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5 Things You Need to Know Before Refinancing

With mortgage rates at all time lows, it may be the right time for you to refinance your existing mortgage. As of the today (06/15/2020), the 30-year rate is sitting at 2.875% to 3.250% depending on your credit score and equity in your home. If your current rate is 3.875% or above you should definitely consider refinancing. Before you get started there’s still a few items to consider before you make your final decision:

  1. How much longer do your plan on staying in your home? The general rule of thumb states that you want to be able to cover all of your closing cost in less than 36 months of payment savings. If you’re moving in the next 36 months or less refinancing is counter intuitive. The math is easy to calculate, just take your total 3rd party fees (closing cost) and divide it by the monthly payment savings, if that number is more than 36 months it probably doesn’t make any sense unless this is the last house you plan on living in.
  2. Should I start over at the original term? If you are 4 years into a 30-year mortgage you may not want to start over again at 30 years, you may want to consider selecting a 20-25-year term and with the lower rate keep the same payment or depending on your rate savings drop your payment. A lot of our older clients will reduce their term to 10-15 years which will save them thousands in interest especially if they plan in living in the property for the remainder of their lives.
  3. I currently have an FHA loan, should I consider going to a conventional? The answer is almost always yes, but not always. FHA is a great way to get into a mortgage with very little out of pocket, it also allows you to qualify with lower credit scores (580-660). FHA requires you to pay MIP (mortgage insurance premium) for the life of the loan regardless of your equity in the property. A conventional requires PMI (private mortgage insurance which is very similar to MIP) as well but only when you are putting down less than 20%.  Typically, conventional PMI has much lower month premiums than MIP and once you reach 20% equity you can request a cancellation which will lower your payment by as much as $200 per month. PMI is automatically cancelled when you loan balance reaches 78% of the original sales price.
  4. What will happen to my existing escrow account? Your servicer typically will refund your full escrow balance approximately 30 days after closing. In many cases the borrower can request a Net Escrow Payoff. This allows you to immediately use the balance of your escrow account and apply it to the closing costs associated with your refinance.
  5. Will my servicer change? Since most mortgages have their servicing rights bought and sold multiple time throughout the like to the loan, it’s very much possible. That being said, Rock Mortgage will always be your first point of contact if you ever have any issues or concerns.