By Anthony O. Kellum
The ongoing question…Should I refinance or sell? Everywhere you look you see, advertisements suggesting: “Lock in the rate!” “Refinance now and save!” Before you know it, you are asking yourself “Should I refinance?”
That is a great question and we will explore what the hype is all about as it relates to refinancing. The answer usually comes down to two basic facts.
- Budget: Avoid accumulating debt as a result of a loan
- Lifestyle: Downsize living space or access your home equity
Whether you ought to refinance or sell comes down to answering a few questions and being honest about your future plans.
But before we go any further, let’s explore what the term refinancing actually means. According to Investopedia.com Refinancing is the process of paying off an existing loan and replacing it with a new loan that includes the debt of the old one. Many people refinance by finding a new lender with better terms or interest rates.
Lenders may also offer homeowners the option to change their loan type from variable- rate (interest rate may go up or down) to fixed rate (interest rate does not change over the life of your loan), establishing a constant interest rate each year.
The question becomes, why are so many people considering refinancing? As of late, in the beginning of March 2020 the Federal Reserve dropped interest rates by half of a percentage point and then dropped it again mid-month to between 0-0.25%. Zero percent is very intriguing, but keep in mind that doesn’t mean you can get a mortgage with 0% interest ~ although that would be AWESOME!
The shifts in interest rate is an effort to stimulate the flailing economy in the middle of the COVID-19 Pandemic.
What you should know before you go searching to refinance:
- Know your credit score: Review your credit report and unfortunately, nearly 1-in four credit reports contain errors of some kind.
- Have you mortgage paperwork handy: Although every mortgage application is unique, there are some common required forms, gather the necessary paperwork in advance.
- Know if you want to pay closing costs: You can save time on your mortgage approval if you know how you want to have your closing costs paid ~ when refinancing your closing costs can be added to your loan balance ~ also known as “rolling your costs” into your loan.
- Shop multiple lenders: Mortgage rates are different with every bank and the lender with the lowest rates today may not be the lender with the lowest rates tomorrow.
Should you sell your home and move into a new property offers you the opportunity to pay lower interest rates and cheaper monthly payments. According to Amplify Credit Union, selling your home can help to reduce or even eliminate your loan. Following a sale, some homeowners receive a payout from their previous home based on the portion that they own.
This is determined by the amount of payments that have already been made towards the loan. This portion is referred to as a home’s equity. Using the equity from your old home and putting it towards your new mortgage assists in paying off the loan and reduces debt in the long run.
What and when you plan to do in the next three to five years is critical to making the right decision. In fact, time is one of the most important factors. If you plan to sell in the next three to five years, it might not make financial sense, depending on how much equity you currently have in your home, to refinance. Here are some more factors to take into account:
- Your cash and equity positions. You probably know if you have little equity, or, less than 20 percent, you won’t be able to avoid paying private mortgage insurance. It’s important to note that refinancing is the same as getting a new mortgage. You have to qualify for a new loan and even if your FICO score is good your debt to income ratio might be too high
- Your current neighborhood. The neighborhood in which your home is located will have an enormous impact on your decision.
- Being able to recoup costs. While remodeling certainly increases the value of a home, it doesn’t mean you’ll get back everything you put into it.
- Your lifestyle changes. Should you be in a position where you just need more space, it probably will be a better idea to sell and buy.
While it may seem ideal to sell your home and accept a mortgage with lower monthly payments, there is often increased competition for less expensive homes according to the mortgage consultants at go amplify.com.
Also, not all prospective buyers qualify for lower interest rates when looking for new homes. According to homelight.com, lenders typically review the financial history of applicants including credit history, current wages, and the amount of debt owed.
Before deciding to sell or refinance, do your research to determine what is best for you and your family and also the options available to you regarding your home.