Many homeowners elect to refinance loans when mortgage rates plummet. Refinancing was rampant last year. However, it’s not always a wise choice. The real trick lies in knowing when to refinance your mortgage.
What’s a good time for mortgage refinancing?
Once you can see where refinancing is likely to foster your building equity, saving money, and paying off your mortgage, it’s a good idea. Even those with new mortgages can benefit from refinancing, based on how low rates are.
If you see where you can reduce your interest rate by between a half and three-quarters of a percentage point, investigate refinancing. Going that route can reduce your monthly payment immensely.
Note that you must be able to offset the cost with your monthly savings. If you plan to move in the next two years, it may not be such a good idea since you get virtually no time to recover the cost.
Interest rates aren’t the only things that factor into the question of refinancing. Your credit also matters, and it must meet the loan qualification standard. Note that market factors, such as long-term Treasury bond yields, determine mortgage interest rates. Additionally, persons with the best credit get the best terms and rates.
Important considerations that come with refinancing include how long you intend to remain in your home, financial goals, current financial standing, and equity portion. It would help if you always were asking yourself the relevant questions.
How does refinancing work and is the process worth it?
You can refinance your mortgage in numerous ways. Your goals influence finding the right loan. For example, it may be best to switch to a fixed-rate loan instead of an adjustable-rate mortgage since that would result in a regular monthly payment. Alternatively, you may wish to cut your loan term from 30 years to 15, which can significantly save you money on interest.
You can also use a refi once you have 20 percent equity in your home to rid yourself of private mortgage insurance.
Homeowners want lowered interest rates and comfortable repayment terms. Therefore, they choose straight rate-and-term refinance, which helps them to achieve these objectives. Many people want a lower monthly payment, so that funds are available to cover other expenses, such as auto loans or college tuition.
How does a cash-out mortgage refinance work?
The cash-out refinance option is popular with other homeowners. This arrangement allows them to borrow above the limits of what they owe on the loan. Therefore, they get extra cash, which they use to deal with renovations, eliminate credit card debt, or handle other significant expenses.
It can be very wise to use a lower-interest loan to take care of credit card debt. However, if your card balance starts to climb again, you create a setback and a risky position for yourself. Remember that your home secures your mortgage, so foreclosure could be around the corner if you miss payments.
Richard Liu, a consultant at C2 Financial Corp in San Diego, suggests that borrowers consult with mortgage professionals. The consultation should involve evaluating financial needs to see if other credit forms are better suited than cash-out refinance.
How long does recovering refinancing costs take?
When considering refinancing, the interest rate is not the only consideration. The costs associated with closing the refi loan are nothing short of steep. Note that they can range from two to five percent of the principal amount. For example, if you borrowed $300,000 with a three percent closing cost, you’d owe $9,000 at closing.
Many lenders don’t require it all upfront. Instead, the closing cost can become a part of your principal balance, which you can finance as a loan component.
Calculate how long a mortgage refinance needs to pay for itself when you want to determine whether refinancing is feasible. It may not be worth the trouble if you intend to sell the house before you break-even.
Liu advises that borrowers who are accessing loans to lower monthly mortgage payments should consider closing costs. He states that a borrower should expect to save no less than the closing cost figure in interest payments for the loan tenure.
If you wish to ascertain your break-even point, you need the total closing cost. Once you have that figure, you should divide it by the figure you save monthly based on your new payment.
Calculating your break-even point for closing costs
It’s best to use an example here to illustrate the process for you. Imagine that your new mortgage manages to save you $250, and your closing cost is $4,000.
You need to divide $4,000 by $250. $4,000 / $250 monthly = 16 months to get to the break-even point.
Should you intend to sell the property before that timeline has elapsed, refinancing is not a good idea for you.
Mortgage refinance example
Imagine you opted for a mortgage for $200,000 that lasts 30 years at a fixed five percent interest rate. Your monthly payment would be $1,388.88, and you’d repay $500,000. Note that $300,000 of this would be interest.
After 10 years pass, you’d pay $66,666.66 towards your principal, while $100,000 would go to interest. You then want to refinance the $133,333.34 that remains of your principal. You wish to do this with a new loan that has a 30-year fixed rate of two percent.
The new loan terms would reduce your monthly payment by $896.05. Your repayment would total $213,333.34, and $80,000 of this would be toward interest. You can then add what you paid over the 10-year period, which would bring the total to $380,000, which includes $180,000 of interest.
The refinance move would significantly cut your monthly payment, and you’d save $120,000 in interest.
How long does mortgage refinance take?
The answer to this question depends on the lender you choose, and the time required for credit checks, appraisals, inspections, and other prerequisites. Many of the lenders’ websites available offer information about many loan products, and you can also compare rates, complete applications, and submit documents.
According to Liu, technology spent the past few years creating a much smoother application process. Thanks to online applications, electronic signatures, and scanning apps, borrowers can get through most tasks without printing a thing. He also states that most refinances can reach closure in only 30 days.
- Explore different mortgage terms to see what happens in months or years.
- Find out the total interest you’d pay by revealing the amortisation schedule.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.