Mortgage interest rates are always changing – in fact, they may even fluctuate multiple times within a given hour. And while rates aren’t going to plummet or spike on a whim, it is important to pay attention to trends and identify if there is an opportune time to refinance your home mortgage.
Homeowners choose to refinance their mortgages for a variety of reasons, including to obtain a lower interest rate on their mortgage or as a means of tapping into their home equity to fund a project or investment. When you refinance a mortgage, you pay off your existing loan and replace it with another one.
What to Consider Before Refinancing
While refinancing is similar in some ways to a traditional real estate closing, it has one key difference: the transaction is typically between just a borrower and a lender. There is no seller involved in the refinance process. As you assess if refinancing is right for you, it’s important to keep the following factors in mind:
- Know your purpose – Before pursuing a refinance, determine your goals. Common reasons include lowering monthly payments, obtaining a better interest rate, changing from an adjustable-rate mortgage to a fixed-rate mortgage (or vice versa), accessing home equity through a cash-out refinance or consolidating debt.
- Monitor interest rates – Refinancing is most advantageous when you can secure a lower interest rate than what you currently have, but it depends on your financial goals. Working with a real estate law professional can help you understand the stipulations of your mortgage, loan obligations and any associated costs and fees.
- Keep equity considerations in mind – Lenders often have requirements regarding the amount of equity you need to have in your home to be eligible for refinancing. Generally, having at least 20% equity can help you qualify for better loan terms. If you have less equity, you may need to pay private mortgage insurance (PMI), which could impact the overall cost savings of refinancing.
- Determine your break-even point – Calculate the break-even point to determine if refinancing is financially advantageous. This is the point at which the savings from refinancing offset the costs associated with it. Consider how long you plan to stay in the home to assess whether the break-even point aligns with your goals.
- Plan for paperwork – Refinancing typically requires similar documentation as when you initially obtained your mortgage. This includes income verification, bank statements, tax returns and other financial records. Be prepared to gather and provide these documents during the refinancing process.
Other things to consider are your creditworthiness, which can impact the loans you qualify for, and if you want to maintain the same loan term or extend or shorten it. Extending the loan term can reduce monthly payments but may result in paying more interest over time. Shortening the loan term can save money on interest but increase monthly payments. Refinancing your mortgage can be a complicated process, but at the Law Offices of Alex D. Sirulnik, P.A. and ADS Title Services, Inc., our team is here to help by advising on all real estate law considerations, negotiations and processes that come with refinancing. Contact us today to ask your questions about refinancing and real estate closings in Florida.