Things You Should Know Before Refinancing in Colorado
Many homeowners are refinancing to take advantage of lower mortgage refinance rates in Colorado. With rates reaching historic lows, refinancing activity across the U.S. reached its highest level since 2003.
While refinancing has many benefits, it’s important to understand how it works and what to expect.
1. You May Need PMI
If refinancing reduces your equity to below 20%, the lender may require you to get private mortgage insurance, or PMI.
If you’re already paying PMI on your current mortgage, this requirement may not affect you financially. However, if you’re not paying PMI right now, you may need to prepare for this additional expense.
2. There Will be Closing Costs
When considering refinancing, homeowners often forget about closing costs. Typically, the closing costs will be between 3% and 6% of the total loan cost.
Many borrowers choose to roll the closing costs into the loan, but you will need to have enough equity to cover this cost. Adding these costs to your loan will also increase your monthly payment, but the additional cost is negligible for many homeowners.
A no-cost refinance may also be an option, but you may need to pay a higher interest rate to cover the cost.
3. Refinancing May Not Make Sense if You’re Selling Soon
Before refinancing, it’s important to calculate your break-even point. Your break-even point is the point when you’ve recouped the cost of the refinance.
To find your break-even point, divide your closing costs by the amount you’re saving by refinancing. For example, let’s say that your closing costs are $4,000 and you’re saving $200 a month by refinancing. It would take you 20 months to recoup the cost of refinancing, or to break even.
Calculate your break-even point before you commit to refinancing. For example, if you plan on selling your home before you recoup those closing costs, refinancing may not make sense.
4. Your Tax Bill May be Higher
If you’re like most homeowners, you probably deduct your mortgage interest to lower your tax bill. However, it’s important to remember that refinancing and lowering your interest rate will also reduce your tax deduction.
On the other hand, if you’re increasing your loan amount by taking out cash or adding your closing costs, your interest deduction may actually be higher initially. This is because most of your payments will be put towards interest during the first few years of the loan.
It’s wise to consult with a tax professional before refinancing if you’re concerned about how this move will affect your taxes.
5. Cash-Out Refinancing Can Give You Cash for Repairs
Many homeowners use refinancing as an opportunity to lower their Colorado mortgage rate and save money on their monthly payments. However, cash-out refinancing is also an option and may make sense if you want to make repairs that will increase your property value.
A cash-out refinance is when the new mortgage’s principal is higher than the one it’s replacing. The borrower receives the difference between the two loans in cash.
Refinancing a mortgage is a big decision and one that requires careful consideration. Keep these five points in mind when deciding whether it makes sense to refinance.