WHEN DOES REFINANCING MAKE SENSE?
Though individual factors may differ, following are a few
times when refinancing might make sense.
If rates drop
In general, when rates drop roughly one percent or more,
refinancing your mortgage can save you money. Refinancing
can lower your monthly payments, and, in certain cases, may
waive mortgage insurance.
If you want extra cash
Refinancing your mortgage may reduce your monthly payments,
and free up some equity for other things. If you are seeking
additional money, but a straight
refinance isn’t equitable,
you may consider a Home Equity Line of Credit. This program
lets you borrow against the equity in your home with a
credit account, checking account and/or direct payment.
If you want to consolidate debts
If you have equity in your home, you can consolidate all
your
debts into one payment by refinancing. Generally, your
overall monthly payment can be significantly reduced plus,
all the interest you pay on your mortgage is tax deductible
(whereas interest on credit cards, car loans, student loans,
etc. it is not). However, if interest rates have not dropped
considerably, you may consider consolidating your
debts with
a home equity loan.
If you plan to stay in your home for a period of time
The longer you plan to stay in your home, the more you can
benefit from a lower interest rate. Refinancing may not be
as beneficial if you plan to sell your home in the near
future.
If you want to reduce the term of your mortgage
Refinancing from say a 30-year loan to a 15 year loan means
you will build equity and pay off your mortgage quicker.
Though your monthly payments will be larger, you will save
on the total interest (paid over the life of your loan) and
generally, rates on shorter-term programs are lower.
WHEN DOES REFINANCING
NOT MAKE SENSE?
Follow these tips to help avoid common refinancing pitfalls.
When your interest rate is not lowering much
Generally, refinancing costs about 1.5 to 2 percent of the
loan amount. So to be equitable, your interest rate must be
bettered by about one percent or more (when paying full
closing costs). There are “no cost” rates available where
all of the
closing costs
are built into the rate. In these
cases only a slight lowering of the rate is necessary for
refinancing to make sense.
In order to remove Mortgage Insurance (on conventional
loans)
Mortgage insurance can be dropped by refinancing. However,
if rates have not dropped enough to make refinancing
beneficial, there are other ways to drop the insurance. On
conventional loans, mortgage insurance can usually be
removed by requesting an
appraisal. Most lenders require
that you have at least 20% equity in your home with the new
appraisal to remove mortgage insurance, but each investor is
different. Generally the cost of an
appraisal is $400 which
is much cheaper then refinancing.
To eliminate a borrower from title
If you would like to remove a borrower from title, simply
have the borrower complete a “Quit Claim” Deed. It is a very
simple process and may be much more cost effective than
refinancing. This does not remove such borrower's obligation
to repay the loan. If you would like them removed from the
obligation of the loan then you must
refinance and qualify
for the loan on your own merit.
Refinancing Questions & Answers:
Understandably, we receive lots of questions about the specifics
of refinancing. Here are the answers.
When will my monthly payments change?
Your monthly payment generally will start on the first of
the second month after your loan closes. For example, if you
close January 25th, your first payment will be due March
1st. There are cases when you receive an interest credit if
you close just after the first of a given month. In these
limited circumstances your first payment will be due on the
first of the following month.
How much does refinancing cost?
Typically, refinancing costs about 1.5 to 2 percent of the
loan amount. If you currently have your taxes and insurance
in your monthly mortgage payment then you have an escrow or
reserve account. When you
refinance, this money will be
refunded on your old loan. A number of months worth of
reserves will be collected on your new loan.
When will my closing payments be due?
Mortgage payments generally cover the previous month’s
interest. That is, interest is not collected until the end
of the month. For example, your March 1st payment is
actually paying for February’s interest. Therefore, when you
close your
refinance, you will have about a month’s worth of
interest due, but you will not have a payment in the
following month.
For example, let’s say you close on January 20th. You would
owe interest from January 1st - January 20th on your old
loan. You would also pay interest from January 20th -
January 31st on your new loan. Since interest is collected
after the month, there would be no payment due in February
as you already paid the January interest at closing. Your
first payment on the new loan would be due on March 1st.
Mortgage Glossary2
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