What Should You Be Aware Of
Your unsecured debt does not have any collateral. But when you refinance your mortgage to consolidate debt, your monthly amount to be paid increases. You also lose a bit of equity with this process, so make sure you always pay the debt consolidation mortgage on time.
This type of mortgage can be a big advantage, but, if misused, you would be in a worse position than before. It can be very tempting to reuse your line of credit or credit card once its paid off completely. But the point of this solution is to get out of debt, so dont max it out again!
You Need To Change Your Loan Term
There are several reasons homeowners might want or need to change their loan term. Heres a bit more information on switching to a longer or shorter term.
Longer Mortgage Term
Are you having trouble making monthly mortgage payments, or are you unsatisfied with your current payment amount? A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.
When you lengthen your mortgage term, you may get a slightly higher interest rate because lenders take inflation into account, and a longer mortgage term means you will likely pay more in interest over time. If you know your current payment schedule isnt realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend it on other necessities.
Shorter Mortgage Term
You can also refinance your mortgage in the opposite direction, from a longer term to a shorter term. When you switch from a longer-term mortgage to a shorter one, you will likely enjoy lower interest rates and youll also own your home sooner.
Usually , switching to a shorter term also means that your monthly payments will increase, so make sure you have enough stable income to cover your new payments before you sign on for a shorter term.
Next Steps: How To Get The Best Refinance Rate
Once youve determined why you want to refinance and the type of loan you want, youre ready to shop lenders and compare refinance rates. Get quotes from at least three mortgage lenders, including a mortgage broker, a bank and an online lender. Be sure to compare their rates as well as fees and other charges that could add to the overall cost of the loan.
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Pros And Cons Of A Mortgage Refinance
A mortgage refinance is a major financial decision that shouldnt be made lightly. While a mortgage refinance has the potential to save you thousands of dollars over your mortgage term, there are inherent risks associated with refinancing that you need to be aware of. The table below summarizes the pros and cons of mortgage refinancing.
| Pros of refinancing | |
|---|---|
| Potential to get a lower interest rate and save money. | Penalties may be higher than the savings. |
| Can consolidate debt with a lower overall rate. | Consolidating debt removes an incentive to pay it down faster. |
| Access to equity in your home. | Accessing equity puts you into more debt. |
| Allows you to swap to a variable or fixed rate. | Switching rate type is not always in your best interests. |
You Can Refinance Your Mortgage With No Closing Costs But It Could Cost You More In The Long Run
Refinancing your mortgage without any closing costs is called a no-closing-cost refinance. While it is an option, carefully look at the numbers to see whether it will actually save you moneyyou might just end up paying the same amount, or more.
“Instead of paying for closing costs at the closing table, your closing costs will be lumped into your new loan or be compensated for in agreeing to a higher mortgage rate,” says Valdes. She suggests negotiating with your lender regarding their fees instead of opting for a no-closing-costs deal.
It might also be challenging to find a lender that provides this option. “It takes good market research to find a lender that offers such services,” says Jeff Johnson, a real estate agent and acquisition manager of Simple Homebuyers. Even if you do find the right lender, not paying any closing costs while refinancing is unlikely to save you money down the line, because you end up paying more interest. “You save almost no money even after refinancing without closing costs,” Johnson continues.
Calculating your total refinance amount, comparing lenders, and thinking about how long you plan on living in your home are all factors to consider before refinancing your mortgageso you can be sure it’s a decision that makes sense for your short-term and long-term financial goals.
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How Do I Know If Refinancing Is Right For Me
If youre refinancing to save money with a lower rate, you simply have to weigh the costs of refinancing against the potential long-term savings. Historically, the rule of thumb is that its a good idea if you can reduce your interest rate by around 2%. But every case is different, and it pays to do the math.
First, lets look at the costs of refinancing your mortgage. It depends on when youre refinancing and if youre changing lenders. Extra fees can include: a mortgage pre-payment penalty, a mortgage discharge fee, a mortgage registration fee and legal fees.
A mortgage pre-payment fee is charged if you end you mortgage contract early. If you have a variable-rate mortgage, the fee is typically 3 months interest. If you have a fixed-rate mortgage, the fee is typically 3 months interest plus the interest rate differential. Its important to note that you do not have to pay a pre-payment penalty if youre refinancing when your mortgage is up for renewal.
The mortgage discharge fee only applies if youre switching lenders. Every lender set their own rates, but they typically range from $75 to $350. To avoid this fee, stay with the same lender.
The mortgage registration fee, on the other hand, is unavoidable. Its the cost associated with your lender removing the current mortgage amount from the title on your property and re-registering it with a new mortgage. The registration fee varies by province but is typically around $70.
Getting A Second Mortgage
A second mortgage is a second loan that you take on your home. You can borrow up to 80% of the appraised value of your home, minus the balance on your first mortgage.
The loan is secured against your home equity. While you pay off your second mortgage, you also need continue to pay off your first mortgage.
If you cant make your payments and your loan goes into default, you may lose your home. If thats the case, your home will be sold to pay off both your first and second mortgages. Your first mortgage lender would be paid first.
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Calculate Your Approximate Refinancing Prices
Subsequent, use a free mortgage refinance calculator like Financial institution of Americas to calculate your approximate refinancing prices.
Above all else, this calculation should verify youll be able to afford the month-to-month mortgage cost in your refinance mortgage. If one among your goals in refinancing is to scale back the quantity of curiosity paid over the lifetime of your mortgage, this calculation can even verify your chosen mortgage time period and construction will obtain that.
For it to be value it, you have to a minimum of break even on the mortgage after accounting for closing prices.
Calculating Your Breakeven Value
Breakeven is a straightforward idea. When the full quantity of curiosity you have to pay over the lifetime of your refinance mortgage matches the mortgages closing prices, you break even on the mortgage.
The time limit at which you attain parity is the breakeven level. Any curiosity saved after the breakeven level is successfully a bonus cash youll have forfeited had you chosen to not refinance.
An excellent mortgage refinance calculator ought to mechanically calculate your breakeven level. In any other case, calculate your breakeven level by dividing your refinance mortgages closing prices by the month-to-month financial savings relative to the unique mortgage and around the outcome as much as the following entire quantity.
Determine Whether You Can Afford The Monthly Repayments Of A Refinanced Mortgage
When you refinance the mortgage of your house, the amount you can borrow will depend on the equity of your home. The Financial Consumer Agency of Canada defines home equity as the difference when the remaining balance of your present mortgage is subtracted from the appraised value of your property. As you continue to pay your mortgage, your home equity increases. The same thing also happens when the value of your house rises.
Heres an example: Supposing that the appraised value of your house is $275,000, and your remaining payable to your current mortgage amounts to $150,000, then your home equity is valued at $125,000.
However, since you can only receive a loan that amounts to a maximum of 80% of the appraised value of your home , then your maximum refinancing credit limit is $70,000. If your lender grants you that amount, youd be owing a total of $220,000 on your refinanced mortgage.
Add the fact that new interest rates may apply on the refinanced part of your mortgage, and you may need to secure a separate mortgage loan insurance from your original one and pay for various administrative fees, you need to do the math to determine if paying for a new loan has room in your budget.
Therefore, before you apply for a loan, you must ask yourself the following questions:
If you are honest and realistic with your responses to these questions, then you have a better chance of getting a loan thats most favorable to you.
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Shop Multiple Mortgage Lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once youve chosen a lender, discuss when its best to lock in your rate so you wont have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether theyll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
What It Means To Refinance Your Mortgage
Homeownership
Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance .
When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one this is the reason for the term refinancing.
Most borrowers choose to refinance so they can lower their interest and shorten their payment term, or to take advantage of turning some of the equity they have earned on their home into cash.
There are two main types of refinancing: rate and term refinance and cash-out refinance.
Rate and Term RefinanceIn a rate and term refinance, you would typically be getting a new mortgage with a smaller interest rate, as well as possibly a shorter payment term .
With the recent record-low interest rates, refinancing your 30 year mortgage into a 15 year mortgage may end up getting you similar monthly payments as your original loan. This is because of the lower amount of interest you would be paying on your new mortgage, even though 15 year mortgage payments are usually higher than the 30 year loans.
The Truth about Mortgage states that it’s important to be sure you find your break-even point before deciding to refinance your current mortgage rate. This is essentially when the refinancing costs are recouped via the lower monthly mortgage payment .
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Is There A Limit To The Number Of Times You Can Refinance
The good news is, there is no rule that specifies a maximum number of times a homeowner can refinance their loan. As long as a property owner is able to get approved for a refinance loan, they can move forward with doing so. And, applying for past refinance loans generally shouldn’t affect that approval — as long as the homeowner generally has good credit and solid proof of income.
Of course, while you can refinance as often as you want, that doesn’t mean it’s practical to take this financial step very many times. There are a few reasons for that.
First, the truth about refinancing is that it comes with a lot of upfront costs. You’ll have to pay various fees including mortgage origination fees, appraisal costs, and other closing costs — and these can add up to thousands of dollars.
Now, paying thousands in fees up front can still make financial sense as long as the refinance loan will save you enough to eventually cover the closing costs and leave you better off. But if you refinance again too soon after doing so initially, you may not have time to break even on the first set of closing costs before you incur a second one.
Refinancing also makes sense only when you can drop your interest rate. Although interest rates have been falling, it can take time for dramatic shifts in rates to occur. If rates aren’t much lower than the rate on your current loan, it wouldn’t make sense to go through the trouble of refinancing your mortgage.
Can Refinancing Your Mortgage Save You Money
- Mortgages & Home-Ownership
- Can Refinancing Your Mortgage Save You Money?
Why should you learn about refinancing your mortgage? Thats simple: because it can potentially save you money, reduce your monthly payments and increase the rate you build equity. Did that get your attention? Great! Because today, were going to teach you all about it. Youll learn what refinancing is, reasons you might want to do it and figure out if its worth it for you. Lets get started!
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Expert Insight On Mortgage Refinancing
To help answer all your questions, MoneyGeek spoke with industry leaders on refinancing and home lending. This panel will help you identify what to look for, when you should consider refinancing and how to avoid scams in the process.
The Refinance Clock Is Ticking
Mortgage rates fell to all-time lows in late 2020 and early 2021, but began edging up in February. While they still remain relatively low, mortgage experts expect rates to rise as the coronavirus vaccine is distributed and the U.S. economy returns to normal.
Mortgage rates probably wont soar, however the Federal Reserve has vowed to keep the rate it controls near-zero until further notice. The Fed doesnt directly control mortgage rates, but its decisions do influence the mortgage market.
If mortgage rates do in fact follow the experts consensus, theyll probably end up in the range of 3.5 percent by the end of 2021. In other words, the window to refinance is gradually tightening rather than slamming shut.
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To Access Equity In Your Home
By refinancing your mortgage, you may be able to access the equity in your home. You could potentially access up to 80% of your home’s value, less any outstanding debt. Thats extra money for investment opportunities, home renovations, or your childrens education. There are several ways to access this equity including breaking your mortgage, taking on a home equity line of credit , or blending and extending your mortgage with your current lender.
Costs Of Refinancing Your Mortgage
The cost to refinance your mortgage depends on the strategy you use to access equity or lower your interest rate. No matter which strategy you use you will always incur legal costs, as a lawyer must change the financing on title. The good news is if your mortgage balance is greater than $200,000, many brokers and/or lenders will cover this cost.
If you are breaking your mortgage in the middle of your term to access equity or lower your interest rate, your lender will charge you a prepayment penalty. For fixed mortgage rates this penalty is the greater of three months interest or the interest rate differential payment . For variable mortgage rates this is simply three months interest.
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Are You In Need Of More Room For Monthly Cash Flow
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If youre in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what youll be doing with those new freed up dollars each month.
Tap Into Your Home Equity
When you make payments on your mortgage, you build equity in your home. Your home equityOpens a popup. is the difference between your property’s market value and the outstanding balance of your mortgage plus any other debts secured by your property. If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value1 in cash.
Estimate your available equity and find out how much you may qualify to borrow with our home equity calculator.
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