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Pay Off Interest Only Loan with Mortgage Refinancing
An interest-only mortgage is unique because of its amortization schedule. Whereas most loans are paid back in monthly installments of both principal and interest, the interest-only home mortgage allows that no principal be repaid during the first payback phase. This results in lower monthly payments. Also, since mortgage interest is generally 100 percent tax deductible, it also rewards the borrower with a hefty savings around tax time. But after a period that usually extends for the first few years of the loan, the amortization changes. Principal is tacked on to each monthly payment, and the chunks are large enough to make up for the preceding interest-only phase.
For instance, a $250,000 conventional 30-year fixed-rate mortgage with a 6 percent interest rate would be paid back in monthly installments of about $1,500. But an interest-only mortgage for the same amount might begin with payments of only $1,200. Once the principal repayment phase starts, however, those payments could jump to $1,600.
Most people who take out an interest-only mortgage do so with the intention of selling their house in a few years and paying off their loan. They don't plan to keep the property long enough to experience the higher rates. Others use these types of loans if they anticipate higher income in the future. A medical student, for example, might choose an interest-only mortgage with the expectation that, within three to five years, he'll be working as a highly paid doctor who'll be able to afford higher payments.
Mortgage refinancing saves the day
For many people, refinancing is the best choice if they want to stay in their home without the possibility of dramatically higher monthly payments. If you have an interest-only loan and pay it off by refinancing into a low fixed-rate mortgage, you can get a competitive rate that will not accelerate during the life of the loan. And the interest portion of the payment is still tax deductible. For most people, that kind of predictable security is invaluable.
If you'd like to take advantage of refinancing your mortgage to a more comfortable fixed-rate mortgage, act quickly. Remember, "He who snoozes, loses." Rates are moving higher, and those who procrastinate may miss the boat and find that a few months down the road, those attractive rates will have sailed into the sunset, replaced by numbers approaching double digits.
Know the lingo
If the saying "familiarity breeds success" holds true, it would be in your best interest, if you're looking for a mortgage refinance, to understand the terminology. There's no need to pour over dry-as-dust mortgage textbooks. Learn a few basic terms, and you'll be headed in the right direction.
A loan with a periodically changing interest rate. The mortgage rate is pegged to a specific economic indicator such as treasury bills or the prime interest rate, for example. Terms can vary greatly, and often offer very low introductory rates during the early years.
The Annual Percentage Rate (APR) is intended to include all of a lender's closing costs, giving a true yearly interest rate. However, many lenders calculate their APRs in different ways.
A loan in which the rate is set at the time of closing and is constant throughout the mortgage term.
Good Faith Estimate:
Lenders are required by law to produce a Good Faith Estimate, which details all the costs you'll be charged to close your loan.
Loan-to-value (LTV) ratio:
The ratio of your loan amount to the appraised value of your home. (Loan amount/appraised value = Loan-to-value ratio.) Generally expressed as a percentage, a higher LTV can trigger the need for private mortgage insurance or a higher rate.
A point on a mortgage is 1 percent of the total loan value. For example, a point on a $100,000 mortgage is $1,000 (.01 X $100,000).
The length of time that you have to repay your mortgage loan. Generally expressed in years, the typical term for most mortgages is 15 to 30 years.
Third party fees:
Charged by vendors, such as appraisers and title companies, these are fees that your lender uses to assess the quality of your loan.
There are plenty of other commonly used mortgage terms, but these are the basics. Study up if you have time. Like any educational initiative, it's bound to pay off in the end.
Best Reasons to Refinance Your Mortgage
Refinancing is similar to a key to a buried treasure. If it fits your financial situation, it can lead to some significant financial rewards. Consider some of the top reasons why many people refinance, and unlock the power of your home's equity.
A pirate lives his life in the hopes that buried treasure will someday right his financial ship. For most homeowners, the situation isn't quite so dire, and a simple refinance mortgage can help significantly improve your financial wellbeing. Here are some top reasons why homeowners avoid walking the financial plank with a home refinance.
Making an adjustment
Many homeowners have an adjustable-rate mortgage (ARM), which can switch to a higher term after its initial teaser rate. If your ARM is adjusting, you're probably going to have a higher monthly payment. In order to avoid this, you can refinance to a fixed-rate loan, or to another ARM.
Lower your monthly payment
Like a cash-strapped pirate, it's not uncommon for you, as a homeowner, to find yourself in debt. If you need to free up cash on a monthly basis, move to an ARM with a lower interest rate, or even an interest-only mortgage loan. Either one may help you clear up some short-term monetary hurdles.
Consolidate your credit card loans
A debt consolidation loan can be a treasure chest for you if you carry a balance on your credit cards. Because most credit lines carry double-digit interest rates, you can consolidate all these debts into a single home equity loan or home equity line of credit. Your monthly payment will drop, and you'll be able to reap some tax savings on the tax-deductible interest payments.
If you have a home loan, you pay a tremendous amount of money in interest on it for the privilege. You could refinance your loan to a shorter-term fixed-rate mortgage, for example, moving from a 30-year to a 15-year. Your payments may increase, but you'll realize significant interest savings in the long run.
A new home loan may not be as lucrative as a sunken treasure, but the right refinance loan can go a long way to improving your financial situation. Consider the reasons above when you analyze your particular situation. If any of them align with your current needs, you'll want to set sail for a mortgage refinance.
Debt Problems? Consolidate Loans with a Mortgage Refinance
It can happen to the best of us. Your finances are all planned out and budgeted. But then, you have some unforeseen expenses, or your income stream stops flowing. All of a sudden, your carefully budgeted balance sheet is in shambles, and you're struggling to keep up with all the monthly bills.
If you're having a difficult time with financial obligations, here's some good news. The solution to your problems may be closer than you think. In fact, you're living in it. Refinancing your home mortgage may help you get a handle on those bills in a hurry.
Bottom Line on Cash-out Mortgage Refinancing
The solution can be simple: do a cash-out refinancing, where your new mortgage loan has a higher balance than the old one. Then you can use the extra funds to pay off the other loans in their entirety.
You'll end up with just one monthly mortgage bill instead of having multiple bills for a car loan, private student loans, credit cards, or whatever other debts you're currently juggling in addition to your old mortgage loan. Not only will it be simpler to manage your finances, but mortgage rates will be typically much lower than most other types of debt interest.
- More on Debt Consolidation Refinance
The exceptions here are federal student loans, which you may want to leave out of your debt consolidation process because of their generally unbeatable interest rates. But it's usually better to move car loans, unsecured private loans, and particularly credit cards, into home equity debt.
This plan also has its tax advantages. When you roll your non-mortgage debts into your home loan, the interest on up to $100,000 of that balance may be tax deductible.
The Bottom Line
With the lower interest and longer repayment terms of your new mortgage, you should see your paycheck stretching further than before. It's a great way to put a little breathing room into a tight budget and simultaneously start rebuilding a rocky credit history. And it all will be thanks to a refinancing that you had already planned on anyway.
In order to begin this debt relief, gather up your loans and credit cards, and visit our refinancing tools area where you can find a great new mortgage loan with the power to loosen your financial belt. And the next time life throws you some unexpected lemons, you'll be all prepared to make lemonade.
A Refinance Checklist
If you're applying for a mortgage loan, you can be certain that the documentation floodgates are about to open. To substantiate that you have enough cash flow and solid income to pay your mortgage, lenders require proof from borrowers in the form of financial documents. The most commonly requested are:
- Pay stubs, including ones from the last two months.
- Two years of W-2 forms.
- Two years of income tax returns.
- Declarations pages from your homeowners insurance.
- Title report, abstract, and survey.
- A breakdown of your assets.
Lenders may require more documents, depending on your situation. If you're divorced, they'll want to see a divorce decree. If you're self-employed, they'll want a year-to-date profit-and-loss statement and current balance. The list can vary, but expect to produce anything pertaining to your financial situation.
Refinancing and protection
Why do lenders require so much documentation? There are two primary reasons:
- To protect themselves. Unfortunately, borrowers have been known to falsify tax returns, or lie to lenders. This can result in a financial hit to lenders in the event that a borrower can't meet his mortgage payments. The lender uses this paperwork as a gauge to determine your ability to make that mortgage payment on a monthly basis. Are you a good risk or a bad risk?
- To protect you. Documentation can serve as a method to evaluate whether the borrower has stretched himself too thin. By denying a cash-strapped individual a mortgage, the lender not only prevents a loan default and possible bankruptcy, it may also be keeping a borrower out of jail. That's right-a lender can request a tax return directly from the IRS. If it finds you've falsified your documents, it's considered perjury, and that could heap legal troubles on top of financial ones.
The "no document refinancing" alternative
If all this documentation is too much of a headache, there are No-Doc loans available which require no documentation. A No-Doc loan makes you a greater risk, however, and a lender will charge you a higher interest rate.
If you go with a conventional loan, prepare yourself for the inevitable document requests. Make sure that all your financial documents are in order; the ones listed here are a good start. You can always call a lender well in advance of applying to get a sense of what it needs. With a little organization, you not only make the document process easier, you may even improve your chances of getting that loan.
Refinancing in Spite of Prepayment Penalties
A few months ago, many homeowners were refinancing their mortgages in order to capture low rates. But things have changed quickly within the real estate market. Today, "refi fever" is back, but this time, it's motivated by a desire to lock in rates before they skyrocket out of control.
When the terms of mortgages no longer look attractive, you may have a tendency to just pay them off by acquiring a new mortgage that looks better. Sometimes, this means taking your business to a different lender. Even if you stay with the same mortgage company or bank, but refinance to more attractive terms, your lender may experience a loss of revenue. In order to discourage this practice and protect their business, many mortgage companies insert prepayment penalties into their loans. These are activated if you pay off the loan too soon. If you refinance early and pay off your balance with a newer mortgage, you can get stuck with extra expenses on top of your normal refinance fees.
Benefits of mortgage refinancing
Prepayment penalties may be daunting, but they shouldn't necessarily deter you from refinancing. The crucial thing to figure out is how much those penalties will cost you over time, compared to the cost of not refinancing. For example, if you can save $10,000 over the next three years by refinancing your mortgage, and the total amount of your prepayment fees and other refinancing expenses adds up to $6,000, you can still enjoy a net savings of $4,000 by refinancing.
To calculate the impact of prepayment fees, add them up and divide by the amount you expect to save per month, after refinancing. If you anticipate an overall reduction in your monthly payments of $300, and your total refinancing costs-including prepayment fees-is $6,000, divide $6,000 by $300. The result-20-represents the number of months it will take you to break even. If you keep your new mortgage longer than 20 months, you'll start saving $300 a month, beginning with the 21st monthly payment. Using our example, you could refinance and keep your new mortgage for five years-or 60 monthly payments-and save $12,000.
Have your lender crunch numbers to give you a side-by-side comparison of your existing mortgage and the new mortgage that you're considering. If the arithmetic is in your favor, you can't go wrong, in spite of the pre-payment penalties. Trust the numbers and pick the mortgage option that allows the most savings over the time you expect to remain in your home. It can really pay to learn the new math.
Get a Head Start on Your Lender
Many consumers who want to refinance anxiously make an appointment with a loan officer, and just hope for the best outcome. But those who understand what lenders look for, and how to take steps to ensure that their mortgage refinance applications will be processed with smooth sailing and a prompt turnaround, can make the whole process work in their favor, right from the start.
Five refinancing tips
Here are some basic tips for preparing to refinance your mortgage:
- Clarify your objectives. Decide how much you'd like to borrow, how long you want to keep the mortgage before you sell or refinance again, and whether you want a fixed rate (which works best for most consumers now as rates are rising), or an adjustable rate.
- Examine your credit report. Get a complete copy of your credit report and check it for outdated information or outright mistakes. You may have canceled those credit cards, or paid off that student loan, but the report may not show such information. It can take just an hour to review your report, and the time can save you thousands of dollars by helping you get the refinance terms you want. But do it well in advance, because it can take 60 to 90 days to identify mistakes to reporting agencies and get them corrected.
- Know the score before you get in the game. Your FICO credit score estimates the probability of your making payments on time, based on your prior payment history. If you have a score of 620 or above, you'll probably get a low interest rate. Lower scores mean that refinancing will probably cost you more, so you may need six months or so to work on improving your rating before you apply for the refinance.
- Get your ducks (and docs) in a row. Certain documents-like bank statements and tax returns-will be needed to evaluate your financial standing. Find out what the lender needs, and bring it to your first appointment. Your lender will appreciate it. Plus, doing so will probably speed up the application process.
- Shop around. Shop at least three different lenders before deciding where to take your refinance business. Let them compete by offering attractive terms or discounted rates and fees, and you'll be the winner.
By following these tips, you can help your loan officer move the process along, and likely avoiding hitting a paperwork snag. Remember, the faster they can process your loan, the faster the funds will be delivered to you.
What's the Right Refinancing Amount for You?
Life seemed simpler in the olden days. Gas was cheap, everything was made in America, and borrowers always put at least 20 percent down on a mortgage loan. In the old days, the down payment would often dictate the size of your mortgage: whatever you could afford to pay was 20 percent of the mortgage loan you could handle.
Times have changed, and these days, there's a steady stream of lending choices that make the "20 percent down" an option rather than a necessity. Therefore, you need to look to other factors to determine what the right number is for you if you want to refinance your first mortgage.
A look at mortgage options
Borrow what you can afford. Lenders typically will only allow buyers to borrow 33 to 38 percent of their gross monthly income. However, as the lending world's appetite for more loans becomes more voracious, you'll find financial institutions eager to let you stretch your budget to the breaking point. Before you close on that mortgage refinance, do some serious number crunching, and find out your exact comfort level in terms of a monthly payment. Remember, just because you can tap equity doesn't mean you should.
Twenty percent down. The rule of 20 percent down might seem a little conservative and old-fashioned if it didn't carry with it one unfortunate, glaring truth: Private Mortgage Insurance (PMI). Lenders require you to carry PMI if you can't come up with a 20 percent down payment. This insurance is risk-management for the lenders, and it can cost you upwards of $100 or more on your monthly loan payment if you get stuck with it. If it's refinance time, a down payment that helps you avoid PMI makes sound financial sense.
Closing costs. The closing costs to refinance your mortgage are approximately the same as they were the first time around. If you're refinancing within a few years of your original closing, you may be able to use some documents, like the appraisal, the second time around. When calculating the right amount for you, take into account these additional costs. They can most likely be rolled into the amount you're borrowing, but you will, at some point, be paying for it.
Things aren't as simple as they used to be. But that doesn't mean there aren't answers to the difficult questions. Take your time and use the preceding tips as a launching pad for your mortgage search. In the end, you'll settle on the right loan size for your refinance.
Refinancing Tips - Five Steps to a Speedy Loan
Many homeowners complain that, in these days of refinancing fever, customer service is sluggish, at best. Lenders don't return phone calls or reply to emails, leaving consumers in limbo. Here are five things you can do to help grease the wheels before interest rates have another chance to rise.
- Have your ducks in a row: Documents are the name of the game when it's time to processing a mortgage loan. Call ahead and find out what you need to bring before you sign the application on the dotted line. These may include tax returns, legal papers, or your spouse (to sign paperwork). If you have everything ready when you show up at the bank, things move quickly.
- Be ready for the race: It's great if you're "on the mark" and "set;" but if you're not ready to "go," you may be eliminated from the race. If fees are due for credit checks, appraisals, etc. before the closing can take place, make sure that you have the money in hand, and pay them promptly. If you aren't ready to lock in a rate, your home mortgage application process may not go forward. By the time you finally decide, more decisive customers may reach the finish line first.
- Treat it like a doctor's appointment: When you go to the doctor with a specific complaint, the most important thing is to communicate your symptoms. This way, the doctor can prescribe the ideal remedy. Before you make an appointment with a mortgage loan officer, write down your top five reasons for refinancing. This way, you can get the exact mortgage package that's appropriate for you.
- Narrow the field: Use the Internet to research various mortgage options, and narrow the field before you talk to your lender. Do you want an adjustable or fixed rate? Do you want to pay the same amount each month, but shorten the life of the loan? Are you trying to free up some needed cash, or just hoping to lock in a lower rate? Do you want to pay down principal, or just pay interest? Ask yourself these questions ahead of time. By knowing your priorities, it will be easier for your lender to suggest the home loan mortgage refinancing that best fits your specific needs.
- Don't babysit the mortgage refinancing loan process: Once the loan is in progress, keep in touch with your lender, but don't become a backseat driver who looks over the loan officer's shoulder every mile of the way.
By following these five simple protocols, you'll greatly assist your loan officer. And that translates into helping yourself to a smoother and faster mortgage loan refinance.
Know Your New Vantage Score
For lenders and borrowers alike, there are few criteria in the refinancing process as scrutinized as a credit score. FICO is a system that pools credit data from the credit bureaus Experian, TransUnion and Equifax, and produces a numerical grade that indicates your worthiness as a borrower. A FICO score is based on factors that include current debt load, payment history, credit currently in use, length of credit history, and any types of new credit.
The irony is that this method of evaluating your credit worthiness sometimes produces more questions than it answers. While the rule of thumb is that anything in the 720s and above is a good score, a lower number lacks definition and may confuse a lender.
The new VantageScore, which is offered by all three of the credit union agencies, does offer some relief to this quandary. It still uses the same evaluation factors as a FICO score. But along with a lower price tag (one free report per year, and additional viewings at $5.95), it offers some notable differences.
Advantages of the VantageScore
Overall, the VantageScore's evaluating guidelines are the same as FICO scores; too much debt with poor payment history will result in higher scores for consumers. However, the new system provides greater definition of what the numbers mean, which is potentially helpful for borrowers who want to refinance their mortgages, but whose FICO scores are considered too high.
Improved Definitions: Now, instead of a raw score, VantageScore assigns a letter grade. The raw numbers range from 501 to 990, and letter grades are assigned for each hundred-point increment. For example, a score of 901-990 would equal an "A."
The scores also include some real-world applications. A VantageScore report tells you how increased debts could affect your credit evaluation. If you're in the market for a mortgage refinance, you may learn that it's worthwhile to forego that shopping spree at the mall.
Easier for Subprime Borrowers: It can be rough going for borrowers who have little or no credit history and are interested in mortgage refinancing. Generally, these people score low on FICO and are relegated to loans with higher interest rates. The VantageScore claims to provide a more accurate assessment of the credit-worthiness of these individuals-potentially paving the way for better rates.
Keep in mind that both a VantageScore and a FICO score are just one piece in the lender's assessment of you. Many times, there are legitimate explanations to poor credit histories, and lenders may take these into account. If you'd like an invaluable tool for refinancing, and some help finding a good rate, check our your VantageScore. It may give you a big advantage.
Figure out the Break-Even Period
To do a realistic, cost-conscious mortgage refinance, first determine your break-even point, or how long it will take to start gaining a positive return on your investment of the costs of refinancing. With a calendar and a calculator-or help from your number-crunching lender-it's relatively easy.
Maybe in a perfect world, you'd be able to refinance to a lower interest rate for free. In the real world, however, you have to pay for it, and it usually costs a rather significant amount of money. Many homeowners overlook this important fact as they rush to capture alluring cheaper rates. In so doing, they risk undermining and negating their potential savings. Even worse, many borrowers refinance in such a way that they actually lose money in the process, even though they think that they're saving. To avoid this trap, sit down with your lender first, itemize your costs, and determine your break-even point.
Recouping your costs
For a refinance mortgage to make good financial sense, you need to remain in your house long enough to begin reaping the net rewards. Add up all the various charges, including lender's fees, appraisals, credit checks, and legal fees. (Keep in mind that you wouldn't be paying any of these if you don't refinance.) Once you know the grand total of your refinance costs, you'll know how much you need to recoup to start realizing the benefits. Before you can be paid back for your refinance, you first have to pay yourself back for all those charges. The more it costs to obtain the new loan, the longer the break-even period will be.
Say, for example, that your current monthly payment is $1,500. If you can refinance to a new monthly payment of only $1,400, you'll capture monthly savings of $100. But if the total fees required to refinance add up to $2,400, it will take you two years to recoup those fees ($100 X 24 months = $2,400). Once that 24-month period passes, you'll be realizing approximate net savings of $100 per month, or $1,200 per year. That adds up to about $12,000 or more over the next decade.
Rate of mortgage pay-off
One factor that's often excluded from calculations is the rate at which you're paying off your loan. If you refinance from a 30-year loan into a 15-year mortgage, you should add credit for paying off your loan in half the time. Even if your monthly payments after refinancing are the same or higher, it might still be the most cost-effective option, because you'll have no monthly payments whatsoever after only 15 years. If the loan that you're refinancing out of still has 25 years to pay on it, you're essentially saving yourself 10 full years of interest payments. Those savings need to be included in your formula.
There are some things to look out for when you consider refinancing.
Refinancing Involves Writing a New Mortgage
This means a couple of things. The most important thing to realize is that the lender will not just fork over a new, lower interest rate. You will be asked to bring in income documentation, and your credit score will be checked, just like with your original mortgage. This means, of course, that there will be fees involved. You will have to pay closing costs on this mortgage just as you did initially.
The other important point about writing a new mortgage is the fact that, if your financial situation has changed, you may not qualify for a mortgage, or you may not get a lower interest rate. For example, if at the time of the initial mortgage, you and your spouse both worked full time, and now, one of you has decided to stay home, it does not matter if you are paying the mortgage on time every month, the lender will notice the change in income.
If you are concerned that, due to lower income, you may not qualify for a refinance, you should hop online or talk to a lender in person. If you have lived in your home for a while, you may have paid a good bit down on the principal. Remember, you are refinancing the amount left on the loan, not the original purchase price.
Refinance for Less Monthly Payments or Shorter Term
When you refinance, you are, of course, taking advantage of a lower interest rate to save money. There is, however, more than one way to save money. You can keep the length of the mortgage the same as it currently is and lower your monthly payment amount, or you can keep your payment the same, and shorten the length of your loan. If your financial situation has improved since the original purchase of your home, you may even consider increasing your monthly payment in order to dramatically shorten the term of your loan, saving money in the long run on interest payments.
Whether you choose refinance to lower your monthly payments or refinance to shorten the term of the loan has many determining factors. If you can handle the amount of the monthly payment, shortening the term saves money paid on interest and may allow you to pay off your mortgage in full by a point when the extra money would be valuable, such as retirement, or children going to college.
If your current monthly payments are causing problems, such as limiting the amount you can save toward retirement, or preventing you from replacing a car that is in need of work, you may choose to lower your monthly payments, freeing up some cash for things that you need right now.
Is it time for a mortgage makeover? Time to visit the bank or mortgage broker of your choice and get a new deal? If that's the case, follow these simple cost-cutting tactics to save money over the short and long term, and make a good deal even better.
Low Refinance Rate, Save Great
The majority of your mortgage payment goes toward paying interest. To save an astounding amount of money over the long term, choose a mortgage loan with a lower rate and a shorter payback term. A 15-year mortgage may be just what the financial planner ordered. This type of loan carries a larger monthly payment; but if your budget can withstand the jolt, you can save big bucks over the long haul.
Credit Cards: Know When to Fold 'em
Lenders like pristine credit reports. If you have a bunch of open credit card accounts that you never use (and who doesn't?), consider closing them. It will boost your credit score and make you a much more attractive borrower to a lender. Then, a month after you've closed your accounts, go over your credit report with a fine-tooth comb. It should read that the accounts were closed at your request. (You don't want lenders to think someone cut you off and that you're a bad credit risk.)
Pay Points, Prevent PMI
You can also save money on your mortgage refinancing by paying "points." This is a fee that effectively lowers the interest rate of your loan. If you plan on staying in your home for a long time, this long-term strategy can be an excellent way to save thousands of dollars.
Another way to cut costs is to avoid Private Mortgage Insurance, or PMI as it's commonly called. PMI is insurance that lenders require you to carry if you are borrowing more than 80 percent of a home's value. This can cost you hundreds of dollars annually. If possible, don't rush out and buy that new bedroom set before your loan closes. Instead, put more money down on a home and avoid PMI.
Check and Double-Check those Refinancing Fees
Before you refinance a loan, make sure that you carefully analyze any fees that your lender is including on the loan. The Department of Housing and Urban Development can provide you with a list of standard fees. Use it to make sure that your lender isn't tacking on anything extravagant. And by all means, compare their fees with other lenders in the market.
Sounds simple, doesn't it? You'll be amazed at how much money just a few tactics like these can save you. Follow them diligently, and you'll find the payback well worth the effort. You'll have money for a lot more than just a bedroom set-perhaps a whole new bedroom as well.
Refinancing is similar to applying for an original mortgage. But people who have never done it before may be unsure of their out-of-pocket costs. To help you plan for your refinance, an understanding of what fees to expect can come in handy.
If you're going to do a mortgage refinance, there are certain things to do before you begin. First, check to see if your current mortgage has a prepayment penalty clause. If so, you could be charged substantial fees for paying off your mortgage early. A refinance automatically pays off the old mortgage, and if prepayment penalties apply, they could cost you a big chunk of cash.
Beyond the potential for prepayment fees, the main costs to consider regarding your refinance are the new interest rate and monthly payment. Do a side-by-side comparison to find out how the new loan looks in relation to your existing one. If it will save you money, you'll then be ready to take the next logical step- reviewing your closing costs.
Costs of refinancing
Most lenders will require a new appraisal, but some may waive this requirement, especially if you're refinancing a loan that they already service. A typical appraisal will average around $200, but some modified "drive by" appraisals-where the appraiser just examines the outside of the home and doesn't do a thorough inside investigation-can cost considerably less. There will also be fees for loan origination, processing your application, and doing a credit check.
Your "lender fees" may also include paying points. A point is equal to one percent of the loan amount. Some lenders waive them, but other financial institutions charge a point to the borrower as a way to generate the commission paid to the loan officer. If you want to get an especially low interest rate, you can also pay extra points up front. For instance, you might be able to pay an extra point to get a rate that's one half of a percentage rate lower. If you plan to keep the loan for a long time, this might pay for itself over time by saving you interest. It's also important to note that interest rates are subject to constant change and fluctuation, so base your closing cost estimates on the actual rate you confirm and lock.
Third-party fees cover such incidentals as title insurance, document preparation, and recording of the transaction with the county courthouse. These will vary from lender to lender and from state to state. You will also have pre-paid items, such as taxes and insurance premiums.
A typical rule of thumb is that your total closing costs will typically average about 2 to 3 percent of your loan amount. A written estimate of these costs will be provided to you soon after you submit your refinancing application. Should you have any questions about the fees, consult your lender or real estate attorney.
Mortgage refinances have resulted in plenty of rewards for homeowners. But the risks are becoming more complicated as lenders alter programs and find new ways to drive profits. Understand both sides of the coin before committing a penny to a mortgage refinance.
A mortgage refinance has a Zen-like quality. Risk and reward are like the balance of yin and yang. While a drop in interest rates may hold plenty of reward, there's also the risk of things like high closing costs and a potential increase in property taxes. Here's an overview of the risks you need to take into account when considering a mortgage refinance:
1. Loans in their best interests
Banks and mortgage brokers are paid to produce loans, and they may push you toward a refinance that might not be a proper fit for your financial situation. Any positive point they bring up is likely to have a negative point somewhere. Make sure that you understand all facets of the loan that they're proposing. Consult a financial advisor-be it a professional or knowledgeable friend-before you take the word of someone in the lending industry.
2. ARMs can adjust
If you're looking to increase your cash flow, the prospect of refinancing an adjustable-rate mortgage (ARM) can help you meet your short-term needs. Generally, the rates on an ARM are lower than a 15- or 30- year mortgage and will result in a lower monthly payment. The risk is that the rate of the mortgage could adjust upward at the end of the loan's low-rate introductory period. This could leave you in a tough spot if the rate adjusts too high and you can't make the new payment.
3. Numbers don't add up
The old rule of thumb used to be that if rates dropped 2 percent, you could refinance your mortgage. These days, there are other factors you should consider when you run the numbers on a mortgage refinance, including:
- Prepayment penalties: Lenders tack this onto your mortgage in the event that you decide to refinance. Sometimes these fees can be sizable.
- Closing costs: Take a close look at all the fees and closing costs that a new loan requires. Will you be able to recoup those costs in interest rate savings? (Don't forget that the average person moves once every five years, so you may not have 30 years to recoup your savings.)
- Property taxes: A refinance requires a new home appraisal. The appraisal's dollar value will be reported to your lender, and it may trigger a reassessment of your house. That could spur higher property taxes for you, and could mitigate the value of the refinance.
A mortgage is the biggest financial decision most people will ever make. Be crystal clear that the loan makes solid financial sense before you proceed. Meditate on the yin yang balance of risk and reward before you decide. It's essential if you wish to achieve financial inner peace.