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The answer to this question varies depending upon your individual circumstances. Begin by determining whether you are looking to refinance in order to lower your monthly payments and interest rate, to change the term of your mortgage in the form of a Rate and Term refinance, or to take cash out of your home in the form of a Cash-Out refinance. The following sections offer information to help you decide which applies to you and what to look for when shopping for refinance programs. As always, I encourage you to call me any time (520.275.1882) to discuss the feasibility of refinancing your home and to review your particular needs in detail.
Rate and Term Refinance
A Rate and Term Refinance simply means that your current loan is paid off and replaced by a new loan with a different term and/or interest rate. Closing costs and prepaid items can be included in this loan or “rolled into” the loan amount, meaning that you do not come out of pocket for these fees. Jason also can share with you “no cost” and “low cost” refinance options, which would actually lower and/or eliminate the closing costs incurred in refinancing.
In terms of feasibility, the goal is to lower your monthly payments and
interest rate enough to offset the costs incurred in refinancing (also
called the “recapture” time or “break even point”).
For instance, if the closing costs involved in the refinance are $3,000
and your monthly payment will be reduced by $100 per month, the recapture
time is 30 months (3,000 ÷ 100 = 30). Saving $100 per month, or
$1200 per year, without spending any cash out of pocket is very appealing.
However, if you are not planning on being in the loan/home for at least
30 months, a different loan program with a shorter recapture time may prove
more beneficial.
You also may consider changing the term of your mortgage loan. For
instance, you may want to go from an Adjustable Rate Mortgage to a Fixed
Rate Mortgage, or from a 30-year fixed rate to a 15-year fixed rate. Although
the monthly payment may not be lowered, the overall interest savings may
be large enough to warrant the refinance. For instance, if you are at an
8.5% 30-year fixed rate and refinance to a 6.5% 15-year fixed rate on a
$100,000 loan, the payment would increase by $102.20, but you would save
$2,000 per year in interest. Jason will help you to determine the program
with the right recapture time, rate, and term for your particular circumstances.
Cash-Out Refinances
A Cash-Out Refinance enables you to take out, in cash, equity built up
in your home. This is done for many reasons, including to pay off higher
interest rate credit card debt, to fund home improvements, or just to invest
that money in higher yielding financial options. The closing costs and
prepaid items incurred are taken from the transaction’s cash-out
proceeds.
When paying off other debt with the proceeds from a Cash-Out refinance,
it is important to compare the overall savings with the “recapture” period.
The monthly mortgage payments may increase due to the larger loan amount,
but when compared to other debt payments, the total monthly savings can
drastically lower the homeowner’s overall monthly expenses. The added
tax benefit (due to the deductibility of the mortgage interest) is also
something to consider. For instance, if your monthly mortgage payment is
$1000 and your credit card debt adds up to an additional $1000 per month,
you may be able to do a Cash-Out refinance that increases your monthly
mortgage payment to $1500 but eliminates your monthly credit card debt.
This would be a savings of $500 per month, or $6000 a year. If the closing
costs were $3,000, then the recapture time would be 6 months. As long as
you stay in the loan/home for at least 6 months, the refinance would be
fiscally beneficial.