When Isn't it Good to Refinance?
Mortgage lenders heavily advertise refinancing when interest rates drop. By refinancing your mortgage, you can save on interest payments and reduce the amount of your monthly mortgage. While a refinance seems practical, there are reasons not to refinance. Before going to your lender and drawing up papers for a new home loan, consider whether it's the right time to refinance your house.
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Property Value
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Mortgage lenders rarely refinance for 100 percent of the property value. Instead, they ask borrowers to have at least 80 percent equity in their home. Borrowers with less equity can take advantage of government programs such as the Make Home Affordable Program (if eligible), or refinance the home loan and make a down payment to meet the lender's qualification. A home appraisal determines the property value, and borrowers who don't have enough equity can wait until their property increases in value.
Closing Fees
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Mortgage refinances involve more than completing paperwork and signing new home documentations. Hefty fees are involved with refinances, and you'll need about 3 to 6 percent (of the mortgage balance) for closing. You can't close on the new loan without first paying these fees to the mortgage lender. There's the option of rolling closing fees into the mortgage, but this method increases your mortgage balance. For example, if you owe $10,000 in closing fees, lenders attach the $10,000 to your home loan balance, which increases monthly payments. Refinances do not benefit owners with limited cash.
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Credit History
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Another factor that can stop a mortgage refinance is credit history. Holding a mortgage doesn't automatically ensure you'll qualify for a refinance. Mortgage lenders essentially swipe the slate clean and start the mortgage process over. They'll ask for W-2s or tax returns and they'll pull your credit report. Any negative change in your income or credit rating can hurt your chances of qualifying for a mortgage refinance. Get your credit report and score first, and wait until you have a score of 680 or higher before applying for a refinance.
Considerations
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Because refinances involve high closing fees, this options isn't wise if you plan to move in the near future. Plan to remain in the home until you recoup the fees paid at closing. For example, if a mortgage refinance decreased your monthly payment by $250, but you paid $10,000 in closing fees, it'll take about 40 months (more than three years) to break even.
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