As interest rates remain at historical lows and homes are selling like hotcakes at or above list prices, the dilemma to refinance or sell can be tough for many home owners. How do I know which is the better choice? Whether it’s the lure of saving more per month or the dollar signs you imagine from a home sale, take some time to get the numbers crunched and weigh the pros and cons of each path. Let’s look at each route to help you examine your own situation.
The Basics of Refinancing
Keep in mind that when you refinance, you still need to be able to qualify for a new loan. Refinancing is basically paying off your existing home loan with an entirely new one. And qualifying is easier for some than others. Negative changes to your credit rating, a downturn in income, or significant debt can hurt the prospect of refinancing at a lower rate, or even qualifying at all. The best place to start, regardless of your financial report card, is to get multiple quotes from different lenders (at least three). Compare 15-year and 30-year fixed rate loans. Beware of variable rate loans that could cost you less in the short term but more in the long run.
There will be closing costs and fees associated with a refinance just as there are with a new home loan. Make sure you know how many months in mortgage payments it will take before you see the savings after accounting for the cost of the new loan. If your new mortgage savings per month takes years to cover what you spent in upfront fees, you might need to stay in your home another three to five years or more to see the benefit of a refinance.
Signs to Refinance
The desire to build more equity in your home at a faster rate is one good reason to refinance. That typically means going from a 30-year to a 15-year fixed rate mortgage. Also, if you currently have a mortgage rate that is significantly higher than current rates, it makes sense to refinance for significant savings.
Signs to Sell
If your family needs more space or you feel it’s time to upgrade to a home with more amenities, these are obvious reasons to choose selling over refinancing. Maybe you want to relocate to a different neighborhood, downsize, or pocket cash from your home sale. On the financial side of any of these choices, be sure to calculate how much equity you have in the house and what amount you’ll profit after Realtor, closing, and moving fees.
Bottom Line
If you’re on the fence about which route to take, examine both the financial and emotional aspects of your options. Use lender resources to help determine your exact savings over time and determine if the refinancing process is truly cost effective. Use a Realtor to determine how much your current home is worth and what kind of homes you can afford on your budget. How tied to your home and community are you? What’s the availability of homes in neighborhoods you’d like to live in? Does it make more sense to get a new home loan and move now while rates are still low than gamble on what it will be like in three to five years? Asking yourself all the appropriate questions will help you determine the right choice for your family.
Real Estate Term of the Week
Refinance: Trading in an old mortgage for a new one. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one. Refinancing is sought to make favorable changes to an interest rate, payment schedule, and/or other terms outlined in a mortgage contract. If approved, the borrower gets a new contract that takes the place of the original agreement.