Refinancing your home mortgage loan can be a benefit or a detriment to you, depending upon a few factors.
First is the reason for the refinance. If the purpose is to lower your interest rate and/or reduce the remaining years on your loan, it’s a good idea.
It’s an even better idea if you have an FHA loan with a mandatory mortgage insurance payment each month. If you’ve acquired 20% equity in the house and your credit is good, you can refinance into a conventional loan and do away with the mortgage insurance payments.
It can also be a good idea to refinance and take some cash out if the cash is going to be used to do renovations and increase the value of the house. Replacing an old roof with a newer steel one adds longevity to the overall structure and greatly increases a house’s value. The addition of more square footage is also a profitable renovation.
If the purpose is to extend the length of the loan or take cash out for an unnecessary expense – such as a new car or a vacation – it’s a very poor idea.
Second is the rate of interest you’re paying right now, compared to the rate you would pay on a new home mortgage loan.
Third is your future plans. If you plan to stay in your home until the loan is paid off, then shaving $100 or more off each months’ payment is a really good idea.
If you plan to sell within a year or two, the cost will outweigh the benefit.
Remember that a new loan is not free. You’ll pay for an appraisal, title insurance, and a variety of closing costs and transaction fees. Sit down with your lender and calculate both the costs and the savings. Then you’ll see how many months it will take you to “break even” on the costs of the loan.
Will refinancing harm your credit?
Refinancing your home mortgage loan will have an effect on your credit, but it will be negligible in comparison to the benefit of paying less each month – and therefore less overall – for your home.
The effect on your credit will largely depend upon the FICO version your lender is using.
When you shop for a new loan, each lender will pull what’s called a “hard inquiry” on your credit report. Since the credit bureaus recognize several mortgage loan inquiries in a short time as shopping, your credit score will only be affected by one inquiry.
But what is considered a short time? Under the latest version of FICO scoring, 45 days is a short time. Under older score models, it’s only 14 days.
Also, since refinancing requires closing an old loan to open a new one, you could lose the benefit of your payment history with your current loan. Since payment history makes up 35% of your credit score, this will have a slight impact, depending upon the scoring model used.
Some models will eliminate that history while others will continue to report your payment history for the closed account. However, the impact of hard inquiries and possible loss of payment history on your current loan will fade over time as you build a payment history with your new loan.
If you’re thinking of refinancing and aren’t sure if it’s the right thing for you, call us! We at Homewood Mortgage, the Mike Clover Group, will be glad to talk it over with you.
Call today: 800-223-7409