Description: Know whether going for refinancing your existing mortgage is worthwhile for you.
The 30-year and 15-year fixed mortgage rates are at record lows. Hence, is it the ideal time for mortgage refinancing? This is dependent on a number of factors.
The first factor, obviously, would be your loan to value (LTV) ratio. Under no cash-out mortgage refinancing (where the new loan amount is not more than the outstanding balance of your current mortgage along with closing costs and points, if applicable), you might qualify to borrow up to 95% of your home value. Nevertheless, if your home value has dropped below the amount of your outstanding mortgage balance, you might not be allowed to refinance by any means, other than with the American Recovery and Reinvestment Act of 2009 under the Home Affordable Refinance Program. Let’s take for granted your loan to value ratio is satisfactory or your home value is higher than your unpaid loan balance.
If you opt to refinance your existing mortgage at a reduced interest rate, you might save a considerable amount on your monthly mortgage payments. This would help you get some extra money that you can utilize towards your savings or lowering your other debts. This is often one of the key reasons why people think about refinancing their loans. What are the other factors that you should take into account?
How much would it cost?
The cost of mortgage refinancing might incorporate both points paid by you and other expenditures known as closing costs associated with refinance.
One point is equal to 1% of the amount to be financed. Therefore, if the refinancing costs would incorporate an upfront fee of 0.5 points and you’re refinancing $250,000, you would incur a fee of $1,250 (special tax treatment is applicable for points).
Closing costs usually include attorney fee, application fee, credit report fee, appraisal fee, loan origination fee (this can be 1% or more of the refinance amount), title insurance and title search fee. These fees can differ from one state to another. Request a “good faith estimate” from every prospective lender and evaluate both interest rates and closing costs.
You must steer clear of lenders that publicize “no closing costs, no points” refinance offers. These programs frequently include the closing cost into the amount you’re going to refinance or are available at higher rates.
How long would it take to recover the costs?
To work out your break-even point (the point where you’d start saving money following payment of fees and closing costs), divide the refinancing cost with the amount you have saved on your monthly mortgage payments through refinance. The outcome is your break-even point and it is expressed in months.
It is reasonable to refinance when you’re sure that you have the ability to recover your refinancing costs when you’re still staying in your home. Usually, you should be able to recoup your costs within 12 months or less.
The repayment term
On many occasions, refinancing might suggest obtaining a mortgage with a new term that is equal to the original term of the mortgage that you’re going to refinance and not equal to the rest of the term on that mortgage. Dependent on the time of refinancing, this can make a substantial difference in the interest amount you would pay in full. You might wish to consider using the savings on your monthly payments after refinancing towards extra principal payments. In this way, you can lower both the term of your loan and the overall amount of interest you would need to pay.
Crunch the numbers in the beginning
On numerous occasions, refinancing seems attractive temporarily since your monthly mortgage payment would be reduced, which is essential for your monthly budget. But would it truly save you money when you refinance for the long term? This is dependent on different elements, as well. Take all of them into consideration prior to making your decision.
