While many of the customers we help here at LGI Homes are first-time homeowners, some are seasoned property owners who are attracted by the high-quality, affordable homes in our new homes communities. Often, those homeowners are interested in learning more about refinancing their current properties—and interest in refinancing has surged recently, thanks to current rates lingering at historic lows. In deference to those customers, we offer this next installment of the “All About” series, with the basics on mortgage refinancing.
What does it really mean to refinance?
In essence, refinancing means you’ll be taking out a new loan (at a lower interest rate), which you will use to repay your original loan (which had a higher rate). This is a smart financial move when, as now, interest rates are well below the rates that were prevalent when you took out your original loan.
How do I know if refinancing makes sense for me?
One of the rules of thumb regarding refinancing has always been that the interest rate on your new loan should be at least two percentage points below that of your original loan (e.g., down to 4% from 6%). However, it may still make sense to refinance even if you won’t see a two percent drop, depending upon your timeline for staying in your home.
How does the length of time I plan on staying in my home factor into refinancing?
While the two-percent interest rate drop is a good general rule, if you’re planning on staying in your home for a protracted length of time, refinancing may be a good move. You simply have to calculate what your monthly payment savings would be by moving to the new, lower, rate and then calculate how many months it will take for those savings to recoup the costs associated with refinancing your loan. If you’ll still be in the home once those costs are recouped, refinancing probably makes sense for you.
What are the costs of refinancing?
Much like when you purchased your home, you will have costs associated with the generation of, preparation of, application for and dispersal of your new mortgage loan. The refinancing process typically also includes an appraisal of your home, which is an additional cost. These costs, which are paid for at the closing of your refinancing mortgage, can amount to thousands of dollars, depending upon the principal involved.
How do I know if I will be able to refinance my loan?
The answer to this question is tricky, as many current homeowners looking to refinance may or may not be “underwater” (owing more than their home’s current assessed value). Some homeowners have paid hundreds of dollars towards the refinancing process, only to have their home’s current appraisal show that they are, indeed, underwater. Most lenders, of course, balk at lending more than the collateral put forth for the loan (the home) is worth. You can do your research and crunch some numbers in order to come up with an estimate of what your home may sell for if you put it on the market today. If you owe less than that, you can be reasonably assured that your refinance will be approved.
Remember: real estate is highly local, so you may find that your own home in your own community has retained much of its value. If so, refinancing to today’s incredibly low interest rates may be one of the best financial moves you can make!