided You Should Refinance? Do it All Online Now!
Have you come to the conclusion that you are a prime candidate for refinancing? You don’t have to go to the bank to do it. We offer mortgage refinancing completely online. No calls, no paperwork, no hassle. If you are still unsure, check out this refinancing guide for first-time refinancers. Otherwise, let’s get started now!