Tempted to ditch your decade-old mortgage for one of those flashy refinance offers you got in the mail, or sell your house and get a new loan? Either way, you just want to ease up on some expenses, right?
Nile Lundgren, a top New York agent and Bloomberg TV commentator, who was named Executive of the Month by the New York Real Estate Journal, can see why a mortgage shake-up is an attractive option for some:
“My mom bought her house in the 1980s when the interest rates were at 17%. They’re now at historic lows. So if you also have a higher mortgage rate, now would be an unbelievable time to refinance.”
True, refinancing allows you shorten the lifetime of your loan and negotiate a lower interest rate—which can in turn reduce your monthly mortgage payment. But selling could make more sense financially, if your home’s gone up in value since you bought it.
You’re wondering, “Should I refinance my mortgage or sell?”—and it all depends on your credit, debt levels and current income, so weigh your options carefully before you sign on the dotted line for a deal that looks too good to be true.
Refinancing basics: What’s the advantage of getting a new mortgage deal?
How does refinancing work? Essentially, you’re paying off your existing mortgage and replacing it with a new loan that has better terms and interest rates.
Since refinancing and buying a new home (after selling) both involve getting a new mortgage, in each case you’ll need to qualify for a new loan.
And qualifying may not be as easy as you think.
According to Lundgren, “Banks are going to give you rates based on your credit and income. For example, if you’re retired, it might be a little bit harder to refinance, especially if you don’t have a lot of cash on hand.”
If you do qualify, the question becomes: “Which is financially better for me—refinancing my existing mortgage or selling my home and purchasing a new property?”
Mortgage evaluation 101: How to examine current rates and compare loans
If you’re considering refinancing or selling purely for the financial benefits (versus needing or wanting to buy a new home), the place to start is by comparing your existing mortgage rate with current ones.
This is easier said than done. While you have only one existing rate on your mortgage, there are dozens of current mortgage rates to compare it with.
Every mortgage lender determines its own rates, which is why experts recommend that you get quotes from multiple lenders and brokers. Not only that, but those rates vary within each institution depending on the loan type.
For example, the same lender may charge 4.25% interest on a 15-year, fixed rate mortgage for a new purchase home, while charging 4.75% interest on a 30-year fixed rate mortgage.
And if you’re simply refinancing instead of buying new, those rates are often slightly higher for each loan type, depending on how you structure the loan.
With dozens of loan types and mortgage lenders to choose from, you have plenty of opportunities to find the one that best helps you financially. However, you may no longer qualify for the loan type you currently have.
Are the loan types you qualify for now better than your existing mortgage?
Lower rates aren’t everything.
The type of loan you get is just as important. Remember, whether you sell and buy a new home, or refinance, you need to qualify for that new mortgage. This means that your lender will be looking at your existing financial data, including your current income, credit history, and outstanding debt.
If you’re making more money, carrying less debt, and have a better credit score now, you’ll be able to strike a better deal. For example, you may be able to replace your 30-year variable rate mortgage for a 15-year fixed mortgage.
But if you’re making less, carrying more debt, or having credit trouble, your chances for getting a good deal on a new loan are slim.
Case in point, refinancing could require you to give up your slightly higher fixed-rate mortgage for an only slightly lower variable rate one. Even though the new rate is technically lower, you may wind up paying more in the long run.
Before you decide if refinancing or selling is right for you, you’ll need to evaluate other costs that impact the savings over the lifetime of the loan.
What impacts your new or refinanced mortgage?
Just because refinancing or new mortgage rates are lower on paper, doesn’t mean they’ll actually save you money in the long run. In fact, a number of factors can both increase mortgage rates and reduce the amount you save. Let’s take a look at a few of them.
1. Loan-to-value ratio
Simply put, the Loan-to-Value ratio (LTV ratio) assesses a borrower’s risk-level by evaluating the amount of the mortgage loan versus the current market value of the mortgage property.
For example, if you need a $400,000 mortgage on a property valued at $500,000, you have an LTV ratio of 80%.
Remember those slightly higher refinancing mortgage rates?
Those typically occur because you’re either cashing out equity as part of the refinance, or wrapping closing costs into the new mortgage. Doing so reduces the LTV ratio. If it goes over 80%, you’ll only qualify for higher interest rates and the lender may require you to pay for mortgage insurance.
If you’ve paid your existing mortgage for a number of years—and your home’s value has risen during that time—then your LTV ratio has improved. This means that you’ve probably built up enough equity for lenders to give you the best possible rate if you refinance.
However, if your home’s value decreased after taking out your existing loan—and you’re now upside down on your mortgage—then your LTV worsened over time, even if you’ve been consistent in your mortgage payments.
In this situation, your LTV ratio will only qualify for the most expensive interest rates. In fact, you may not even qualify for refinancing or a new-home purchase at all.
2. Closing costs, fees, and other unexpected expenses
Getting a new mortgage is going to cost you. Aside from the potential for mortgage insurance, you’re going to have closing costs and lender fees which are typically 3% to 6% of your outstanding principal on your existing mortgage.
There are also other expenses specific to you that must be accounted for when you’re calculating how much that lower interest rate is actually saving you.
For example, homeowners who obtained their existing mortgage with a First-time Homebuyer Credit can actually cost themselves money by restructuring their mortgage.
Why? Because this credit must be repaid when you close out that first mortgage—whether you’re refinancing or buying new.
An initial rate comparison may indicate that you’ll save money with a better rate that lowers your monthly mortgage. However, those minimal monthly savings over time may not cover the amount you’ll pay in upfront fees to get the new loan.
Refinance or sell? That depends…
Every homeowner’s financial situation and existing mortgage structure is so unique that you can only make recommendations on whether to refinance or sell on an individual level.
That’s why it’s important to get help in making this decision from the experts.
The National Association of Mortgage Brokers (NAMB) offers a search feature to help you find a Lending Integrity Professional. You can also check the credentials of independent experts with inquiries to the Association of Independent Mortgage Experts (AIME).
If you don’t have a lot of home equity, you’re not necessarily out of luck. The government’s Home Affordable Refinance Program is designed to help struggling homeowners obtain refinanced loans with more affordable mortgage payments.
To be eligible for HARP, the home must be the primary residence, the mortgage must be owned by Freddie Mac or Fannie Mae, the loan origination date must be on or before May 31, 2009, and the LTV ratio must be above 80%.
After working out the numbers with a refinancing expert, your next step is to consult with an experienced real estate agent. An agent will help you compare your refinancing savings with your potential profits from selling your home.
An agent is also your best resource for obtaining the comps of homes sold in your area that you’ll need to assess your home’s current market value—rather than letting your lender alone determine its worth.
Deciding to refinance or sell is a personal financial decision only you can make. Just don’t wait too long to make it.
While mortgage rates are still relatively low today, they’ve been trending upwards in recent months. Contact a mortgage refinancing expert and an experienced real estate agent now so you can make the smartest financial decision on your mortgage.
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