Cunningham says borrowers should make sure they contribute to retirement savings and college savings, pay off high-interest debt, and save six to 12 months of expenses “before opting for a shorter, more expensive mortgage.”
Meshel says people should consider whether they want to retire without a mortgage before opting for a new 30-year loan. Those who have employment concerns may want to refinance into the lowest possible payment in case they experience a job loss.
How long do I plan to stay in this home? Mortgage professionals generally tell borrowers to expect a home refinance to cost 3 percent to 6 percent of the loan amount. A simple calculation shows how long it will take to reach the break-even point when the savings outweigh the costs.
“If the breakeven is at 15 months and you plan to stay in the home for five years or longer, it is probably worth it to refinance,” Cunningham says. “But if you plan to move in two years, it may not make sense.”
Meshel says long-term homeowners who are close to paying off their mortgages might not want to refinance because of the costs incurred.
What are the terms of my current loan? Borrowers with adjustable-rate mortgages or interest-only loans should consider the potential benefit of switching to a fixed-rate loan. Hsieh says all borrowers with ARMs should switch to a fixed-rate loan unless they intend to move within one year.
But Cunningham says some borrowers can benefit by sticking with their current ARM.
“Consumers with a subprime ARM should definitely switch to a new loan,” Cunningham says. “But some with conventional ARMs may find that they are in a good loan and that their rates are actually dropping.”
While new loans today rarely have a prepayment penalty, many homeowners still have loans with that restriction, which could reduce the financial gain of a refinance, Meshel says.
Do I have a second mortgage or line of credit? Cunningham says borrowers with a second mortgage will face additional complexity when refinancing.
“Borrowers can either pay off the second loan or combine the two loans into a larger first mortgage,” Cunningham says.
Michele Lerner writes about real estate and personal finance for http://www.bankrate.com.
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