You Could Save More Each Month
If you refinance to the same term as your original mortgage, youre further extending the time you have to pay off the loan, meaning your monthly payment will go down. And if you can refinance the loan with a lower interest rate, your monthly payment could go down even more.
Heres an example of how your payment would go down.
Well use the same numbers as the example above. Keep in mind, these monthly payments do not include escrow.
You get a 30-year mortgage for $200,000 with a 4% interest rate. Your monthly payment is $954.
You refinance your loan after 2 years to another 30-year mortgage and keep the same interest rate. Since youve been paying for 2 years, your loan balance is now $192,812. By extending your term back to 30 years, your monthly payment is now $920.
Lets say rates were low when you refinanced, so you also lowered your interest rate. Your new 30-year mortgage is $192,812 with a 3.5% interest rate. Now your monthly payment is $865.00.
To Take Cash Out For Investing
Even when the stock market isn’t rocky, this is not a generally good idea. The problem with cash is that it is too easy to spend. If you are disciplined and will truly use the extra money to investor to build your emergency fundthis can be a good option. However, paying down a mortgage at 4% per year can be a better deal than plunking your cash into a CD that earns 2% every year. Make sure you are a savvy investor who understands both the risks and potential upside before playing with the equity in your home.
Pros And Cons Of Refinancing
Refinancing has several potential benefits:
- It can lower your monthly payments if you refinance into a loan with an interest rate that’s lower than your existing rate. This might happen because you qualify for a lower rate based on market conditions or an improved credit score, factors that weren’t in place the first time you borrowed. Lower interest rates typically result in significant savings over the life of the loan, especially with large or long-term loans.
- You can extend repayment by increasing the term of the loan, but you’d potentially pay more in interest costs. You also can refinance into a shorter-term loan to pay it off sooner. For example, you might want to refinance a 30-year home loan into a 15-year home loan that comes with higher monthly payments but a lower interest rate. You’d have the loan paid off in 15 fewer years.
- It might make sense to consolidate multiple other loans into a single loan if you can get a lower interest rate than what you’re currently paying. Having just one loan also makes it easier to keep track of payments.
- You might prefer to switch to a loan at a fixed rate if you have a variable-rate loan that causes your monthly payments to fluctuate up and down as interest rates change. A fixed-rate loan offers protection if rates are currently low but are expected to rise, and it results in predictable monthly payments.
But refinancing isn’t always a smart money move. Some drawbacks include:
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Is It Worth Refinancing For Half A Percent
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. But that’s traditional thinking, like saying you need a 20% down payment to buy a house. Such broad generalizations often don’t work for big-money decisions. A half-point improvement in your rate might even make sense.
To determine if refinancing makes financial sense for you, it’s a good idea to run the real numbers with a mortgage refinance calculator.
To calculate your potential savings, youll need to add up the costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs. Also, check whether you face a penalty for paying off your current loan early. Then, when you find out what interest rate you could qualify for on a new loan, youll be able to calculate your new monthly payment and see how much, if anything, youll save each month.
Youll also want to consider whether you have at least 20% equity the difference between its market value and what you owe in your home. Check the property values in your neighborhood to determine how much your home might appraise for now or consult a local real estate agent.
Once you have a good idea of the costs of refinancing, you can compare your all-in monthly payment with what you currently pay.
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Lower Monthly Mortgage Payments
A mortgage refinance can reduce your monthly payments. For instance, a refinance could extend the term of the loan from 15 years to 30 years, which would reduce monthly payments. For example, the monthly payments of a $200,000 mortgage with a 7 percent interest rate would drop from about $1,792 to $1,329 by changing from a 15-year loan to a 30-year loan.
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How To Calculate The Break
The break-even point on a mortgage refinance occurs when savings equals costs, explains Jared Maxwell, vice president of consumer direct lending at Embrace Home Loans.
To determine the break-even point on your refinance, divide the closing costs by the amount youll save each month with your new payment.
Lets say that refinancing will save you $150 per month, and the closing costs on the new loan are $4,000:
$4,000/$150 = 26.6 months
So, if you were to close your new loan today, youd officially break even just over two years and two months from now. If you live in the home for an additional five years after that point, the savings really start to add up $9,000 total.
You can use Bankrates refinance break-even calculator to figure out how long it will take for the cost of a mortgage refinance to pay for itself. If you think you might sell the home before your break-even point, refinancing might not be worth it.
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The Bottom Line: Your Circumstances Determine The Right Time To Refinance
When youre getting ready to refinance, make sure youre factoring in your goals, your loans term, your interest rate and the overall costs associated with your decision as well as your monthly payment. Refinancing a mortgage loan can be an extremely useful option for many homeowners, but its important to take the time to properly assess whether a refinance is the best fit for your needs before fully committing to it.
We also always encourage you to take the opportunity to speak with a financial advisor before making any big moves affecting your future monetary planning.
Can A Mortgage Calculator Help You Figure Out How Much Cash You Get After Refinancing
Yes, it can. In particular, a mortgage refinance calculator will show you how much you can cash out from your refinance. Heres an example of how this works.
Lets say your home is currently valued at $300,000. A new home mortgage, with typical terms, will allow you to borrow up to 80% of your homes value so you can retain some equity in it. But your current mortgage balance is $150,000. From the $240,000, $150,000 will be subtracted to pay off your existing loan. The remaining $90,000 will be cashback to you.
Refinancing can reduce your monthly payments and the duration of your loan. But, this isnt the only thing a refinance calculator will tell you. Like a standard mortgage calculator, it will also provide:
- Monthly mortgage payment, including principal and interest. Your property taxes and homeowners insurance costs are unlikely to change.
- Interest rate
- Loan term
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Remove A Person From A Mortgage
There are times, usually after a divorce, when someone who originally signed onto a mortgage is no longer to be held financially responsible for the loan. The only way to get them off the mortgage is by refinancing. This can also be used to remove the name of a co-signer whose support is no longer necessary and wishes to be freed of liability.
The Benefits Of Refinancing Your Mortgage
Depending on what kind of loan you are eligible for, refinancing might offer you one or more benefits, including:
- a lower interest rate
- a lower monthly payment
- a shorter payoff term
- the ability to cash out your equity for other uses
The most immediate benefit of refinancing is that it helps cash-strapped borrowers find space within their monthly budget. This could be advantageous if you expect your cost of living to increase or if your income has decreased .
But when you refinance, you can also use it as an opportunity to use some of the cash from your home’s value toward other costs: “Essentially 50% of the folks are pulling cash out, and they are looking at either reinvesting that money in other properties or sending their children to college or something like that,” English explains.
Other times, homeowners want to refinance in order to change the term of their current mortgage from a 30-year term to 15 years. Depending on the interest rate you qualify for, this could change your monthly budget only slightly while helping you pay off your loan faster.
When you refinance, you might also get to skip a mortgage payment while the new loan is originated and the paperwork is being processed.
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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.
When Should You Reconsider Refinancing Your Mortgage
There are a few situations when you might want to rethink refinancing your home.
- Prepayment penalty If your existing mortgage has a prepayment penalty, consider if youll save enough to make paying the penalty fee worth it. And ask your lender if its willing to waive the penalty if you refinance your mortgage with it.
- Moving soon Do you already have your eye on a new home? Calculate your break-even point to make sure you wont lose money once you factor in the costs of refinancing.
- Existing home equity loan If you have a home equity loan or line of credit , you may have to ask that lenders permission to refinance your loan. If it doesnt agree, you might have to pay this account off before you can refinance.
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Achieving Better Credit Scores
Some borrowers may be looking to achieve better credit scores. This can be done by refinancing their mortgage. For instance, a borrowers credit score may have gotten better because they have been making their mortgage payments on time. Therefore, the homeowner can take advantage of their improved credit score and refinance to a loan with a lower interest rate and lower monthly payments. When homeowners also consolidate their debt and use equity to pay off debts, they will also be helping their credit score. There are so many ways that refinancing your mortgage can help out your credit score!
Can You Refinance With Your Current Mortgage Lender Pros And Cons
See Mortgage Rate Quotes for Your Home
If youre looking to lower your monthly mortgage payment, refinancing with your current lender could save you the hassle of switching financial institutions, filling out extra paperwork and learning a new payment system.
But before you sign on the dotted line, its smart to shop with multiple mortgage companies to get the best refinance rate. After all, hefty savings may make it worth it to change lenders.
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Is Refinancing Right For Me
There is no clear right or wrong answer for everyone to this question. Like any big financial decision, whether or not you should pursue a mortgage refinance depends a lot on your personal financial situation and goals. But rates are indeed low, and if your credit is reasonably good, your household has steady income, and you still owe a considerable amount on your current mortgage, then a refi is worth exploring. If youre not sure, it costs nothing to call your local banker and ask for input to see whether you might benefit.
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Get A Lower Interest Rate And Monthly Payment
As a borrower, you could potentially save thousands of dollars over the term of your loan when you lock in a lower interest rate. And in many cases, a lower interest rate also means a lower monthly mortgage payment. This interest savings could allow you to pay off other high-interest debt, add to your savings account or put more dollars toward retirement.
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Refinance Mortgage To Consolidate Debt
- Consider the difference between paying down your credit, and closing your credit.
- If you want a certain credit card or credit line to remain open/ accessible after the refinance is complete, then request this from your Broker or lender otherwise it might be permanently closed.
- If your overall monthly payment drops because you dont have loan or other credit payments, consider increasing your mortgage payment to get ahead faster on your mortgage.
- If you increase your mortgage payment, you still gain the benefit one, simple payment and will also save even more on interest because you are paying down your mortgage faster.
- If set up properly using mortgage pre-payment privileges, you can turn off and on these extra mortgage payments throughout the term incase of a cash flow issue or emergency during the term.
Factoring In The Costs
Once you know what the costs of refinancing are, its a matter of just doing the math. If youre doing a rate/term refinance with the goal of lowering your payment, simply divide your cost to close the loan by the amount youre going to save every month.
This will tell you the amount of time to stay in the house in order to break even on the deal. If you see yourself moving before you reach breakeven, refinancing may not be a great option.
As an example, if refinancing lowers your interest rate and saves you $50 per month on your payment, but it has $5,000 in closing costs, you would need to stay in the home 100 months a little over 8 years to break even. If you were to move out before that point, refinancing isnt right for you under the terms of that deal. Its a matter of balancing the cost against both your plans for the refinance and your long-term goals.
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How Does Refinancing Work
Refinancing involves takingout a new mortgage loan to replace your existing one.
When you refinance, youapply for a new home loan just as you did when you bought the house. But thistime, instead of using the loan money to purchase a home, its used to pay offyour existing mortgage.
Refinancing effectively erases the debt on your current mortgage. It also lets you choose the rate and loan terms on your new mortgage, so you can get a new home loan that saves you money or helps you accomplish other financial goals.
The result is that you continue to pay off your home but now youre making payments on the new loan instead of your old one.
Note, you dont actually pay off the first mortgage yourself. The mortgage lender involved handle that part on the back end.
As far as youre involved, the mortgage refinance process typically looks a lot like your original home loan process did.
Homeowners refinance becauseyou get to choose the rate and loan terms on your new mortgage. So you can takeout a new loan thats more affordable or benefits you in another way .