Refinancing Your Home
Thinking of refinancing your mortgage? Since rates are at 30 year lows, it's a good idea to get pre-approved for a loan if you're seriously thinking about refinancing your home.
If you qualify and once you're pre-approved, you'll have a commitment from a lender. While it is important to analyze the savings versus the costs, it is equally important to take into account the history and future of your home loan.
- If you plan to keep your home for 1 to 3 years, you may want to consider a loan with minimal or "no costs".
- If you plan to keep the home for 7 - 20 years, you may want to pay extra points to get a lower interest rate.
- If your property will be a rental, cash flow and the lowest possible payment may be your concern which you may want to pay extra points.
- If you have already been paying on your 30 year loan for 10 years, a new 15 or 20 year loan might be the best option.
To compare the savings to the cost, divide the total cost of the refinance by
your monthly savings to determine how many months it will take to
"break-even". If you plan to keep the loan longer than the break-even
point, it probably makes sense to refinance.
Example: Mike is saving $200/month by refinancing. The new loan cost him $4,800. It will take 24 ($4,800/$200) monthly payments for Mike to "Break Even" on the cost of the loan. If Mike plans to stay in his home for more than 2 years, it makes sense for him to refinance.
It may make sense to finance the costs into the new loan. Sometimes referred to as a "No Cost Loan" (No Out of Pocket expenses), including the cost in the new loan uses the equity in your home, not you bank account, to pay the loan costs. You may choose a loan with lender/broker paid costs.
Reasons To Refinance
Lower Your Monthly Mortgage Payment
Take Cash Out for Debt Consolidation or Home Improvements
One of the most common reasons to refinance is to lower your monthly payment. In addition to a lower interest rate, lowering the loan amount or eliminating mortgage insurance can decrease your mortgage payment.
You may be able to lower your payment without changing your interest rate, if your property value has gone up or your loan balance has gone down substantially.
If you have peen paying on your 30 year loan for 10 or more years, a refinance will most likely result in a lower payment, but it may not be to your benefit. Starting over means financing a lower loan amount for more years and paying more interest.
If your loan is less than 10 years old, your not planning to keep your loan longer than a few more years, or you really want a lower payment see the section above on Break Even Point.
Combine high interest rate credit card balances, buy a new car, add a room to the house or send your kids to college. The equity in your home is likely to be the cheapest money you can borrow.
The interest paid and some loan costs may even be tax deductible. (Ask your Tax Advisor).
You may be able to borrow up to 80% of the appraised value of your home for a "cash out" refinance. If you have less than 20% equity in your home, there are 2nd Trust Deed loans available for up to 95% of the value of your home under certain conditions.
Unless you have been paying on your ARM loan for several years, the current fixed interest rates may be slightly higher than the current interest rate on your ARM. Ask yourself if the security of a fixed rate is worth a slightly higher payment.
If you think interest rates aren't going up for awhile, you may want to wait until you next adjustment. If the fixed interest rates are lower than your current ARM interest rate, ask yourself where you might be in 2 years? 5 Years? Evaluate your Break Even Point. If your Break Even Point is a long period, ask yourself if the security of a fixed rate is worth the cost?
With a true No Cost Loan, all of your Non-Recurring closing costs are paid by the lender/broker. They are NOT added to your loan as with a No "Out of Pocket" Cost loan. No Cost Loans are great if you have a high interest rate and are planning to sell or refinance again within the next 2 or 3 years.
You may want to refinance for even a small drop in your interest rate. Since the loan has no costs, any drop in your payment is money in your pocket. If you plan to keep your loan for more than about 4 years, you should consider paying your own closing costs. By paying your own closing costs, you will be able to get a lower interest rate and payment.
If you plan to keep your house for awhile and/or you don't like the prospect of paying all that interest for 30 years, a shorter loan term may be for you. 15 year loans often carry slightly lower interest rates than 30 year loans.
The lower interest rate combined with the shorter payoff time means you will save tens of thousands of dollars in interest over the life of the loan. The payment on a 15 year loan is approximately 33% higher than on a 30 year loan.
Lenders recommend refinancing to a shorter term only if you are comfortable with a higher payment and it will not cause you any financial hardship.
Keep in mind, you can shorten the term of any loan just by making extra principal payments as much and as often as you want. Add an extra $100 a month to your payment and you may payoff your 30 year loan as much as 7-10 years early.
If you have a 2nd mortgage and some equity in your home, it may benefit you to refinance and combine both loans into one loan. In addition to the convenience of writing one check each month, the payment on the new loan is likely to be less than the combined payments of the first and the second.
For example, Scott had a First Loan at 6% paying $900/month and a Second Loan at 11% paying $350/month. His combined monthly payment was $1,250. After he refinanced both loans into a new First Loan of $195,000 at 5.00% his new payment was $1,050 saving him $100/month
If you purchased your home with less than a 20% down payment, you are probably paying "mortgage insurance" (MI). If the value of your home has increased and/or your loan balance has decreased over the last few years, you may be able to avoid paying mortgage insurance.
Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a piggyback mortgage) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% down payment). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% down payment).
If you already have a low fixed rate mortgage, you may NOT want to refinance just to Remove Mortgage Insurance. Attempt to work with your current lender to remove the mortgage insurance without refinancing.
Your lender may ask you to pay for a new appraisal and a small processing fee. Ask for everything in writing and follow the procedure carefully to avoid any unnecessary delays. If your lender asks for a fee that seems unreasonable ($1,000 or more), compare their costs to the cost of a traditional refinance with our lenders.
Learn more about a cash out refinance