Mortgage Refinance Vs Heloc
AHome Equity Line of Credit is similar to a mortgage refinance in the sense that you can borrow your home equity, however, there are major differences between these two products.
A HELOC is a revolving account that allows you to borrow money at any time. On the other hand, a mortgage refinance would be a one-time event where you receive a lump-sum amount.
HELOCs also have different credit limits, where you can only borrow up to 65% of the homes value if you have no mortgage, or up to 80% when combined with a mortgage.
HELOC ratesare variable, while refinance mortgage rates can be either fixed or variable. If you choose a fixed refinance mortgage rate, you will be able to lock in a rate. Variable HELOC rates mean that you will be paying more interest if interest rates rise. Refinance mortgage rates are also generally lower than HELOC rates.
You Want A Shorter Loan Term
If youre keen to pay off debt, you may want to refinance your mortgage to a shorter loan term. You could add to your savings if you can secure a lower interest rate and shorten your term. A shorter loan term means youll pay less in total interest.
But one word of warning: Youll probably be increasing your monthly payment in exchange, so make sure it fits into your budget. You dont want to risk defaulting on your loan.
Your Credit Has Improved
Your credit is a significant factor in determining your mortgage rate. Generally speaking, the better your credit is, the lower the interest rate youll receive.
Lets look at an example based on recent interest rates. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO® credit score is within the 660 to 679 range, the myFICO Loan Savings Calculator estimates you could pay 3.375% APR .
With this interest rate, your monthly payment would be $663 and your total interest paid across 30 years would amount to $88,732.
In comparison, if your credit score was in the 700 to 759 range, the calculator estimates your monthly payment would drop to $631 . And over the life of the loan, you could save more than $11,500 in interest.
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Get Rid Of Your Mortgage Insurance
If you have an increase in property value based on a new appraisal, you might refinance in order to remove private mortgage insurance .
Its also very common to refinance FHA loans once borrowers reach a 20% equity threshold. FHA loans require MIPs even after youve reached an LTV of 80%, so to avoid continued MIP payments, youll need to refinance from an FHA loan to a conventional loan.
Does It Make Sense To Refinance My Mortgage
You should refinance your mortgage if you are able to refinance at a lower mortgage rate that covers the cost of any mortgage penalties for breaking your term early, along with other mortgage refinancing fees. You can also refinance if you are looking to borrow from your home equity. However, your savings from borrowing using a mortgage refinance should exceed the penalties for breaking the mortgage if you refinance mid-term.
For fixed-rate mortgages, most major banks charge a mortgage break penalty that is either three months worth of interest or something called an interest rate differential . IRD is the difference between interest on your current non-discounted mortgage rate and the interest on a mortgage for the same time period remaining on your mortgage term at the current posted rate. You can use a mortgage refinance calculator to calculate how much you can save or pay if you decide to refinance your mortgage.
Lets say that you have a $500,000 fixed-rate mortgage at 3.00% for a five-year term, and you have two years remaining. You notice that mortgage refinance rates are currently as low as 2.00%.
If you choose not to refinance, you will pay $29,029 in interest at 3% for the next two years. If you do refinance, you will pay a total of $19,320 in interest at 2% for the next two years. This results in $9,709 in interest savings.
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Should I Refinance My Mortgage And When
Your mortgage may be one of the biggest and most important investments you make in your entire life and it can also help you reach your future financial goals. A mortgage refinance can be a wonderful tool to help you reach those goals sooner.
But is it the right choice? Heres a reference guide to help you decide if a refinance of your current mortgage is right for you.
Can You Refinance Your Mortgage To Consolidate Debt
Homeowners also refinance their mortgage for reasons other than getting a lower mortgage rate. A common reason is to borrow more money in order to pay off other debt or to consolidate higher-interest debt, which might even include second mortgages. To see whether a mortgage refinance makes sense, you will need to compare the cost of refinancing versus the cost of other loans that you could use instead.
Lets consider a $500,000 mortgage on a $1 million home that currently has a mortgage rate of 3%. Your lender is also offering a mortgage refinance rate of 3%. You currently have $50,000 in credit card debt that has an interest rate of 20%, $100,000 in a personal loan at an interest rate of 7%, and a $50,000 car loan with an interest rate of 5%.
With a mortgage refinance, you can borrow an additional $300,000 at an interest rate of 3%. Thats more than enough to cover your other $200,000 of debt that all have a higher interest rate. If you were to not refinance your mortgage and continued to keep these other debts as-is, you will be paying:
$100,000 at 7% per year will be $7,000 interest paid in one year
$50,000 at 5% per year will be $2,500 interest paid in one year
Combined, you will be paying $19,500 just for the interest from these debts in one year. How much can you save if you refinance to pay off these debts?
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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.
Do You Need To Consolidate Debt
If you’re struggling with debt, refinancing to pay off your highest interest loans can be a smart financial decision. With credit cards, for example, you may be paying as much as 20 percent interest, forcing you to spend more each month to cover the interest fees. Borrowing money cheaper means that it’s possible to save more money, helping you pay off higher debts more efficiently. With current mortgage rates still competitively low, now is the perfect opportunity to consolidate debt.
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What If I Cant Pay My Current Mortgage
If youre out of work right now and finding it hard to pay your mortgage, theres good news for you. Depending on your specific situation, you may be able to have your mortgage payments lowered or put on hold.5
Doing that can really help to free up the burden you might be feeling right now if youre worried about when youll see your next paycheck.
What Do You Stand To Save By Refinancing
There are two big reasons to refinance:
- To reduce your monthly mortgage payment or
- To save on the overall interest you will pay on your house in the long run.
In the best case, a refinancing will do both, but that doesnt always happen. For example, if you have 25-years left on a 30-year mortgage and refinance again for a 30-year term at a lower rate, youll get a lower monthly payment, but may end up paying more interest in the long-run because now youll pay your home off over at total of 35 years. If, however, you have 25 years left on your loan and refinance with a 15-year mortgage, your monthly payment may actually go up, but you may pay tens of thousands less in interest over the long run .
A loan officer or mortgage broker can help you run scenarios that show you the cost and potential savings of refinancing. Remember: Refinancing costs money, to the tune of several thousand dollars. Youll pay application and origination fees, a fee to have your home reappraised and, in some cases, mortgage points that reduce your new interest rate. This article explaining what your mortgage rate really means can help you decode the various costs that go into your mortgage. Or if you prefer to jump into the mortgage refinance process right away, delivers quotes from multiple lenders in just minutes without affecting your credit score.
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When Is It Better To Hold Off On Refinancing
If the rate you have is close to 3 percent, it may not necessarily be worth it to refinance, especially if you are not sure how long you plan to live in or keep your home. The rate may not have fallen low enough, says Kan. Refinance when there are enough benefits to refinance. Are you taking cash out? What is the lowest possible rate? If you are going to move and sell your place in the near future a year or so you may not want to refinance. Consider the closing costs and the length of the loan as well as the rate.
There are a lot of calculators online that allow you to figure your potential savings by entering the new loan amount, the rate and the length of the loan, such as one offered by Fannie Mae. If its a larger loan amount, even if you will get a rate reduction, it may not be worth it, Kan says. Your savings depend on the loan amount and the rate drop. Smaller loans need a bigger rate drop to produce savings.
The average home loan size is $300,000 to $400,000, according to Jonathan Lee, senior director at Zillow Home Loans.
Other reasons to hold off on refinancing are: If your financial situation has either changed or deteriorated, says McBride. Another reason is if you are not saving on total interest over the life of the loan or on your monthly payment.
Stretching Out Your Loan
Most homebuyers start out with a 30-year mortgage. By the time they’re ready to refinance, they’ve been paying on it for a number of years. But if they refinance into a new 30-year mortgage, they’re starting all over again.
Extending your mortgage like this can significantly reduce your monthly payments. After all, you’re spreading out your remaining loan principle over a longer period. But it will likely cost you more in interest charges over the long run, even if you get a lower mortgage rate, because you’re amortizing the loan balance over a longer time.
A better approach is to refinance into a new, shorter-term loan that closely matches the time left on your current mortgage. For example, if you’ve been paying on a 30-year mortgage for 7-8 years, you might refinance into a 20- or even a 15-year loan instead. Because shorter-term mortgages have lower rates, you can often shave several years off your mortgage with little or no increase in your monthly payment.
Extending your loan term can make sense if you’re financially stressed and need to reduce monthly expenses, or if you’re doing a debt consolidation loan or other type of cash-out refinance that increases the balance on your primary mortgage. Just be aware of the costs of doing so.
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Refinancing Versus A Home Equity Loan
Another option to finance home renovation plans is to take out a home equity loan. This is an additional mortgage on your home. Sometimes this option makes more sense, especially if you already have a low-interest rate on your first mortgage. Closing costs on a home equity loan are often lower than a cash-out first mortgage as well. This enables you to save more money. If you can lower your interest rate on your first mortgage, however, cashing out your primary loan usually saves you the most money in the end. The exception to this rule is if you plan to move in the next few years. Generally, if you move within five years, it does not pay to refinance your first mortgage an HELOC makes more sense in this case.
When Is A Refinance Worth It
Whats most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings youll earn? says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says best candidates for refinancing are:
- Those with high mortgage rates relative to a new lower rate
- Those who intend to stay for a long time in their home
- Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you dont have to pay upfront.
That higher interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makesthe decision to refinance an easy one.
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Refinance: When Does It Make Sense And How
With mortgage rates at or near record lows, many homeowners with mortgages should analyze whether refinancing makes sense. If you have a 30-year fixed-rate mortgage above 3.5%, you should run a break-even analysis to determine if it makes sense to refinance.
While you can refinance and save money on a monthly basis, sometimes the monthly savings wont save you money over the entire course of the loan.
Well explore how to shop around for the best refinance rates, how to run your own calculation to see if makes sense for you, and detail the refinance process.
Before we get started, look at the chart below to see how the 30-year fixed-rate mortgage average in the United States changed throughout time. The cost of borrowing has gone down significantly. I am still amazed banks are lending money for 30 years at 2.5%.
With the calculator I like, you input your current loan balance, monthly payment , and interest rate. Then, you enter the potential new loan term, new interest rate, and estimated closing costs. Finally, the calculator shows you the difference in monthly payment, remaining interest, remaining total, and the mortgage payoff date.
When I first bought my house, I had a 30-year fixed mortgage at 3.75%. I thought rates would never go lower. It felt like an amazing deal!
I am in the process of refinancing into a new 30-year fixed mortgage at 2.375%. How did I decide to refinance from 3.05% to 2.375%? I ran the numbers.
What Are Mortgage Refinance Closing Costs
You already qualified for at least one mortgage when you originally bought your home, so youre likely familiar with closing costs. These are the expenses you pay to borrow money for your home purchase or refinance. Mortgage refinance closing costs include many of the same fees you paid when you closed on your first mortgage.
There isnt a standard method to calculate refi closing costs the amount youll pay depends on your lender and location. One of the best ways to get an idea of how much you might pay is to use a reliable refinance calculator. Youll get an idea of what a refinance can cost you, plus your break-even point the amount of time it could take you to recoup those costs.
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Refinancing When Mortgage Rates Are Down
Mortgage interest rates do not just occur in your own personal vacuum, and change according to the overall state of the U.S. and global economy, inflation, and the current policy of the U.S. Federal Reserve.
Mortgage rates throughout the U.S. may have lowered from the time when you took out your initial home loan. By refinancing your mortgage through a rate-and-term refinance during this kind of nationwide-mortgage rate drop, you may be able to secure a lower interest rate and save thousands in monthly mortgage payments.
Additionally, if economic indicators are pointing towards a long period of decreased mortgage rates and you have a fixed-rate mortgage, it may make sense to refinance your mortgage into an adjustable-rate mortgage . With an ARM, you can take advantage of falling mortgage interest rates and monthly home loan payments may continually decrease.
Does Refinancing Make Sense For You
Refinancing has the potential to save you a years salary or more in interest. But you have to go about it the right way, and that means running the numbers for your own situation.
Lets take Ormans example of a 30-year mortgage thats been paid down for eight years. The median home for sale in the U.S. is listed at $349,000, and the average down payment for first-time homebuyers is around 6%. With a 30-year loan at 4.5% interest, youd owe about $439,000 in principal and interest over the final 22 years of the loan, according to the NextAdvisor mortgage calculator.
If you refinanced down to a 3.5% interest rate on a new 30-year mortgage, your monthly payments would go down by $400. But youd pay an extra $10,000 in interest over the life of the loan. Instead of the $439,000 you had remaining on the original mortgage, youd now be on the hook for $449,000 for the new refinance mortgage.
|Years left to pay|
Paying $400 less each month, it would take you 25 months to erase the extra $10,000 of the new loan. Also, closing costs on any refinance could cost about $15,000, which would take about 37 months to offset. So now it will take you 62 months, or 5 years, before you come out ahead in the math.
Consider, too, the time youll take to become debt-free on your home. When it comes to budgeting, being totally free of a mortgage payment will unlock big opportunities to save, invest for retirement, and enjoy your money.
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