Should I refinance? What should I consider?
Even though the loan process is similar to a first mortgage, refinancing is different than buying a home. Usually, people need a mortgage if they want to purchase a house. Refinancing only makes sense if it's of benefit to the homeowner - a way to save money. That's why research is really important with a refinance. Some things you may want to consider and know the answer to include:
1 How long you plan on living in your home. Know your break-even period.
There's something called a break-even period you need to take into account. When you refinance, there are costs very similar to when you signed for your first mortgage. When your refinance savings exceed the costs of your refinance closing - that's the break-even period. If it takes 5 years to reach that point and you're not planning on being in your home for 5 more years, it does not make sense to refinance. You will move before you realize the savings of your new mortgage.
2. What your refinance Annual Percentage Rate will be.
3. What your current APR is.
When you are looking to lower your monthly payment, a common rule of thumb is to refinance when you can decrease your APR by 2%. Sometimes it is still advantageous with less of a rate reduction, but you have to consider your break-even period – when the amount you save surpasses the cost to refinance. If you are not going to be in your home past the break-even period, a refinance may not be valuable.
4. How much will it cost for you to close on your new loan.
How much you have to pay for your refinance is a big determinant of whether or not a refinance is an advantageous decision. Depending on the stage of your loan, there are 3 primary ways you will receive information on how much you owe at closing.
Good Faith Estimate (GFE): an itemized list of fees and costs associated with a loan usually provided within 3 business days of applying for a loan, but is highly subject to change.
- Summary of Charges: another estimate that is also subject to change. When you apply online with GTE Financial, there is a page within the online system that will provide a Summary of Charges as well as Closing Cost Details. The Summary of Charges is usually a bulk number, for example $7,500, and then the Closing Cost Details specifically outline all of the line item costs that get you to your bulk sum. You can receive a Summary of Charges via our online mortgage application or using our Loan Consultant tool. By answering 12 simple questions, the Loan Consultant will calculate available interest rates, total closing costs and monthly payments.
- HUD Closing Statement: the official and final detailing of what you owe at closing provided by the U.S. Department of Housing and Urban Development. This will be provided to you usually 5 days or more in advance of your closing date.
5. How much will it cost for you to close on your new loan.
One of the major questions for a borrower who is refinancing is how much will I have to pay at closing? For a roundabout estimate, your refinancing fees may total between 3% to 6% of your principal balance – what you still owe on your first mortgage.