Things to Consider Before Refinancing Your Home - Quicken Loans Zing Blog

The new Home Affordability Refinance Program has made it even easier to refinance your home, even if you owe more than its value. Just because you can refinance your home, however, doesn’t mean you should. Make sure you consider the answers to the following questions carefully before you commit.

Why Do You Want to Refinance?

Refinancing your home loan will potentially allow you to get a better deal. This might mean taking up a new home loan with an improved interest rate or a longer loan period, for example. Refinancing typically helps homeowners free up money in the short term, and often saves them cash in the long term.

“The typical borrower who refinanced reduced their interest rate by about 1.5 percentage points,” affirmed Chief Economist Frank Nothaft. “On a $200,000 loan, that translates into saving about $2,900 in interest during the next 12 months.”

It’s easy to look at the general reasons why people refinance their homes, but perhaps it’s more important to consider why you’d take this action. Perhaps you want to pay less on your home loan so you can pay back high-interest loans or beef up your policy. Paying off debts and protecting your home are both worthwhile ways to spend extra cash. Perhaps you’re already dreaming about the vacation you could take if you could reduce your monthly payments. This is another tempting reason to act, but you may need to examine the pros and cons of refinancing if it’s your main motivation.

What’s the Current Interest Rate?

The interest rate you can secure is one of the greatest considerations when deciding whether to refinance your home. There’s no point in getting a new home loan if your payments will be higher than they are currently.

In December 2013, the average interest rate for a 30-year fixed-rate mortgage stood at 4.57%, which is close to the highest it’s been in two years. Because of rising interest rates, there’s been a 71% drop in refinancing figures since May.

As a rule, you should look for rates that are at least two percentage points less than you’re currently paying. Also keep in mind that published interest rates only offer a ballpark figure. Your personal circumstances, including your credit score and intended loan type, will influence the interest rate available to you.

Will You Incur Any Penalties?

Penalties can easily eat up any savings you might make, so it’s important to consider them before refinancing your home. Some financial institutions charge hefty fees for paying out your loan early. These fees make it unfeasible to refinance your home.

A refinanced loan also often incurs “moving costs,” including legal fees, disbursement costs, new valuation costs and stamp duty. These extra charges could easily cost 2–3% of your refinancing amount. Banks that offer to pay these moving costs usually aren’t being altruistic. You’ll likely find their interest rates are higher, so make sure you do your sums before signing on the dotted line.

Many refinancing packages also lock you into the loan for a fixed term. If you expect to exit your loan early, you could be slugged up to 5% of your loan amount.

The decision to refinance your home is a big one, but if you weigh all your options carefully, refinancing can save you plenty of money in the long term.

Have any other questions? Let us know in the comments below!


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This Post Has 10 Comments

    1. Hi Rita:

      There are a number of factors that go into whether you can refinance and whether it makes sense for you. I’m going to have one of our Home Loan Experts get in touch to go over your options.

      Kevin Graham

  1. I owe about 180.000 and just started a new job but it’s only part time do you think I qualify. I also owe about 25000 in credit cards do I have a chance

    1. Good morning Manuel:

      Every situation is different. I’m going to pass your inquiry along to a Home Loan Expert that will reach out to you for more information.

      Kevin Graham

  2. My home was valued at 140k in 2014 and I currently owe 97k. I want to get rid of the FHA fee and MIP, will I be able to accomplish it by refinancing my home?

    1. Thanks for your question, Alfredo. We’re going to need a little more info to give you the best possible answer, so I’m going to have a home loan expert reach out to you. Have a good day, and best of luck on getting rid of your FHA fee and MIP!

  3. My mortgage with taxes and insurance is $1035 a month. I purchased the home at $115,000 and owe $112,000 and was hoping to refinance. My credit score is 700. Do you have a rough estimate of the closing cost amount for a 30 year loan?

    1. Good morning, Cory. Everyone’s situation is different, so I’m going to have a licensed home loan expert contact you. They’ll be able to work through the numbers, so you can see if refinancing is the right decision for you. Have a good day!

    1. Hi Sheila! The appraisal is apart of the home loan processes. You don’t need to do it before starting the process, but it is one of the first things you will do during your refinance process.

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