When you purchased your condo, you may have had a low down payment or your interest rate was higher due to issues with your credit rating. Now that your credit problems are behind you, you may want some cash out on your equity or you may just want to lower your mortgage payment. Refinancing can accomplish either objective. Getting cash out with refinancing is a more realistic outcome now that your condo has increased in value.
Before you refinance, do some research and preliminary calculations. Don't just dive in -- mortgages are a long-term commitment. It pays to shop around to different lenders because they offer different programs that could produce unexpected results. For example, the fees and points charged vary from lender to lender. This can increase your closing costs. If your current mortgage has a pre-payment penalty, talk to your current lender first. He may waive penalties and some fees to keep your business. Also consider how long you have left to pay now, and how long you intend to stay in the condo. If you have only a few years left on your mortgage or plan to move in a couple of years, it might not make sense to refinance. You will lose the equity you have built up and, if you sell in a short period of time after the refinance, will receive less money as a result. If your credit isn't as good as when you originally applied, the terms may not be as favorable on the new mortgage.
When you execute a cash-out refinance, the amount you can receive depends on the amount of equity you have in your home and your home's market value. Your equity is the value of your condo minus the amount you owe on your mortgage. Lenders can only loan you a certain amount of cash on a refinance, based on the loan-to-value ratio. Since the value of your home increased, you now have a better ratio and might qualify to take out some of the equity.
How to Shop for a Lender
There are many fees and penalties that can make a world of difference between loans from various lenders. The Federal Reserve has a worksheet on its website with questions to ask the lenders before you apply. If you ask these questions of each lender, you can objectively decide which deal is best for you.
Reasons For Refinancing
Examine the reason you want to refinance your condo. You should refinance if you can get a better interest rate, are changing the length of your mortgage -- longer for smaller payments or shorter to build equity faster -- changing from an adjustable- to a fixed-rate mortgage or getting an adjustable-rate mortgage with better terms. If you do want to cash out some of your equity, calculate the break-even point to see how long it will take to recoup the cost of your refinance before you benefit from the better interest rate. Refinancing calculators can do this for you. If it will take 27 years to break even, but you want to move in two, it isn't worth doing.
- National Bureau of Economic Research: Optimal Mortgage Refinancing-A Closed-Form Solution
- Board of Governors of the Federal Reserve System: Mortgage Shopping Worksheet
- The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- The Federal Reserve Board: How Do You Calculate the Break-Even Period?
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