Homeowners Insurance Your Mortgage And Escrow
Now that weve explained the difference between PMI and homeowners insurance, lets get back to the question of the latter being included in your mortgage. If you pay for your homeowners insurance as part of your mortgage, you have an escrow.
An escrow is a separate account where your lender will take your payments for homeowners insurance , which is built into your mortgage, and makes the payments for you. This is advantageous for both you and your lender you dont have to worry about keeping track of one or two more bills, and theyre assured that youre staying current on those financial obligations.
Some borrowers will be required to escrow their insurance and property taxes into their mortgage payments, and some wont. Like your PMI, if you havent paid a 20 percent or more down payment on the home, chances are that your lender will require it.
If youve made a down payment of 20 percent or more, you can usually choose whether or not you want to pay your insurance with your mortgage. Those who decline to pay via escrow generally prefer to pay their insurance in one lump sum or have more control over when payments are made.
Does Refinancing Affect Taxes
Unfortunately, theres no cutanddry answer here. Refinancing may or may not affect your taxes, depending on what type of refinance you used and how you file.
As a general rule, your mortgage only impacts your taxes if you itemize your deductions.
And, if you used a straightforward rateandterm refinance, there likely arent any tax implications. A cashout refinance could have some, but you will not have to pay income tax on the equity you cashed out. Heres what you should know.
The Mortgage Reports is not a tax site. This information is for general guidance only. Consult with a tax professional about your specific situation.
Access Cash For Your Repairs And Home Improvements
If the hot water heater broke and the roof needs replacing soon, taking cash out of your home with a refinance can make more sense than putting these bills on a credit card with a much higher interest rate.
Your home is likely your largest single asset and if you want to keep it appreciating in value, youll need to keep it in good repair and up-to-date. On the bright side, the money you spend on capital improvements will not only help you keep up with the real estate market. It will also be added to your cost basis in the home typically the propertys purchase price and could help you save on capital gains taxes when you sell.
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How Much Will It Cost To Complete The Refinancing
Depending on your lender and your loan terms, you may pay as little as a few hundred dollars or as much as 2% to 3% of the new loan value to complete a refinancing. If its going to cost you $3,000 to complete the refinance and it will take four years to recoup that money, it may not make sense for you.
Alternatively, if you can refinance and pay only $1,000, and have no plans to sell anytime soon, its very likely worth paying that $1,000 to save over time. In addition, some lenders allow you to roll your closing costs into the amount of the loan, so you dont have to come up with money out of pocket for closing costs.
Accessing 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. Thatâs extra money for investment opportunities, home renovations, or your childrenâs 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.
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What Is Mortgage Life Insurance
Mortgage life insurance is coverage that you can purchase as a mortgage borrower. Its designed to pay off or pay down the mortgage if you die. The insurance money payable under the coverage is always applied to the mortgage balance. This can help your family stay in their home, even if the primary income used to make the mortgage payments is no longer there.
Mortgage life insurance can be convenient to get at the bank when youre arranging your mortgage. It may be easier to qualify for coverage than with personal life insurance. Mortgage life insurance also features an easy application process. Since mortgage life insurance is group insurance, this can result in lower premiums because the risk is spread out over a large group of people.
A benefit of having mortgage life insurance as part of your overall financial plan is that it can free up money you may get from other insurance policies. For example, the money you get through insurance from employer benefits or a personal life insurance policy could go towards expenses other than the mortgage, such as utility bills or university tuition for children.
Mortgage life insurance usually carries a 30-day free look period when all premiums paid can be refunded if you cancel your coverage. This lets you buy coverage right away and have time to review the insurance certificate. It also allows you to talk with an advisor to determine what type of insurance may be best suited for your own financial situation.
Does Your Mortgage Go Up When You Refinance
A higher percentage of your monthly payment goes to interest the first few years. If you’ve had your loan for a while, more money is going to pay down principal. If you refinance, even at the same face amount, you start over again, initially paying more on interest. That, in effect, increases your mortgage.
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Refinancing Your Mortgage Can Be A Smart Financial Move Potentially Saving You Money On Your Monthly Mortgage Payment Or On Total Interest Over The Life Of Your Home Loan
Before you apply, youll want to think carefully about when to refinance your mortgage. Youll also want to decide if refinancing makes sense financially by weighing any money youll save against the cost of refinancing the loan.
Well review some common scenarios to think through.
How To Refinance Your Mortgage
Refinancing a mortgage shouldnt be a quick decision. After weighing the pros and cons, you can determine your goals and take the necessary steps toward lowering your payment or taking cash out to achieve your financial goals.
Set a Goal for Your Mortgage Refinance
Before starting toward refinancing, its important to set a goal for starting a new mortgage. Are you interested in saving money on your monthly payment? Or is taking out cash to consolidate debt or fund a big project more important? By setting a clear-cut goal, you can decide the best way to move forward with a refinance.
Check Your Credit Score
As with any transaction involving credit, you should know your credit score before talking to lenders. Checking your credit report can help you understand how lenders perceive your risk, and it allows you to fix any erroneous information before requesting rates. Although you can refinance with bad credit, you may not qualify for the best rates.
Shop for Mortgage Refinance Rates With Multiple Lenders
Once you understand your credit, you can now shop for mortgage refinance rates with several lenders to see which gives you the best options. You can request multiple quotes from lenders within 14 days of your first request without negatively impacting your credit. If you qualify for a VA mortgage refinance or FHA mortgage refinance, you will want to work with lenders who can help you explore those options.
Select a Mortgage Refinance Lender and Lock Your Refinance Rate
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An Appraisal Amount Won’t Necessarily Be The Same As Your Home’s Market Value
I was shocked when our house was appraised for $306,000 so much so I thought maybe we should put our house on the market to make some fast cash! Our loan officer quickly explained that what a home appraises for isn’t necessarily what it will sell for.
Your house is ultimately “worth” what someone will give you for it. If you live in a high-demand neighborhood where houses are getting multiple offers, you might sell your house for more than the appraised value.
The inverse can also be true: Our house might be “worth” $306,000 based on the appraiser’s research and comparable homes in the area, but I doubt anyone would actually pay that much for it since it only has one bathroom and our neighborhood isn’t in ultra-high demand at the moment. It may gain market value over time, though, so if we eventually decide to sell, the house could go for $306,000 or more.
Our Mortgage Refinance Strategy
My husband and I quickly realized that the offers for a 15-year mortgage were far more attractive than those on a 30-year loan . We also realized that since we were already eight years into our original 30-year mortgage, we didn’t want to reset that clock by refinancing into another 30-year loan.
So instead, we opted for a 15-year loan. Doing so caused our interest rate to drop more than a full percentage point. It also meant swapping a 22-year repayment period for a 15-year repayment period, which would get us finished with our mortgage sooner.
The only drawback is that instead of lowering our monthly mortgage payment, we actually raised it by about $300 a month. But we’re not bothered by that for a few reasons:
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The Best Option: Refinance
Theres a third way to reduce your mortgage interest and shorten your loan term. Its called refinancetoprepay.
Refinancetoprepay is exactly what it sounds like you refinance your loan to a lower rate, then prepay on your new loan.
With refinancetoprepay, you get access to current mortgage rates, and a quicker amortization schedule.
Heres how to execute this strategy:
The refinancetoprepay system works because, although your mortgage rate is lower, youre making the same payment to the bank each month.
Youre paying less interest because of your lower rate and youre sending bonus principal monthly.
When you refinancetoprepay, your loan will restart to 30 years, but youll ultimately pay it off faster than had you never refinanced at all.
Heres a reallife example of how refinancetoprepay works.
- Your current loan balance is $400,000
- You refinance from the 75% mortgage rate you took two years ago, to a zeroclosing cost 2.75% mortgage rate
- After the refinance, your payment will be about $220 less per month
Simply take those $220 savings and send it to your lender each month along with your regular payment.
If you keep it up, your new 30year loan will pay off in 25 years.
This is 3 years faster than if you hadnt refinanced at all .
Refinancing To Access Your Homes Equity
In the first quarter of 2020, 42% of all refis involved an increased principal balance by at least 5%, indicating the owners took cash out, financed closing costs or both. While cash-out refi rates can be a bit higher than rate-and-term refinance rates, there still may be no cheaper way to borrow money.
You can access your home equity through a cash-out refinance if you will have at least 20% equity remaining after the transaction. Heres an example.
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Is It Cheaper To Refinance With My Current Lender
Not necessarily. While it is possible having an established relationship with your current lender may lead to more favorable rates, its not a guarantee. Your best option for finding the best mortgage rate is to shop around and consider different types of lenders, including banks, mortgage brokers, private lenders and credit unions.
How Old Will You Be When The Mortgage Is Repaid In Full
One downside to refinancing is that if you sign up for a new 30-year mortgage, youre restarting the clock until youre mortgage free. If youre already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean youre carrying debt into your 60s when youre likely going to be thinking about retiring.
Its possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.
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Break Your Existing Mortgage Contract Early
You would consider breaking your mortgage early if you wanted to obtain a lower interest rate or access equity from your home. In this case, you eliminate your existing mortgage and take on a brand new one with any lender. Breaking your mortgage will incur a prepayment penalty from your bank, which is normally equal to around three months worth of interest charges. If you can justify the cost of the prepayment penalty with your new mortgage rate, then breaking your mortgage can still be worth it.
Calculate Your Mortgage Refinancing Savings
To calculate your monthly savings from refinancing, use a mortgage calculator to enter these numbers and get your new monthly payment:
- Amount to refinance
- New interest rate
- New loan term
Compare your new monthly payment to your old monthly payment. The table below shows how grabbing a lower interest rate could save you $204 per month, or $2,448 per year.
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Interest Rates And Fees If You Borrow On Amounts You Prepaid
You pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.
Fees vary between lenders. Make sure to ask your lender what fees you have to pay.
You may not have to make any changes to your mortgage term.
How Do You Tell If I Should Refinance My Mortgage
So when does it make sense to refinance? The typical should-I-refinance-my-mortgage rule of thumb is that if you can reduce your current interest rate by 1% or more, it might make sense because of the money you’ll save. Refinancing to a lower interest rate also allows you to build equity in your home more quickly.
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Refinance To Remove A Borrower From A Mortgage
Sometimes refinancing is the only way to remove a borrower from a mortgage. For example, after a divorce it may make sense to remove a former spouse from the mortgage for a house by refinancing. You may need to accept a higher interest rate to do this if current rates are higher than the rate on your existing mortgage.
Interest rates are on the move. Would you like to talk to us about a refinance or cash out refinance on your home? Get started today or call our friendly Loan Advisors at .
Is Refinancing A Good Idea Right Now
An often-quoted rule of thumb has said that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance. … To calculate your potential savings, you’ll need to add up the costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs.
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Example: Costs When You Break Your Mortgage Contract To Change Lenders
Suppose a different lender is offering you 3.75% interest. To break your mortgage contract with your current lender youll need to pay a prepayment penalty of $6,000.
You may also choose a blend-and-extend option with your current lender. This would give you a 4.6% interest rate.Table 2: Example of costs to change lenders
In this example, you pay less when you choose a blend-and-extend option with your current lender.
Note that youll usually need to pay fees when you set up a new mortgage, including when you choose a blend-and-extend option. This example doesnt take into account any fees. Lenders may be willing to pay some or all of the fees. If this is the case, your costs to renegotiate your mortgage will be less.
Why Did My Escrow Payment Go Up
As we previously mentioned, if your escrow payment goes up, its typically due to an increase in insurance costs or taxes. However, if you dont already have an escrow account, adding one will come with some new costs.
Adding an escrow account will increase your mortgage payment, in order to cover your monthly tax and insurance payments. Youll also have to put in a little bit extra upfront in order to set up the account. The good news is that it wont be more than one-sixth of your total escrow expenditures for the year.
If you miss a tax or insurance payment, your state or local government may choose to initiate a foreclosure or impose fines. To avoid this, a lender or servicer may require that an escrow account gets set up following a missed payment, to make sure the payments are made going forward.
Buying A House After Bankruptcy
Can I buy a house after bankruptcy? It is a common question trustees are asked. Most people are not able to afford to purchase a home outright and need to know how to get a mortgage after bankruptcy. The key is to ensure that you receive a discharge from the bankruptcy and that you are working on re-establishing your credit. Canada Mortgage and Housing Corp. will review your application as early as 18 months 2 years after discharge if you have re-established your credit. Therefore, it is possible to get a mortgage post-bankruptcy.