With interest rates at a new low, many homeowners have taken to refinancing their mortgage to save as many of their hard-earned dollars as they can. 2020 saw a drastic decline in mortgage rates, creating an unprecedented refinance boom. However, with rates still lower than ever, some homeowners may be considering refinancing their mortgage yet again.
While the prospect may be tempting, you’ll need to study the numbers and ensure that refinancing for the second time within a year is the wise decision to make. For an interest rate to be advantageous enough to be worth refinancing, it needs to improve by 50 basis points. That means if your current mortgage rate is at 3.5 percent, you’ll want to take a mortgage with an interest rate of 3 percent or lower. If you can slash your rate by one-half to three-quarters of a percentage point, then refinancing in Los Angeles is worth considering.
Figuring Out Your Break-Even Point
Although refinancing means taking advantage of lower rates, keep in mind that you’ll have to pay closing costs each time, which can quickly drive the total price higher than expected. These costs also add 2 to 4 percent of the loan’s amount, so you’ll need to calculate your break-even point or the month when the cheaper payments will equal the amount of the closing costs from your new loan.
For example, you borrowed $300,000 last year at 3.5 percent, giving you a monthly payment of $1,347. If you refinance a mortgage with an interest rate of 3 percent, your monthly payment becomes $1,265, giving you $82 in savings each month. If your closing costs are $6,000, it will take more than six years for your refinance to pay off.
Refinancing Your Mortgage
If you decide to refinance your mortgage, it’s essential to follow a structured process.
- Establish a Clear Goal. Before you go ahead and refinance your mortgage, review your financial situation and determine if you genuinely have a compelling reason to take a new loan. Your reason could be lowering your monthly payments, shortening your loan term, or getting equity for home repairs. You might even want to roll your HELOC into your refinance. It’s important to note that refinancing your mortgage might backfire if you aren’t careful. For instance, if you’re getting a lower interest rate, but you’re starting over again on a new 30-year mortgage, you may be paying less each month, but you’ll pay more over the loan’s life.
- Review Your Credit Score. The next thing you should do is to review your credit score, as you’ll have to qualify for a refinance, similar to the process of getting approved for your original mortgage. The higher your credit score, the more favorable rates you’ll be given.
- Find Out How Much Home Equity You Have. Your home equity is how much your home is worth over what you owe on your loan. To locate this figure, look at your mortgage statement, which will tell you your current balance. Then, ask a real estate agent to analyze the current estimated value of your home. Your home equity is the difference between these two figures.
- Get Quotes From Multiple Lenders. Shopping around for quotes can help you find the most advantageous loan, so be sure to compare multiple lenders. You’ll also want to look at the cost of fees and if they’ll be due right away or if they can be rolled into your new mortgage.
- Arrange Your Paperwork. Collect all relevant documents, such as your recent pay stubs, bank statements, federal tax returns, and others that your mortgage lender requires. They will also examine your credit and net worth, so be sure to disclose your assets and liabilities right away.
- Get Ready for the Appraisal. Lastly, prepare for the appraisal. Mortgage lenders usually require an appraisal to identify your home’s current market value. Note that this may cost a few hundred dollars, but informing your lender of improvements or repairs you’ve made since buying your home may lead to a higher appraisal.
Your Refinancing Expert in Los Angeles
Refinancing your home to take advantage of a lower interest rate could bring you thousands of dollars in savings. However, if you aren’t careful, you may end up spending more than you would have worth your original loan. With our guide, you’ll know whether or not refinancing your mortgage is a smart decision for your situation.
Shannon Christenot is a mortgage broker in Los Angeles, CA. As one of the city’s top brokers, I can connect you to competitive loans from reputable lenders throughout the area, whether conventional, FHA, VA, USDA, jumbo, refinance, and more. Call my team today at (818) 601-2231 for a free mortgage rate quote!
