The Costs Of Refinancing
Refinancing a home usually costs between 3% and 6% of the total loan amount, but borrowers can find several ways to reduce the costs . If you have enough equity, you can roll the costs into your new loan . Some lenders offer a no-cost refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Dont forget to negotiate and shop around because some refinancing fees can be paid by the lender or even reduced.
Have I Counted The Costs Of Refinancing My Debt Into My Mortgage
Mortgage refinancing can be expensive. A refinance of a home mortgage usually comes with closing costs that are either paid upfront, added into the loan or added via a higher interest rate.
Also, when refinancing debt onto a mortgage, you can potentially stretch your credit card debt out to thirty years if you take out a thirty year loan and youre not committed to paying extra on the mortgage. Thirty years or even fifteen years is a long time to deal with credit card debt.
Thirdly, adding additional monies onto your mortgage balance lessens the cushion of equity you have in your home. If another housing bubble burst came, would you still have plenty of equity in your home to sell and not come out upside-down on the deal?
These are some of the hidden costs of refinancing your debt into your home mortgage.
How Long Does It Take To Recoup The Costs Of Refinancing
The interest rate is not the only cost to weigh when youre considering whether refinancing is worth it. There are costs to close the new loan, and they can be steep. Expect closing costs to total 2 percent to 5 percent of the principal amount of the loan. If you borrow $250,000 and closing costs are 4 percent, for example, you would owe $10,000 at closing.
Rather than require all that money upfront, many lenders let you roll the closing costs into your principal balance and finance them as part of the loan. Keep in mind, though, that adding those costs to the loan only increases the total amount that will accrue interest, ultimately costing you more.
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How Do Personal Loans Work
Once you’re approved for a personal loan, the cash is usually delivered directly to your checking account. However, if you opt for a debt consolidation/refinancing loan, you can sometimes have your lender pay your credit card accounts directly. Any extra cash leftover will be deposited into your bank account or returned to the lender.
Most loan terms range anywhere from six months to seven years. The longer the term, the lower your monthly payments will be, but they usually also have higher interest rates. It’s best to elect for the shortest term you can afford. When deciding on a loan term, consider how much you will end up paying in interest overall.
Your monthly loan bill will include your installment payment plus interest charges. If you think you may want to pay off the loan earlier than planned, be sure to check if the lender charges an early payoff or prepayment penalty. Sometimes lenders charge a fee if you make extra payments to pay your debt down quicker, since they are losing out on that prospective interest. The fee could be a flat rate, a percentage of your loan amount or the rest of the interest you would have owed them.
Once you receive the money from your loan, you have to pay back the lender in monthly installments, usually starting within 30 days.
When your personal loan is paid off, the credit line is closed and you no longer have access to it.
What Are The Benefits Of Refinancing Debt
If you carry a balance on a credit card with a high APR, you might want to consider debt refinancing. Simply put, you take out a new loan to pay off old debt, then pay back the new debt according to agreed-upon terms. It makes sense to refinance if you can’t afford your current bill payments and need to find a lower monthly plan, or if your credit score is good enough to qualify you for a lower APR, which makes paying off the debt cheaper.
For example, say you have a $10,000 balance on your credit card that charges interest at a rate of 24.99% APR. Assuming you can afford to make $400 monthly payments, it would take about three years to pay your balance off entirely. You’ll also pay about $4,000 in interest, according to Experian’s debt payoff calculator.
On the other hand, transferring that debt to a personal loan with a 9% APR, can save you more than $3,000. Experian’s calculator estimates with the same monthly payment and the lower APR, you can pay off the balance in 22 months and only pay $875 in interest charges overall.
When you apply for a personal loan, you should consider the APR and the loan’s term, or the length of time it will take you to pay it off. Make sure the monthly loan repayment amount fits into your budget, so you’re able to comfortably pay off the loan and get your debt under control.
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Investment Gains Vs Loan Interest Saved
If a homeowner decided to invest $100,000 versus paying down their mortgage in 10 years, they would earn $22,019 based on an average rate of return of 2%. In other words, there would be no material difference between investing the money versus paying off the 3.5% mortgage .
However, if the average rate of return was 5% for the 10 years, the homeowner would earn $62,889, which is more money than the interest saved in all three of the earlier loan scenarios, whether the loan rate was 3.5% , 4.5% , or 5.5% .
With a 10-year rate of return of 7% or 10%, the borrower would earn more than double the interest saved from paying the loan off early even with using the 5.5% loan rate.
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.
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You Want To Convert From An Adjustable Rate To Fixed
If mortgage rates are increasing and you currently have an ARM or adjustable rate mortgage you may want to consider refinancing and converting to a fixed-rate mortgage. Thats because with an ARM, your rate may increase beyond what youd pay with a fixed-rate mortgage. If youre concerned over future interest rate hikes, a fixed-rate mortgage could provide some peace of mind.
Refinancing As A Way To Get A Home Improvement Loan
While there are options to taking out a home loan, including home equity loans and HELOCs, or home equity lines of credit, refinancing allows you to retain a single mortgage, often with a better rate. This way you are getting a lower rate on all the money you are borrowing, and not just money on a home equity loan, which is essentially a second mortgage. Private loans or credit cards can also be an option when you are renovating. But again, interest rates can cause these options to become less attractive.
If interest rates are favorable, a cash-out refi can also be helpful if you have significant credit card debt and are paying steep interest fees. The additional money you receive could allow you to pay off your debts in one lump sum, with only one lower interest payment each month. If you do this, however, you must be mindful to not fall into credit card debt again, because you do not want to put your home in jeopardy.
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To Save Money For A New Home
As a homeowner, you need to make an important calculation to determine how much a refinance will cost and how much you will save each month. If it will take three years to recoup the expenses of a refinance and you plan to move within two years, that means you are not saving any money at alldespite the lower monthly payments.
Consolidate Your Second Mortgageonly If Its More Than Half Of Your Income
Some homeowners with second mortgages want to roll it into a refinance of their first mortgage. But not so fast! If the balance on your second mortgage is less than half of your annual income, you would do better to just pay it off with the rest of your debt through your debt snowball.
But if the balance is higher than half of your annual income, you could refinance your second mortgage along with your first one. This will put you in a stronger position to tackle the other debts you might have before you pull your resources together to pay off your mortgages once and for all!
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Other Ways To Pay Off Debt
There are other ways to pay down debt without using your home as collateral. Start by figuring out how much you earn, how much of your income goes toward essential expenses, and how much is left, which you can put toward your debt each month.
Then, look into the following strategies for paying off debt. The best method comes down to your financial situation or preference.
Consider The Cost To Refinance
Before you decide on refinancing your TD Mortgage or a TD Home Equity FlexLine, be sure to look at all potential costs. Prepayment charges may apply if the agreement is ended before the term is done. There may also be associated fees for mortgage registration and property valuation.
But if youre able to take advantage of lower interest rates, your overall savings may make it worthwhile.
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Factoring Closing Costs Into Your Refinance To Pay Off Debt
When refinancing to pay off debt, youll want to be aware of closing costs eating away at the money youll get from tapping into your homes equity. This is the same money that you will be using to pay down debt.
When doing your research about refinancing your home, its best to compare closing costs to interest savings to see if it even makes sense in your situation to refinance. Paying thousands of dollars in closing costs to save yourself tens of thousands of dollars in interest on your balance makes sense. However, it financially doesnt make sense to pay thousands of dollars and only save yourself thousands of dollars of interest by refinancing.
Saving yourself on the interest of the debt you plan on paying off is the goal. If youre going to pay thousands in closing costs then it would make more sense to save as much money on the debts interest as possible.
Should I Refinance My Home To Pay Off Debt
A reader has tried everything else. Or has she?
A reader has tried everything else. Or has she?
Question: Im carrying about $12,000 on nine credit and store cards, and the interest rates are killing me. I already rolled over the balances a couple times to low-interest and zero-interest cards, but I blew through the introductory offers. But I own my condo, and if I refinance it, I can probably cover what I owe. Should I refinance my home to pay off debt?
Debby in New Jersey
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Whatever Solution You Use Balance Your Budget First
A particular concern, Debbie, is that you said you blew through the introductory offers. So you have already attempted to lower your interest cost, which was smart. However, for this strategy to be most effective, its important to not add new debt, but instead, work toward paying off the debt. With nine cards in total, it may be that you have been rolling over balances to new cards and then building up more debt on both the new and old cards. Hence, you are not making progress on lowering debt.
The same thing can happen with a consolidation loan or the cash-out refinance. Youll pay off your credit cards with the money from the loan. But your credit cards will still be open and you may be tempted to run up new balances. So, the first thing you need to do is take control of your budget. Make a budget that balances all your bills and other expenses against your income. That way, you can stop charging and focus on paying off debt.
What You’ll Learn: Reasons To Consider Refinancing To Pay Off Debt
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Refinancing a mortgage can be a solution to simplify bill payments and ease some of your financial burden. Whether or not to refinance your mortgage depends on various factors. Some factors include:
- Student loans with large payments or high interest rates
- High interest rates on credit cards
- Too many bills in general
- Cash flow challenges
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Should You Refinance Your Home To Pay Off Your Credit Card Debt
When youre struggling with debt, its easy to go for the solution that will bring you the quickest relief. Many people choose to refinance their home and roll credit card debt into the new mortgage in order to get the cards paid off and start with a clean slate.
While this move might make sense at first glance especially with the current mortgage rates being so low there are some things you may want to think about before refinancing credit card debt onto a home loan.
How Much Is Your Home Worth
Of course, its important to know what your home is worth versus what you owe on it. When lenders are considering you for a second mortgage or a cash-out refinance, theyll look at this closely.
While you can sometimes get a first mortgage with less than 20% equity in the home, you probably wont be able to get a second mortgage under those circumstances. In other words, if your home is worth $100,000 and you still owe $80,000, youre out of luck.
Even if you do have enough equity in your home, leveraging it to refinance debt isnt always the best option.
In fact, these situations were what got many homeowners into big trouble before the last housing crash. People tapped deeply into their equity during a time of inflated home prices. When that bubble burst and home prices plummeted, they were suddenly underwater on their homes.
That meant they owed more than their homes were actually worth.
Being underwater is tough. It means you likely cant sell the house without paying to get out of your mortgage. And it makes even refinancing to get a lower rate difficult, if not impossible.
It can be hard to tell if youre in a housing bubble thats about to burst. But its important to get a feel for realty prices and trends in your area before deciding to refinance. Not sure where realty prices are going in your area? Check with a local realtor to get a feel for the current trends.
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Other Reasons For Refinancing A Home
Some other reasons people refi is to borrow from the equity in their home to fix or make upgrades on their house. This is often called a cash-out refinance. If you use a cash-out refi for home improvement, it can help with the long-term value of the home. You effectively increase the resale value of your biggest asset.
You can also use that money to pay off high-interest rate credit cards or other personal loans that could be costing you. Some people use the funds from the mortgage for other purposes, such as paying for college and making investments.
Refinancing Pros And Cons
The main reason to go through with cash-out refinancing to pay off your credit card debts involves interest rates. The interest rates for credit cards can approach 30 percent. By contrast, mortgage interest rates today are generally much lower.
Paying off all of your credit card debt might also help your credit scores. However, some lenders might require that you close your credit card accounts after paying them off, which could harm your credit scores, particularly in the case of longstanding accounts that add to your credit history.
Consumers who refinance their mortgages to pay off credit cards can run into several potential pitfalls. For example, if you fail to change your spending habits, you might rack up more credit card debt on top of your new mortgage payments. Additionally, you will end up paying for the purchases that got you into trouble over a much longer period of time since they’re now part of your mortgage. Further, cash-out refinancing leaves you with less equity, meaning you own less of your home.
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