Choosing to refinance a mortgage isn’t a small decision– it’s one that is guaranteed to have a big impact on your finances and you need to be prepared for that. The impact, whether positive or negative, will ultimately be determined by the terms of the refinance, which is a direct result of the financial state you are in. FHA mortgage refinance rates today are still hovering close to historic lows so in terms of a refinance it’s a great time to do it. But though the timing with the rates is right what about your finances? When exactly is a good time to take advantage of low rates?
Where do You Stand with Your Finances?
Before you do anything with a refinance you’ll need to take a good honest look at your financial situation. Where do you stand? Be critical of your debt-to-income ratio, your job history, your payment history and your credit report. This is your chance to fix any discrepancies or get on top of any issues before you approach a lender asking for a new loan. It is possible to get a refinance without fixing any issues but you may be able to get better terms if you can come to the table competent– like you’re in control and expertly manage the debt you currently have.
Take Into Account Your Amortization Schedule
The amortization schedule is very important when refinancing a home. The FHA mortgage refinance rates that are offered to you by a lender may be significantly lower than the rates you currently have, but depending on where you’re at in the amortization it may not be worth it. When you get a loan, there is a schedule in place that shows the breakdown in the amount of interest paid every month for the life of the loan. At the beginning of the loan you’ll be paying more in interest and less in principal. After a few years you start to eat into the principal and you’ll see the loan amount begin to drop. Here’s the kicker; with completing a refinance that same schedule starts over, and you go back to paying more in interest than in principal. So when refinancing you really need to look at the impact of the schedule before you sign on the new loan.
Getting the Best FHA Mortgage Refinance Rate
The best thing to do when considering a refinance is to get a variety of quotes from multiple lenders, including your current lender. Every mortgage refinance company offers a quote with slightly different terms than the others. By getting these quotes you can get a pretty accurate assessment of the terms you are able to qualify for. The nice thing about doing this extra step is that any quote you acquire can act as a bargaining chip. The loan you are offered is only an offer– you can negotiate the terms and try to alter the terms so they are a better fit for your financial goals, but only if you know what other lenders are willing to offer before you start negotiating. When getting these quotes try to get all of them on the same day or within a day of each other. The reason being is that FHA mortgage refinance rates fluctuate with the market trends and you may find that the terms are drastically different if you wait too long between quotes.
Refinancing Costs Money
When you refinance it’s important that you’re prepared to pay the closing costs and fees associated with the refinance. A refinance really is a new loan of an old mortgage, so lenders treat it much like they would a first-time loan. The refinance itself is going to require a slew of fees, including lawyer fees, underwriter fees, appraisals, title and processing, etc. In addition to these fees you have the closing costs which are required on any loan, although they are usually much lower for an FHA loan. Most of the time the expenses for a refinance will amount to a couple of thousand dollars. You will either pay these out of pocket or you may be able to roll them into the loan and pay them down over time.
So before you complete the loan you will want to take into account that the refinance is going to cost money. Knowing the financial consequences is going to help determine whether or not the refinance is worth it for you. As a general rule of thumb, to know if you can afford it you’ll have to determine if you’re able to save enough money on the refinance to pay off the additional expenses in the matter of a couple of years. You will find that a refinance is almost never worth it if it takes you more than five plus years to recoup the initial losses. As a simple tip, be sure to calculate your break-even point prior to signing on the loan.
So is it a good time to refinance? For many people the answer is “yes”. For you however, the answer is going to be determined by many factors. Ultimately you need to look at them all and then decide whether or not the refinance is going to save you money in the long run. If you can save thousands of dollars by refinancing then it may be worth it. If not, you may want to reconsider.