Will You Stay In Your Home Long Enough To Benefit From A Refi
Using our example , youd pay $23,000 in interest over the next three years with your current 30-year loan at a 4% interest rate.
On the flip side, the 15-year refi at 3% interest would only cost you about $17,000 in interest the first three years. That means, after three years, your refi will have made up for its own closing costs .
After that, youll enjoy thousands of dollars of savings nearly every year until you pay off the mortgage or sell your home! But if you relocate in just 12 years after refinancing, you wouldnt earn back that $6,000 and the refi wouldnt have been worth it.
Whewthats a lot to throw at you! And we know that even when using a mortgage calculator, the math can be pretty complicated. So ask a home loan specialist you can trust for helplike our friends at Churchill Mortgage.
When Refinancing Your Mortgage Is A Bad Idea
In certain circumstances, the worst thing you can do for your financial situation is refinance your mortgage.
- When youre in debt If youre looking for the extra stash of cash each month to pull you out of debt, you probably shouldnt be refinancing. Most people who refinance for this reason end up spending all the money they save, and then some. Without making any real changes to your spending habits, giving yourself extra money to blow is only enabling you to fall deeper into debt.
- When a refinance will greatly lengthen the loans terms If youve only got 10 years left on your mortgage and you want to refinance to stretch out those payments over 30 years, you wont come out ahead. Any money you save on lower payments will be lost in the cost of the refinance and the extra 20 years of interest youll be paying on your mortgage.
- When you dont plan on living in your home much longer If you plan on moving within the next few years, the money you save might not even come close to the prohibitive price you paid for your refinance.
Is It Worth Refinancing For Just 025 Percent
Experts often say refinancing isnt worth it unless you drop your interest rate by at least 0.5 to 1 percent. But that may not be true for everyone.
Refinancing for a 0.25% lower rate could be worth it if:
- You are switching from an adjustablerate mortgage to a fixedrate mortgage
- You have a large loan balance
- You can refinance to consolidate highinterest debts
Say you are refinancing from an adjustable rate to a 0.25 percent lower fixed rate. Here, refinancing may make sense. Thats especially true if you expect interest rates to increase, says Bruce Ailion, Realtor and property attorney.
A quarterpoint rate drop may also benefit someone with a large principal borrowed.
A large loan size may result in significant monthly savings for a borrower, even when rates dip by only 0.25 percent, says David Reischer, attorney and CEO of LegalAdvice.com
To illustrate this point, consider the following example from Steven Ho, senior loan officer at Quontic Bank:
- Assume you have a $500,000 mortgage at a 4.5% rate
- Your monthly principal and interest payment is $2,533, with a PMI payment of $250
- So your total monthly payment is $2,783
- You opt to refinance to a 4.25% rate
- This would reduce your monthly payment to $2,459 saving you $324 per month
Over five years, that adds up to over $19,000 in savings, Ho notes.
Refinancing to consolidate debt
Refinancing for 0.25 percent might also make sense in the case of a debt consolidation refinance.
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Some Say You Should Lock A Refinance Rate In Now
McBride acknowledges that waiting is not his typical advice. Normally, rates bounce around, and borrowers who wait lose out. That already has happened to some this spring, as mortgage rates have thrown head fakes on borrowers.
My advice to clients is do not drag your feet, says Ed Conarchy, mortgage adviser at Cherry Creek Mortgage Co. in Gurnee, Illinois. If it makes sense to refi, get your documents in, sign your forms and do everything on your end so you dont lose this opportunity. I have several clients that have dragged their feet and are regretting it now, since rates are off their lows and they have missed bigger savings opportunities.
Michael Fratantoni, chief economist at the Mortgage Bankers Association , likewise advises against trying to time rates. Mortgage rates are really difficult to forecast, Fratantoni says.
In other words, not even the top economist at an industry organization knows which way theyre going. Indeed, the mortgage experts polled weekly by Bankrate are seldom unanimous in their forecasts of the future path for rates.
The MBA, for its part, predicts only a small drop in rates later this year. While Fannie Mae and the National Association of Realtors see 30-year fixed mortgage rates flirting with 3 percent, MBA says rates for the year will average 3.4 percent and edge back up to 3.5 percent next year.
You Need To Be In A Financial Position To Refinance
Ultimately, the key factor in determining whether you should refinance now is how refinancing fits into your personal financial situation. Specifically:
- How much savings can you realize by refinancing? You can use The Ascent’s mortgage calculator to compare the payments and total interest costs of your current loan with a refinance loan. This will help you see whether you can reduce your monthly bills and repayment expenses over time.
- How long do you plan to remain in your home? Refinancing comes with closing costs, which can total as much as 2% to 6% of the cost of your loan. If you’ve reduced your interest rate, the savings can eventually make up for this initial upfront cost. But since it takes time for the savings in your monthly payment to cover the money paid out at closing, make sure you’ll be in your home for a while before refinancing.
- Can you qualify for a refinance loan at a competitive interest rate? Lenders have gotten stricter in who they allow to refinance. You’ll need good credit, a stable job, and enough income to pay off the loan in order to refinance at the best rates. If you don’t have solid financial credentials, you may want to stick with your current loan while working on improving that.
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The Value Of Your Home Has Increased
Since 2011, the values of homes has risen from an average of $250,000 to an average of $394,000. Yet many homeowners dont refinance their mortgages when the value of their home increases. If your homes value has increased, refinancing may be a beneficial option for you. If youre looking quickly to pay off other high-interest debts or fund major purchases, this avenue may be even more appealing.
Cash-out refinancing is a financing option that allows you to acquire a new, larger mortgage so you can receive the difference in cash between your new mortgage and your previous mortgage. For example, maybe your house was originally valued at $250,000. You put 20 percent toward a downpayment ââ $50,000.
Your mortgage of $200,000 is now $140,000 after a few years of payments, but now your house has increased in value from $250,000 to $300,000. You may now opt to refinance your mortgage for more than your remaining balance of $140,000. If you refinance for $165,000, you can use that $25,000 difference to pay off high-interest debt, make home improvements or fund major purchases.
Be sure to check the value of your property so you can have an accurate estimate before refinancing your mortgage. Over or underestimating your homes value may result in you overpaying and saving less.
If any of these five signs apply to you, it may be time to consider refinancing your mortgage.
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.
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How Many Types Of Refinancing Are There
Homeowners can choose to refinance for a variety of reasons including:
Cash Out Home Equity
Homeowners can extract equity from the homes. The extracted equity can be used as a low-cost source of business funding, to pay off other higher-interest debts, of fund home renovations. If the equity is extracted to pay for home repairs or major home improvements the interest expense may be tax deductible.
Change Loan Duration
Homeowners can shorten duration to pay less interest over the life of the loan & own the home outright quicker lengthen the duration to lower monthly payments.
Lower Interest Rates
If mortgage rates decline homeowners can refinance to lower their monthly loan payments. A one to two percent fall in interest rates can save homeowners tens of thousands of dollars in interest expense over a 30-year loan term.
Change Loan Structure
Borrowers who used an ARM to make initial payments more afforadable could shift to a fixed-rate loan after they built up equity & have progressed along their career path to increase their earnings.
Remove Mortgage Insurance Requirements
The following graphic explores examples of why a home owner may choose to refinance.
Should I Refinance If Interest Rates Are Low
When interest rates fall, the possibility of getting a lower mortgage rate is a strong reason to consider refinancing if you need additional funds. A reduction in your mortgage rate could lead to significantly lower monthly payments.
However, you must factor in the costs of ending your current mortgage, including any prepayment charges, as well as how long you expect to live in your home. Only then can you determine whether its worthwhile to refinance at a lower rate.
Is Now A Good Time To Refinance Your Mortgage
When determining whether it’s the right time to refinance, homeowners need to weigh the costs of refinance against the benefits. While this can seem daunting, it does not have to be a difficult task.
The truth is that millions of homeowners can still benefit from a mortgage refinance.
Current mortgage rates are hovering around 3%, higher than at the start of 2021 but still close to historic lows. At current rates, there are around 11.2 million well-qualified homeowners who could lower their mortgage interest rate by at least 0.75 percentage if they decided to refinance today, according to mortgage data company Black Knight.
Together, these homeowners could save an aggregate of $3.1 billion per month, or about $279 per owner per month. That’s a potential savings of $3,348 per year. About 1.2 million of these owners could save up to $500 per month, for yearly savings of $6,000.
These borrowers as well as those who can reduce their interest rate by less will need to decide if these savings justify closing costs.
With the potential savings, it’s worth taking the time to review your options and see if a refi is the right move. We’ve covered the basics to help you decide.
Refinancing To Shorten The Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5% for 30 years , getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.
Refinancing Affects Your Mortgage Interest Deduction
Second, calculate how much youll be saving with the new refinance rates by subtracting the new, lower mortgage payment from how much youre paying now. You can factor in your tax expenses by multiplying this savings amount by your combined federal and state tax rate. Many homeowners dont realize theyll be taking a hit on their mortgage interest tax deduction until the following year, meaning your tax liability could go up as a result of refinancing your mortgage loan.
You can calculate your net savings from mortgage refinancing by subtracting your tax costs from your monthly savings from the previous step. Remember, cheaper mortgage loans result in smaller tax benefits for you.
Finally, calculate your break-even point by diving your total mortgage closing costs by your net savings and youve got the number of months its going to take you to pay off the cost your new home loan. Its worth mentioning that this calculation is only valid if you choose a mortgage with the same term length as your old loan, 30-year to 30-year home loan for example.
If you go shorter, with a 15-year mortgage your break-even point will come sooner than what youve calculated. If you go with a longer term length youll basically never break even because of higher finance charges for those extra years so this calculation is no longer valid.
Heres an example to illustrate how this break-even calculation works:
What Is The Refinancing Process
Whether youre refinancing to lower your monthly payments, to lower your interest rate or to free up some cash to pay off high-interest debt or build equity in your home, youll probably want to know what you can expect from the process of refinancing a mortgage before jumping right in. To refinance, youll likely go through these nine steps:
1. Make Sure Refinancing Will Benefit You
Your first step in refinancing your mortgage is making sure that refinancing will be beneficial for you. Know what your goal is and determine whether you can attain it. Are current rates low enough for you? Will you ultimately be saving money? If you cash out, make sure having that money right now will outweigh the extra years spent in debt. Everyones financial situation and priorities are different, so only you can decide what the best decision is for you.
2. Contact a Lender
With Assurance Financial, we want to make your refinancing process as quick and painless as possible. We offer the chance to get pre-qualified in just 15 minutes, with a no obligation quote and a free rate quote. You can apply online or with one of our experts licensed across the country. We have every type of loan available, and because were an independent lender, we wont pass around your loan or data to anyone else like other mortgage brokers. With no obligation, we can check your credit, provide you with a rate quote and send you the numbers.
3. Fill out Your Application
4. Sign Your Disclosures
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Should You Refinance Your Mortgage
Now that you know what to consider before contemplating a refinance, lets have a closer look at your situation, Jill and Bob. As tempting as it looks, you may be better off sticking with your original mortgage.
The real question is: What will your mortgage balance be in three years if you reduce your mortgage rate by 2% and add $33,600 to your mortgage? I say three years, because that is when your current term is up, and the rate may change at that time.
Without all of your mortgage information, my figures are slightly different from yours, but I can get close enough that youll know which option is right for you.
Looking at the table below, youll see the interest youll pay/save and the remaining balance after three years.
Interestingly, if you pay the penalty and reduce your weekly payment amount, you will save about $33,000 in interest and apply an additional $14,000 or so towards the principal. However, you will still owe more on your mortgage at the end of three years.
In considering this change, is your goal to get your mortgage paid off or to reduce your weekly mortgage payment? If moneys tight and you need to create some breathing room, renegotiating your mortgage may make sense.
In your case, it sounds like your goal is to get your mortgage paid off, and you suggested renegotiating and maintaining your current weekly payments as a strategy to do just that.
Should I Refinance My Mortgage Now Tips To Help You Decide
Feb 19, 2021 | Mortgage
Mortgage rates are still around record lows. Will they stay this way much longer? No one knows, but we do know this environment should motivate you to at least investigate the thought of refinancing. We have a few helpful questions you can ask yourself to determine whether a refinance is right for you and your situation.
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What Does It Mean To Refinance A Mortgage
A mortgage refinance is when you change the terms of your mortgage contract. Common reasons for choosing this option include:
- Getting a better interest rate
- Borrowing more to consolidate debt or to purchase another property
- Extending the amortization to lower your payments
Refinancing to a better rate can help reduce your monthly payments, free up cash flow orif you maintain your current payment amountpay off your mortgage faster.
Note that a mortgage refinance is different from a mortgage renewal. A mortgage renewal occurs when the term of your mortgage has ended and then renews into a new term. Prior to your term renewal, your lender will send you a renewal offer with a proposed mortgage rate which you can either accept or negotiate. This cycle of renewals keeps repeating until you have reached the end of your amortization and you own your home.
Back to refinancing There are a number of things to watch out for when deciding whether or not to refinance:
Andrea Urban, a mortgage broker with Premier Mortgage in Toronto, suggests you consider refinancing when current rates are lower than your existing rate and you have at least four months to go before your mortgage term is up.
Keep your mortgage as flexible as possible, because life happens, she says, and recruit a mortgage pro to help you identify those mortgages with the most flexibility.