If you own a home but have high a high interest rate or an unsatisfactory loan, this might be the time to refinance. However, before you make any decision, it is important to know that just as you had to pay costs associated with the home’s original purchase, refinancing also includes costs. Therefore, you need to consider a few things first to make sure refinancing makes sense.
For starters, look at the amount of time you plan spending in the house, which will have a huge impact on your decision. Additionally, your current tax bracket would also come into the decision-making process. To give you an idea of how costs could affect the refinancing, remember that this would be a new loan. Therefore, if you pay the original loan off early, it might be in your documentation that you are charged a penalty for prepayment. Although this is not as common as it once was, you will still find some loans with this clause.
Then, settlement costs, points, and interest rates, along with other varying costs would be considered by the lender in you qualifying. Just because you were able to qualify for the original home loan, you may be in a different financial situation now. In other words, qualification could be difficult or impossible. You would also want to take time to meet with a couple of lenders so you know exactly the rates and costs you would be expected to pay for the refinance. With this information, you would be able to calculate your new monthly payment to see if the process is worth it.
Once you have the costs, you can go one-step further by identifying the length of time it would take to recoup the costs of refinancing. For this, you would take the closing costs and divide them by the difference of your new and old payments, which would provide you with the monthly savings. Next, take time to shop for the best interest rate, as well as points. You would then want to determine the best interest rate/point combination so you can balance the amount of money that would need to be paid upfront versus monthly.