Are You In Need Of More Room For Monthly Cash Flow
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If youre in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what youll be doing with those new freed up dollars each month.
Lower Your Interest Rate
Your interest payments make up a large portion of your monthly payment, especially in the first 10 years of your mortgage. The higher your interest rate, the larger your monthly payment and the more youll pay over the life of the loan.
When you refinance your mortgage to a lower interest rate and APR, youll pay less in interest over the life of the loan. When rates drop below your current rate, it may be a great time for you to swoop in and get a lower one. Its always good to keep track of interest rates so you know when you can save the most money!
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.
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Locking In A Low Fixed Rate
As post-pandemic life slowly begins to return to normal, it also means that the economy will inevitably improve and mortgage rates may follow suit. Even if rates do slowly climb, an older home loan will most likely have a higher interest rate than Filos current market rates. If you plan on keeping your home for many more years, or youre able to refinance into a shorter loan term, refinancing with todays rates may still save you a lot of money in the long run. Refinancing now can also give you the opportunity to obtain a different type of loan entirely if you want a new, fixed rate. If youve been waiting for the perfect time to convert your adjustable-rate mortgage into a fixed-rate mortgage, that time is now.
Why Are You Refinancing
Knowing the why behind any financial decision is key.
- Why do you want to refinance your mortgage?
- Whats the purpose behind doing it?
- Are you trying to create more monthly cash flow?
- Do you want to pay off your home faster?
- Are you trying to fix a bad mortgage loan?
Determining why you want to refinance will help clarify what success looks like. Then you can look at the numbers and determine if refinancing is the right way to achieve your goal.
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Is It Time To Change The Type Of Loan I Have
Take your prediction on how long youll stay in your current home, then think about the details of your current mortgage. How those factors play off each other could have a role in your refinance decision.
Lets say you bought a home with an adjustable-rate mortgage for an initial term of five years at around 3%. You plan to stay put for several more years. If youre nearing the time when the adjustable rate can reset and move higher, you might benefit from refinancing to a fixed-rate mortgage to get an interest rate that wont fluctuate.
Or, if you know youll be moving in a few years, refinancing to an ARM from a longer-term fixed loan might help you save some money because lenders usually offer lower interest rates on those loans.
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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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Want To Chat About Your Options
If you would like to explore your refinancing options, please dont hesitate to contact me. Id be happy to put together some scenarios for you to think about, so you can figure out if a consolidation is the right solution for you.
Is It Worth Refinancing For 05 Percent
There are two common scenarios when refinancing for 0.5 percent could be worth it:
- If youll keep the new loan long enough to recoup closing costs
- OR, ifyou can get the lender to cover your closing costs
First, lets look at a break-evenscenario.
Remember, the less your ratedrops, the less you save each month. So it takes longer to recoup your closingcosts and start seeing real benefits.
For example, dropping your rate 0.5 percent from 3.75% to 3.25% could save you about $150 per month on a $300,000 mortgage loan.
Thats a decent monthly savings, but it will likely take you over three years to break even with closing costs. So you want to be sure youll keep the refinanced loan for at least that long.
Refinancing for 0.5 percent: break-even method
|Worth It?||Yes, if you keep the loan ~4 years or longer|
Now lets look at how the numbers compare if you can drop your mortgage interest rate by 0.5 percent using a no-closing-cost refinance.
Say your current mortgage rate is 3.75%. Your refinance lenderoffers you a new rate of 2.5%.
Instead of accepting the ultra-low rate, you ask the lender to pay your closing costs. The lender agrees, and in exchange, you accept a higher rate than the initial offer: 3.25%.
This arrangement only lowers your interest rate by 0.5 percent. But theres no break-even point because you paid no upfront closing costs. So you start seeing real savings from your lower monthly payment right away.
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What Are The Benefits Of Refinancing
There are many benefits to refinancing, but they will vary based on your current situation and financial goals. Typically, the number one benefit is saving money, but there are many others as well.
For instance, with a refinance you can potentially get a better interest rate, lower your monthly payments, shorten the length of your loan, build equity faster, consolidate other existing debts by combining them all into a new mortgage, get rid of your mortgage insurance or even remove a person from the mortgage.
Shop Around From Multiple Lenders
One of the best ways for borrowers to obtain a lower interest rate is to shop around for mortgage refinancing from multiple lenders. You do not have to select your current mortgage provider to refinance your mortgage, especially if you find better terms with another lender.
The criteria used to determine interest rates for home mortgages varies by lender. As a result, you may be eligible for a lower rate from one lender compared to another. Fees and closing costs also vary by lender, so when you compare several options, you can maximize your savings.
You may want to obtain at least three quotes from different lenders so you have a better idea of the refinancing terms you qualify for. You may be able to use these quotes to negotiate lower fees and a lower interest rate. Submitting applications to several lenders should not impact your credit score negatively as long as you submit your applications in a short period of time.
What Are Your Other Financial Goals
You don’t want to spend the time, effort and money it takes to refinance just to lose those savings to lifestyle inflation. Think through exactly how you plan to use your newfound savings.
It’s important to look at all financial decisions from the bigger lens of what matters most to you in life. What are you aiming for?Scott Frankcertified financial planner
“It’s important to look at all financial decisions from the wider lens of what matters most to you in life. What are you aiming for?” Frank says. “And then anytime you can optimize cash flow, you need to always be thinking about, ‘Where can I put this to help with me with a better life?'”
It’s smart to check in on your other priorities. “When you are considering a change to your monthly bills, it’s a good time to take a moment and consider your progress on other goals, such as saving for education, retirement or a wedding,” Pearson says.
While refinancing could be a way to save money in the long-term, it’s not worth it if the upfront costs put you in a financial hole. “Ask yourself if you have three to six months’ worth of savings in the bank to cover things like a job loss, unexpected home repair or next year’s vacation before you consider paying additional fees today,” Pearson adds.
Be Cautious About Refinancing
In some cases, it may not be a good idea to refinance. For example, sometimes your total interest costs will increaseeven if your monthly payment decreases. Thats especially true if your new loan has a longer term, like when you switch from a 15-year loan to a 30-year mortgage.
An amortization table can help illustrate how this happens. Each time you make a monthly payment, part of your payment goes toward the principal you borrowed, and part of it is your interest cost. Amortization is the term for front-loading your earlier loan payments with interest rather than principal. Most of each payment goes toward interest in the first years of loan repaymentyou barely make a dent in the principal.
If you keep your old loan, more and more of each payment goes toward reducing the loan balance over time. But if you scrap your old loan for a new one, you go back to the beginning of the amortization process and back to those early payments that are mostly interest costs.
If you had a 30-year mortgage and refinanced after 10 years to another 30-year mortgage, it’s like resetting the clockyoull make payments on your home for a total of 40 years.
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Avoid Costly Loan Churning
If you look only at rates and payments, you can be a victim of loan churning or serial refinancing. Those are scams which stick borrowers with needlessly high costs and bigger debts. Or, you may simply pay too much to refinance.
Loan churning is a form of refinancing in which the borrower appears to benefit but does not. For instance, the Smiths have a mortgage at 4.25%. The lender says they can refinance to 3.875%. The new rate is lower than the old one. The payment is lower and the loan broker shows them the “savings” the new loan offers.
Sounds pretty good. However, this refinance costs thousands of dollars and in fact it would take decades to break even. The Smiths might not notice this because the lender allows them to wrap the refinance costs into the new loan. So they don’t pay upfront to close the loan, and they do see the lower payment right away. But every time they refinance, they add thousands to their loan balance and years to their repayment.
Loan churning can be avoided by shopping around for rates and terms. However, loan churning is such a serious problem that the VA issued new guidelines in 2018 to protect borrowers. While the new guidelines only apply to qualified veterans seeking to refinance through the VA program, they’re actually useful for all borrowers. You should make sure that any refinance delivers the benefit you expect.
Net tangible benefit
To prevent loan churning, the VA says the current mortgage must be in place the longer of
How Does Refinancing A Mortgage Work
When you refinance your mortgage, youre actually taking out a new loan for a greater amount and paying off your existing one.
Refinancing a mortgage in Ontario is almost always worthwhile to save money long term. If you weigh the pros of the money you can free up to use towards a certain purpose like financing your kids schooling or easing your cashflow versus the cons of the penalty youll pay to break your mortgage early, youll be able to make an educated decision on whats best for you.
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Drawbacks Of Taking Out An Additional Home Loan
A number of the disadvantages of accepting the next financial integrate:
Additional lien: facing another lien to your homes throws you at an increased risk of foreclosure should you decide cant consistently shell out both lenders.
Two monthly money: Youll shoulder a supplementary payment. Youll should pay your primary home loan and second home loan each month. Lacking a payment can put you at risk of losing your house.
Cant augment first-mortgage terms: your dont have the choice to modify your original financial words. Your second home loan does not have any affect your own initial home mortgage. You cannot improve your primary loans phrase or interest with a second home loan.
Refinancing To A Shorter Term
On the other hand, refinancing into a shorter-term mortgage can be an unequivocal win.
Interest rates are lower on 15-year loans compared with 30-year loans. In that same example, if you instead refinanced into a 15-year mortgage with a 3% interest rate, youd save a whopping $94,000 in interest compared to sticking with the original loan. Plus, you would be free from mortgage payments seven years earlier.
The tradeoff is that youll pay roughly $250 a month more compared to keeping the original loan.
|Years left to pay|
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See Where People Are Saving The Most By Refinancing
SmartAssets interactive refinance map highlights the counties across the country with both the highest total and highest per loan savings homeowners secure from refinancing. Zoom between states and the national map to see the top counties in each region, and scroll over any county for more information.
|Annual Savings Per Loan||Annual County Savings|
Methodology Refinance mortgages are an important part of the overall mortgage industry, saving homeowners billions of dollars every year. So where is refinancing having the biggest impact? To answer that question, SmartAsset looked at data on pre- and post-refinance interest rates, and the total balance of refinanced mortgages in every county in the U.S.
Specifically, we applied the regional average pre-refinance interest rate and the regional average post-refinance rate to the total balance of refinanced loans in every U.S. county. That gave us the expected total interest payments with, and without, refinancing. The difference between those two numbers yielded the total refinance savings by county. We also divided the total savings by the number of loans per county to produce the average savings per refinance.
You Want A Lower Monthly Payment
If youre considering refinancing to make your monthly mortgage payments more manageable, its a good idea to weigh that convenience against the costs, as well.
Add up your specific closing costs and make sure that, even with paying those, your lower monthly payment is still worth it. If the amount you would save each month ends up going toward closing costs anyway, it might not be the right decision for you.
However, if that takes some of the pressure off your budget, and the interest savings over time are still large enough, theres a good chance its worth it.
Carefully consider your situation and run the numbers to see if refinancing makes sense for you. In the end, its about finding a solution that works for you.