The best way is to stay in touch with your mortgage broker and ask to be notified should interest rates go down to a level where it becomes profitable for you to refinance. You may also consider planning to shop around for rates regularly. Simply call a few local lenders to get an idea of where rates are on a given day. Often, there are articles on the Internet and traditional media talking about declining rates.
It is not always a good idea to refinance. For example, if you are obtaining a longer-term loan but your present loan has a significantly lower repayment term, you will pay much more interest over time with a longer-term loan.
Or, you may plan to move to a different property within a couple of years, thus recouping the refinancing closing costs may take longer than the time in which you own the house.
You may also want to think twice if you do a cash-out refinance to buy risky investments. If your investment flops, you will lose your equity.
If you lack financial discipline and payoff your installment and revolving debts from equity, eventually, you will run out of equity and may have trouble repaying your debts.
Loans carry closing costs. Somebody needs to pay them. These costs consist of but are not limited to the appraisal, credit report, lender’s charges, title insurance, and closing fees, etc. There are a couple of common ways to handle expenses if you prefer not to pay out of pocket at closing, and your mortgage broker will discuss these with you in detail. To explore them briefly, however, here are two of the most common options to reduce or eliminate the amount of cash needed to close up front:
- You can roll all your expenses into a mortgage loan. This will increase your balance and spread closing costs across the term of the loan, making your monthly payment slightly higher.
- Your broker will raise your interest rate so that all or part of your closing costs will be covered by the lender’s premium. You will, however, have a higher rate for the term of your loan.
Private mortgage insurance is generally required when less than a 20% down payment is made on a home purchase or if refinancing when the loan equals more than 80% of the appraised value. Both Freddie and Fannie will drop PMI when the loan-to-value ratio reaches 78%. This is done automatically. However, this will take time if your down payment was low and you do not make any principal pre-payments. If your house increased in value and you feel that your equity in the property is now at 20% or greater, you may contact the lender to order an appraisal, or you can refinance. If your appraisal comes in at 80% or lower loan-to-value ratio, you should be able to drop PMI. This is true for conventional loans. FHA loans, on the other hand, differ. You can’t drop FHA monthly premium unless you refinance with a conventional loan.
If you do not have a problem with budgeting, then our advice would be to pay taxes and insurance without escrowing. This allows you, the borrower, to be in greater control of your finances. Taxes fluctuate (mostly upward) and your lender will be sending you a reconciliation analysis annually, which may, in turn, change your monthly payment depending on a projected shortage in your escrow account. If you do not escrow, then your taxes and insurance will need to be taken care of in a lump sum when due. If you have issues with making tax and insurance payments as lump sum payments and prefer to spread these across 12 months, then escrowing is the right thing to do. Please note, however, that in some circumstances you may not have a choice whether to escrow or not. Ask your mortgage broker for insight into your own unique loan situation.