What do you think when you hit “send payment” to your mortgage lender every month? Are you sure that you have the best mortgage rate possible? If you have doubts that your current mortgage is the best you can get, then it might be high time to think about a home refinance.
There are many benefits to refinance a home. Refinancing your home is a great way to reduce your interest rate, decrease your monthly payments, pay your house off faster, or use the equity in your home to get some much-needed cash.
Mortgage refinancing offers multiple benefits; here are some to consider:
You might be able to refinance with a lower interest rate if your financial situation has improved.
Review your mortgage statement to see the current interest rate of your home loan. Maybe when you first took out your home loan, your FICO score was less than stellar. Possibly you had some ugliness on your credit report that you have been able to resolve over the last few years.
If you managed to improve your financial situation since you took out your mortgage, you might be able to qualify for a lower interest rate loan. Of course, a lower interest rate could mean lower monthly payments. The money you save could be used to consolidate non-mortgage debt, pay for college, or it could be put into a rainy day fund. Either way, more money in your pocket every month is a good thing.
You could reduce your monthly payments if you purchase points.
Let’s say you haven’t had any significant change to your financial situation since originally taking out your home loan and a lower interest rate isn’t available. Consider purchasing points from your mortgage company. Discount points can lower your interest rate.
You might think to yourself: Is purchasing points a good idea? If you have a 30-year-loan, it might make sense to purchase points. During the life of a 30-year mortgage, a lower rate paid every month would result in significant savings.
Not sure about your specific situation? There are mortgage point calculators online to help you calculate your options. For specific answers to your refinancing questions, it is best to contact a mortgage professional.
You may be able to change the term of your loan and pay your home off faster.
Another benefit of refinancing your home is that you could reduce the life of your mortgage from 30-years to 15-years. Imagine, you could pay off your mortgage in only half the time.
If you cleaned up your credit, you might be able to qualify for a lower interest rate mortgage. You might earn more money now than you did in the past. Take advantage of any of the above positive changes and consider refinancing your home from a 30-year to a 15-year-term. A 15-year mortgage might have a lower interest rate than a 30-year mortgage. So even if your monthly payment goes up just a tad, you will make fewer payments in the life of the loan, and you will be free from your mortgage faster.
You may be able to receive cash from your home’s equity when refinancing your home.
Did someone say cash? Refinancing your home is a great option if you want cash for home improvements. You can also use the cash to finance a college education or to consolidate non-mortgage debt. Do you have enough home equity for a refinance? Consider refinancing it and get cash-back.
In a cash-back refinance, homeowners can take out cash and refinance their home with a new mortgage. Homeowners are free to use the cash any way they wish. Cash-back or cash-out refinance is a great way to use some of your home equity.
Whatever your reason, refinancing your home has many benefits. It may help you save money, pay off debt, or shorten the life of your home loan. But just like all major financial decisions, first talk with a mortgage professional to make sure refinancing is the right option for you.
How Much Does It Cost To Refinance Your Mortgage?
Refinancing your mortgage is a great option to reduce your interest rate and your monthly mortgage payment. While mortgage refinancing can be a smart move, you should be aware of the various costs involved. The good news is that many mortgage brokers allow borrowers to roll the closing costs into their home loan.
So, what closing costs are associated with refinancing?
Here’s a breakdown of what you might have to pay when refinancing your home. Remember, refinancing costs can vary on different factors, such as your credit score and loan type.
Escrow and Title Fees
A title fee is paid to the title company that researches the property deeds to make sure that no one else has a claim to the property you are refinancing. This might also be called a title search. Escrow fees are paid to the escrow company to overlook your transaction as a neutral third party. The escrow company makes sure that everyone gets paid appropriately.
Your new loan may require you to make an escrow deposit, which is where your lender takes a portion of your homeowners’ insurance premium and property taxes and holds that money in escrow until you start making loan payments. An escrow deposit may be required if your loan-to-value ratio is more than 80%.
Some states may require that you pay an attorney to complete the closing transaction on your house.
Not all states require an attorney to be part of the closing.
Here are some of the states that require the presence of an attorney or other types of involvement at real estate closings, including Alabama, Connecticut, Delaware, District of Columbia, Florida, Georgia, Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and West Virginia.
Since most loans are coming from a private bank or a mortgage company, there will be overhead fees to cover the work that they do on your loan. Essentially, this is all of the behind-the-scenes, administrative stuff.
Lending fees can include a number of things, but two of these are:
- Loan application fee – You may have to pay a fee when you apply for your home loan, whether you end up being approved or not. The cost can vary, and some lenders may not charge at all.
- Loan origination fee – An origination fee is an upfront charge that is used for processing a new home loan application. Some lenders charge a flat fee of $995.
Credit fees contain the costs of a tri-merge credit report that your lender will pull when you apply for a home loan. Credit report companies charge for a hard pull on your credit report, so you might have to pick up these fees. Typically, credit fees are under $60.
Mortgage lenders require homeowners to buy homeowners’ insurance. Lenders want to make sure that, in case of a disaster, your home is covered. Depending on where you are located, you may need to purchase additional hazard insurance, like flood insurance.
There are some optional insurances you may choose to buy, too. For example, some homeowners may purchase title insurance, which protects them if someone tries to challenge their ownership.
Even if your original mortgage didn’t have private mortgage insurance (PMI), you might have to have it when you refinance. Your lender may want you to pay for PMI, which protects the lender in case you default on the loan. Typically, lenders require PMI when a buyer pays less than 20% down on their home loan.
Mortgage points or discount points let you pay some of your interest up front in return for a lower interest rate over the life of the mortgage. Generally, one point equals one percent of your home loan amount. For example, if you have a $100,000 mortgage, one point would equal $1,000.
Lenders require an appraisal to determine the value of the home. You will need to pay the appraisal fee. The average cost of a house appraisal by a professional can range between $300 and $400.
Home inspections cost around $300-$500. Normally, lenders don’t require borrowers to get a home inspection in order to obtain a mortgage. But, appraisers might highlight some major problems, even though their job isn’t home inspection. Lenders might require a termite report (the cost of the termite report is around $100), and they might not approve your home loan until the property passes.
You may have to pay to have the property surveyed to verify property lines.
If you’ve got any questions about refinancing your mortgage, please contact a mortgage broker.
How Much Money Can I Save By Refinancing My Mortgage?
For many homeowners, mortgage refinancing is an opportunity to save money. If you refinance with a lower interest rate, you could save money by reducing your monthly payments. Another way to save money with refinancing is to eliminate private mortgage insurance (PMI). You might be able to save by refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate home loan. Others save money by refinancing with cash-out, using the cash to consolidate high-interest non-mortgage debt.
Many homeowners choose to refinance their mortgage to save money. The savings can happen in a variety of different ways.
Refinancing your mortgage to a lower interest rate can save you money.
A lower interest rate decreases the amount of interest you pay over the life of your mortgage. It also lowers your monthly mortgage payment. If there is a balance on your current home loan, the refinanced mortgage will take its place. The new mortgage begins when your new lender pays the old lender what you owe. Using a mortgage calculator can help you make a decision about refinancing with a lower interest rate.
A 30-year home loan at 6% for $200,000 has a monthly payment of $1,199. If you were to refinance that same 30-year mortgage at $200,000 for 5%, the monthly payment drops to $1,074. The cost of the home loan at 6% is $431,676, and at 5% it is $386,512. By lowering the interest rate from 6% to 5% reduces the cost of the mortgage by $45,164.
Refinancing could eliminate PMI.
Many homeowners save money when they refinance to eliminate private mortgage insurance. Frequently, homeowners buy real estate with less than a 20% down payment. The down payment is the amount you pay when you buy a house, and the 20% is calculated based on the sale price. If you make a less than 20% down payment, lenders require you to pay for PMI. Private mortgage insurance protects mortgage companies if the borrower defaults on the mortgage. If the value of your home increase, you might have a higher percentage of equity than when you first bought it. Refinancing could then eliminate the need for PMI because your home’s value is higher, and you still owe the same amount, making the home equity percentage larger. Since mortgage companies add the PMI premium to your monthly payment, you would save money by eliminating it.
Refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can lower your monthly payments.
Some homeowners save money when they refinance their ARM mortgage. ARM mortgages are a hybrid of variable-rate and fixed-rate loans. The ARM mortgage terms begin with fixed-rate for an initial period. This initial period could be three, five, seven, or ten years. After the initial period, the ARM mortgage switches to an adjustable-rate that could go up or down. Homeowners whose ARM mortgage is higher than that initial rate could see their payment increase after a rate hike from the Fed. Refinancing to a fixed-rate mortgage helps you save money because the interest rate on your mortgage will not increase.
Cash-out refinancing can help you consolidate high-interest non-mortgage debt.
With cash-out refinancing, homeowners lower their total monthly mortgage payments. Cash-out refinancing or cash-out mortgage allows you to take out some of your home equity as cash. When the new mortgage company pays off the original mortgage, you get the difference in cash. You can use the cash to consolidate high-interest debt, reducing your total monthly payments. Homeowners often use the money from cash-out refinancing to consolidate high-interest credit card debt.
Here is an example of a homeowner who saved money with a cash-out refinance. Theresa owned a home in Dana Point with an appraised value of $360,000. She had a mortgage balance of $165,308. Her home equity was $194,462, and her non-mortgage debt was $20,151. Theresa was paying about 16% interest on the non-mortgage debt. She used the money from her refinance to consolidate her non-mortgage debt. She eliminated her monthly payment of $622 a month. Although her mortgage payment increased by $106 a month, she saved $516* a month in monthly payments. Theresa saved money with cash-out refinance because she reduced her total monthly payments.
The bottom line is that homeowners can save money with a refinance. Do the math. Talk with a lender about your refinancing. Then, consider your options. See if refinancing can save you money.