A mortgage refinance can save you from a large monthly payment and deposit some extra cash into your account over the long run. Once you have decided that refinancing is appropriate for your situation, identify the reasons for your refinancing and search for a suitable lender who can meet your needs. To help you in this process, here are some basics you should know about the characteristics of different mortgage institutes and their packages.
The Federal Housing Administration (FHA) has several refinancing package applicable for FHA financed houses. One such product is the FHA streamline refinance loan. An FHA streamline refinance option will take comparatively less paperwork and fewer requirements than a traditional refinancing product. The eligibility requirements for an FHA streamline refinance are:
● Your housing finance has to be endorsed previously by the FHA.
● You have to be up-to-date with your current payments.
● You must be able to reduce your principal payments and interest payments through refinancing.
● You must not release extra cash from your home equity for other purposes.
Determining if this is a smart time to refinance depends upon several factors. One good reason to refinance is to lower the interest rate. But, one should not refinance their mortgage based solely upon a low interest rate. There are many other factors that determine whether one will benefit from a refinancing program. A refinancing plan should be based upon your personal situation and requirements. Homeowners whose financial situation has improved can save from refinancing, by reducing the length of the loan period and by lowering the principal payment, which will give them the opportunity to save a good deal of money. On the other hand, if you are going through a hardship, a longer loan term with a low interest rate will give you more flexibility. Apart from taking up your valuable time, the refinancing process involves loan origination fees, appraisal fees, settlement charges, new lender’s title insurance, and so forth. Determining a break-even point is one of the best ways to decide whether the refinancing is really worth your time and effort.
In order to be qualified for a refinance program, your lender will consider several criteria including your monthly income, loan-to-value ratio of your property, your credit score, and the equity of your home. If you want to take the opportunity of refinancing but cannot afford to do so, because you owe more than the current value of your property, a Home Affordable Refinance Program (HARP) is a suitable option for you.
If your credit score has improved since you took out your original mortgage, you may be able to refinance with more favorable terms than what you currently have. Through refinancing, you will also be able to drop any Private Mortgage Insurance (PMI) and save money. One of the other reasons many people consider refinancing is to consolidate debts. Refinancing helps by organizing different mortgages and loans under one mortgage with better terms and flexibility. The greater principal loan obtained from a refinancing can give you a supply of extra cash that you can use for any purpose. In this case, refinancing will save you from the risks of taking out another loan.
The 5 stages of refinancing
A short guide to the refinancing process
Refinancing your home loan could result in lower monthly payments, a better interest rate, or the prospect of having a fixed interest rate as well as fixed payments. If you have been putting off a refinancing decision because you are unsure of the process, take a look at the following guide which is designed to help you understand how to go about refinancing.
1) Determine the reason why you wish to refinance
Are you thinking of refinancing to reduce your monthly home loan payments? Are you trying to lower your current interest rate? Would you like to replace your adjustable-rate mortgage with a fixed-rate loan? Determining the reason why you wish to refinance will make the process of selecting a loan easier and will help you reach your goal.
2) Be willing to shop around
You likely know what your monthly home loan payment is, but do you remember what interest rate you are being charged? Are you familiar with the terms of your loan? Is the interest rate on your loan adjustable? Knowing this information can help you select a better loan for a refinance. The RateWinner Mortgage Checkup allows you to look at the various loans available according to the interest rate of your existing loan.
You may also find it useful to verify your current credit score and have a rough idea of how much your property is worth. The RateWinner Home Equity Calculator can help you work out how much equity is locked into your property, which will partly determine whether or not you are allowed to refinance.
3) Consult several lenders
When you are ready to refinance your loan, you must be prepared to contact several lenders to compare the costs and terms of a potential new loan, as these can vary greatly between lenders. One option is to shop for a new mortgage through our website. RateWinner can help you find a loan with up to five lenders, which means you can obtain five different loan offers. You may also wish to contact local lenders, banks or credit unions. Make sure you establish when the interest rate will be locked in for each mortgage you may be considering.
4) Scrutinize the loan offers made by the various lenders
When comparing various loan offers, it is crucial to check the interest rate, costs and terms associated with each loan. As a rule, the costs should include a loan origination fee, a property appraisal fee, closing costs and a new lender’s title policy. The RateWinner Look Before You Lock calculator can help you determine whether the loan you are considering is worthwhile.
5) Select a loan
It usually takes several weeks to close a loan once you have decided which one is right for you. While you are waiting, you will need to fill in a formal loan application unless you have already done so. Your property will also be appraised during that time and you will need to request a cashier’s check to settle your closing costs.
FHA streamline refinance loans
An FHA streamline loan can make it easier for borrowers to refinance
If your mortgage is insured by the Federal Housing Administration (FHA) and you are considering refinancing to make the most of lower interest rates, you may find that the procedures are simpler than you originally thought. Indeed, the FHA uses a streamline process to help you refinance your FHA mortgage.
To help you find out about the FHA streamline refinance process, including its advantages, how it works, and its specific requirements, we’ve compiled several helpful tips.
The FHA streamline refinance loan process
Please note that the term “streamline” only denotes a process which requires less paperwork and fewer requirements than is usually the case with a standard mortgage refinance. In other words, you will still incur closing costs. Because the refinancing process involves fewer requirements, your property may not have to be reappraised. This is one of the advantages of FHA streamline refinancing, especially if your property has declined in value in the past few years.
Although there is a cost associated with streamline refinancing, you may not have to make an upfront payment to cover the closing costs of your old mortgage. Instead, your lender may offer you a slightly higher interest rate and in return waive the costs of closing your streamline loan. If you decide to opt for an FHA loan which bears a lower interest rate, you will still benefit from lower monthly loan repayments.
The FHA streamline refinance loan: do I qualify?
There are a few requirements to qualify for an FHA streamline refinance loan:
– the loan you wish to refinance must be FHA-insured
– you must be up-to-date with your mortgage payments
– the main reason for your refinance must be to reduce your monthly principal and interest payments
– you will not be able to free cash from your home equity if you decide to opt for streamline refinance.
The FHA streamline refinance loan program has been available since the 1980s. If you need assistance with your FHA streamline refinance loan, you should contact an FHA-approved lender.
More information about the FHA
The FHA is a federal agency which is part of the Department of Housing and Urban Development. It is not a lender and it does not issue home loans. Because the FHA guarantees home loans in the event of a borrower default, lenders are willing and able to provide lower-interest loans to property buyers and owners. Any loan which is guaranteed by the FHA is usually described as an “FHA loan”.
Has the time come to refinance your mortgage?
Check interest rates, closing costs and the term of the loans before refinancing
Because interest rates are now much lower than they used to be, you may be considering refinancing your current mortgage. Obviously, you are likely to see significant savings on your monthly payments but will these savings be sufficient to cancel out the upfront costs? Also, how can you check whether you will qualify?
Here is a small guide to help you determine whether now is the right time to refinance.
Lower interest rates may have prompted you to contemplate refinancing your existing mortgage, but other issues should also be considered. If you opt to refinance your current loan with one which has a longer term than what is left on your existing loan, although your monthly payments will be reduced you will have to make these payments for a greater amount of time. This could increase the total amount of interest payable overall. For instance, refinancing a 30-year mortgage you took out 10 years ago with a similar 30-year mortgage would mean increasing the duration of payments by another 10 years. Because of this, some homeowners with a 30-year mortgage opt to refinance with a shorter-term loan (a 15-year loan, for instance).
However, if your financial circumstances have changed and you are now experiencing difficulties with your monthly payments, refinancing and lengthening the term of your loan may be a great solution for you.
Refinancing comes at a cost. When refinancing a loan, you should bear in mind that you are likely to incur loan origination fees, discount points, appraisal fees, settlement services charges and a new lender’s title insurance policy. You may not have to settle these costs upfront and may even be entitled to a discount in exchange for a higher interest rate. In any case, you are strongly advised to look carefully at the total costs associated with refinancing. If you intend to remain in your home for many years, the money you save each month should enable you to cancel out these initial costs. If, however, you are thinking of moving quite soon, you are unlikely to recover all the refinancing costs even though your monthly payments are lower.
Because property prices have fallen in most parts of the country, an appraisal could show that the amount owed on your mortgage is greater than the current price of your property. Although this usually means you do not have sufficient equity to qualify for refinancing, the federal government’s Making Home Affordable program still enables some homeowners to refinance. This is possible because, through this program, a Home Affordable Refinance mortgage can offer a loan-to-value ratio as high as 125 percent. For more information, please consult www.makinghomeaffordable.gov.
If you think refinancing is right for you, you are advised to compare loan products and look for a combination of interest rate, terms and costs which will best suit your needs. Remember that lenders are likely to request a paycheck stub, a bank statement, a recent credit report and other documents before they can approve a new loan.
Qualifying for mortgage refinance
Lenders will typically check your income, the value of your property and your credit score before deciding whether you qualify for mortgage refinance
All lenders nowadays carry out more thorough checks before considering loan applications. As a result, many homeowners who would like to refinance their mortgage in order to benefit from lower interest rates are uncertain whether they will be eligible for a new loan. This guide highlights what lenders will be evaluating when considering mortgage refinance applications.
What are your earnings and how much do you owe?
A potential lender will examine your monthly earnings and debt payments and calculate what is known as a debt-to-income (DTI) ratio. Typically, lenders are more likely to consider a loan application if your DTI is equal to or lower than 38%. However, in some cases a DTI greater than 38% is also acceptable.
Calculating your personal DTI is not easy. You are, therefore, advised to consult a few lenders who will look at your earnings, debts and housing expenses and will let you know whether you are likely to be successful should you decide to apply for a mortgage refinance. If your DTI is quite high, you should consider reducing your level of debts prior to applying for loan refinancing.
Most lenders will require evidence of income prior to considering your applications. Make sure you can supply recent paycheck stubs, W-2 forms or federal income tax returns.
How much do you wish to borrow and what is the value of your home?
Whether or not you qualify for a mortgage refinance will also be determined by the value of your property and the loan-to-value ratio (LTV). You can calculate this ratio by dividing the amount you wish to borrow by the current value of your property. For instance, if your home is worth $300,000 and you would like to borrow $225,000, your LTV will be 75 percent.
Most lenders prefer an LTV ratio below 80 percent before considering a mortgage refinance application. However, some lenders will consider an LTV ratio greater than 80 percent.
For instance, the Making Home Affordable program enables some homeowners to refinance with an LTV ratio as high as 105 percent. This program targets borrowers who have a good mortgage payment history and who hold loans owned or backed by Fannie Mae or Freddie Mac.
The Federal Housing Administration (FHA) also offers a streamlined refinancing program. This plan is open to borrowers who hold an FHA-insured loan, and this particular program does not insist on a home appraisal when refinancing.
Are you up-to-date with your bill payments?
Although a negative credit report may not prevent you from refinancing a loan, you need to be aware that if your credit score is low, you are more likely to be offered poor terms and a higher interest rate. Even if a lender is willing to offer you refinancing, it might make more financial sense to turn down the offer. If, however, your credit score is solid and shows you pay your bills on time, a lender will usually be willing to offer you much better terms as well as a lower interest rate.
In summary, lenders will take a close look at your debt-to-income ratio, the loan-to-value ratio and your credit report. They may also wish to examine other aspects of your financial circumstances before agreeing to mortgage refinancing. It is always a good idea to speak with several lenders to establish the various options available. Remember, you can obtain no-obligation rates and offers from several lenders through RateWinner.
Even if you qualify for refinancing, you still need to decide whether refinancing is suitable for you. The free RateWinner refinance calculator can help you work out how long it will take you to break even using lower monthly loan repayments.
Should you consider mortgage refinancing?
Answer the following questions to establish whether mortgage refinancing is right for you
American homeowners refinance their mortgage on average every four years. In some cases they do so in order to benefit from lower interest rates. However, refinancing can be worthwhile in many other circumstances. If you answer “yes” to any of the following questions, refinancing could be right for you.
Are interest rates likely to rise (further)?
If you hold an adjustable-rate mortgage (ARM) and think interest rates might start rising or might rise further, you may benefit from switching to a fixed-rate loan. By fixing your interest rate, your payments will not rise in the future. However, you may wish to refinance for reasons other than a lower interest rate.
Are you struggling to make your monthly repayments?
You may be thinking of refinancing your current loan to decrease your monthly payments. Even if the potential new loan bears the same interest rate as your current loan, you may wish to refinance your mortgage in order to increase the term, if you are finding it hard to cope with the monthly payments. For instance, if you took out a 30-year, $150,000 mortgage seven years ago at a rate of 6 percent and have been paying $900 each month ever since, you could refinance your loan and take up a new 30-year mortgage at the same interest rate. Your new monthly payments would then be slightly over $800.
Are you unhappy with your adjustable-rate mortgage (ARM)?
You may initially have chosen an adjustable-rate loan because at the time it was more advantageous than a fixed-rate mortgage. The interest rate on such loans is usually adjusted once a year. As a result, if interest rates rise, your monthly payments will rise too. If you are unhappy with these regular rate adjustments and would feel happier with a fixed monthly payment, you may wish to refinance to a fixed-rate loan or to a different ARM if it offers a more advantageous rate cap (a cap limits the extent at which the interest rate can rise).
Has your credit score improved?
When you first took out your mortgage, your credit score may not have been as good as it is today. Because a credit score is one of the factors which determines the interest rate offered when you take out a loan, you may be able to save a significant amount of money if you decide to refinance. Indeed, if you now have a more solid credit report, a lender is likely to offer you a better interest rate.
Has your income increased?
Sometimes homeowners opt for mortgage refinancing in order to increase their monthly payments. This may occur following a pay raise, a promotion or any other positive change in a household’s financial circumstances. Using this extra money to pay off a home loan more quickly can be advantageous. Refinancing a 30-year mortgage and opting for a shorter term of 15 years, for instance, would enable you to own your home outright earlier than anticipated and could save you many thousands of dollars in interest payments.
Is your home equity now worth more than 20 percent of the principal?
When you took out your mortgage, you may not have been able to afford a down payment greater than 20 percent of the principal. If this was the case, you are likely to have had to take out Private Mortgage Insurance (PMI). However, if property prices have since risen in your area, your home equity may now represent more than 20 percent of the principal. If you believe this is the case, you could approach your lender and ask for your PMI to be canceled. A home appraisal will have to be carried out to confirm your property has actually increased in value and that the equity now represents over 20 percent of the principal. If for some reason your lender is unwilling to let you cancel the insurance, you may choose to opt for refinancing. If your new loan represents less than 80 percent of the recent appraisal value, you will no longer require PMI and will probably save at least $100 each month.
Would you like to consolidate your debts?
If you have managed to build up a sizeable amount of equity in your home but also have a significant amount of debt, you may wish to opt for cash-out refinancing. This would entail taking up a mortgage for a greater amount than you currently owe. For instance, if a home appraisal shows your property is worth $300,000 while your outstanding principal is $200,000, you will have built up $100,000 in equity. If you choose to refinance your loan with a principal of $220,000, you will free up $20,000 to pay off some or all of your debts. Provided the interest rate charged on your mortgage is lower than that charged on your other debts, you will be financially better off. Furthermore, you will also be making one single payment each month.
Do you need funds to finance a major expense?
Although cash-out refinancing is often used to consolidate debt, you may be considering this option to free up money for other purposes, such as building an addition or investing in your children’s education. If you opt for cash-out refinancing, the principal owed on your property will increase and this could be problematic if you decide to put your house on the market.
Refinancing can be a costly process and is usually only recommended if you are planning to remain in your home for at least a few years. Although in most cases you will end up paying less each month towards your mortgage, it will take many months before you manage to break even. If you are thinking of refinancing, why not use the RateWinner refinance calculator to work out how long it will take you to reach your break-even point?
Follow these four steps to assess your current home loan
Are you considering refinancing your mortgage loan? Follow these four simple steps before going ahead.
You may be thinking of refinancing your mortgage loan in order to benefit from a lower interest rate or to replace an adjustable-rate mortgage. Whatever your circumstances, there is a chance you will be financially better off. But how do you find out whether refinancing makes financial sense and whether the savings will outweigh the costs?
Here is a short guide to help you assess your current mortgage arrangement.
Check the terms of your current mortgage loan
What interest rate is currently applied to your loan? Do you have a fixed-rate or adjustable-rate mortgage (ARM)? If the interest rate is adjustable, when is the reset date? Check the index and margin amounts to assess the likely increase in your interest rate and monthly payments. You can find more information about ARM interest rates and their calculation in the ARM Mortgage Refinancing section or by using the ARM Payment Calculator. Also, check whether you may be subject to a prepayment penalty should you decide to refinance.
Compare the interest rate charged on your loan with current interest rates
If you took out a fixed-rate loan many years ago, current interest rates will likely be much lower. Refinancing could save you a significant amount of money. For instance, if you took out a $125,000 loan with a 30-year term and you are charged 8 percent interest, your monthly payment will be around $915. If you refinance and benefit from a lower interest rate of, say, 6 percent, you will pay approximately $170 less each month. However, you may not necessarily be offered the lowest interest rate available, as the lenders will base their offer on your current credit score and the loan-to-value ratio.
Determine whether you are likely to move soon
Before going ahead with refinancing, try and assess as best as you can how long you are likely to stay in your home. If you are planning to move in the next few months, you are unlikely to benefit from the savings which are associated with refinancing. As a rule, the longer you stay in your home, the more likely you are to take full advantage of the benefits associated with refinancing.
Calculate when you will break even if you decide to refinance
First of all, determine what your closing costs will be. If your closing costs total $3,000 and your monthly savings amount to $150, it will take you 20 months to recover the closing costs. In this case, if you are planning to move in less than 20 months, refinancing will not make financial sense. If you are planning to remain in your home longer, the monthly savings will soon add up. If you require additional information to calculate the break-even point, please use the RateWinner Mortgage Refinancing Calculator.
When you assess your mortgage loan and look at various offers for refinancing, you need to take other factors into account. For instance, refinancing a 30-year mortgage with a 15-year fixed loan will save you money in the long run. Although the monthly payments will increase, overall you will be charged less interest over the life of the loan.
You can quickly compare your mortgage with various refinancing options thanks to our free RateWinner Mortgage Checkup.
Should you refinance your jumbo home loan?
It might be worth refinancing an old jumbo mortgage if it now qualifies as conforming.
Jumbo mortgages describe home loans above the conforming limit as set by the federal companies Fannie Mae and Freddie Mac. These two companies provide funding to retail mortgage lenders.
The conforming limit for single-family homes has been set at $417,000 since 2007 in the continental United States. In Alaska, Hawaii, Guam and the U.S. Virgin Islands, the limit is $625,500. Because the limit was raised, your mortgage may now qualify as conforming. If this is the case, you may be be eligible for refinancing.
Home loans which are greater than the conforming limit are subject to a higher interest rate than conforming mortgages. If you have a typical 30-year fixed-rate loan, you will most probably be paying between 0.125 and 0.25 percent more in interest. Sometimes, the rate is even higher. The reason behind this higher rate is that lenders face a greater risk. Jumbo loans are also typically accompanied by additional underwriting requirements. A higher interest rate enables the lender to recoup these additional costs.
The conforming limit can go up as well as down. When it goes up, it can provide borrowers with the opportunity to refinance their home loan as well as save money.
For instance, if you took out a $400,000 fixed-rate loan at 6 percent prior to 2007, your mortgage would have been described as jumbo. If you decided to refinance, your loan would now be below the conforming limit of $417,000. You would therefore be entitled to a lower rate of interest. An interest rate of 5.5 percent would reduce your monthly payments by over $125.
However, refinancing can be costly and it may take many months for the monthly savings to cancel out the costs associated with the refinancing process. For some jumbo loan holders, however, refinancing can mean significant long-term savings.
How you could reduce your mortgage payments
Are your mortgage payments uncomfortably high? Refinancing could help you.
Your monthly income may have recently decreased. Or, you may wish to free up some money for a personal reason. Refinancing your home loan may reduce your monthly payments. However, you need to carefully look at the pros and cons of refinancing before proceeding.
Maybe you hold an adjustable-rate loan which is due to reset to a higher interest rate in the next few months and will reset periodically once a year. Or, maybe you would like to benefit from the current lower interest rates. Maybe you have realized that you will not be able to pay off your home loan as quickly as you anticipated. Refinancing and increasing the term of your loan – that is, paying it at a slower pace – could help reduce your monthly payments.
Disadvantages and potential risks
Although you will benefit from lower monthly payments if you opt to extend the term of your mortgage, you will most probably end up paying more interest overall if you decide to pay off your mortgage over a greater number of years. You may also be subject to financial penalties if you refinance. Double-check whether you would be penalized and calculate whether the benefits would outweigh the costs. The examples below will give you an idea of the savings and costs involved in refinancing.
Extending the term of your mortgage
If you hold a $150,000 mortgage at a 6.25 percent interest rate and you decide to extend its term from 15 to 20 years, your monthly payments would fall from $1,286.13 to $1,096.40. You would therefore save $189.73 each month. However, extending your mortgage by 5 years would result in an additional $31,629 in interest charges. You would need to decide whether this extra expense is worthwhile.
|Term||15 years||20 years|
|Total interest cost||$81,504||$113,133|
Lowering the interest rate on your mortgage
Refinancing a $150,000 mortgage with a 30-year term at an interest rate of 6.25 percent and opting for one bearing an interest rate of 5.5 percent would reduce your monthly payments by $71.89. Furthermore, over the term of the loan you would also see a savings of $25,879.50 in interest charges.
|Term||30 years||30 years|
|Total interest cost||$182,484||$156,604.50|
Changing the term and the interest rate
You may be able to renegotiate both the term and the interest rate of your home loan. Once you have been offered a lower rate, you can then calculate the term that best fits your needs and reduces your monthly payments to a more manageable level.
Negotiating a payment holiday
Some mortgage lenders will agree to let you have a payment holiday. If your expect your financial difficulties to be temporary, your lender may allow to suspend your mortgage payments for a few months.
Opting for an interest-only home loan
Refinancing your current loan with an interest-only mortgage could significantly reduce your monthly payments. However, you should be aware that, when the temporary interest-free period runs out, you will be faced with very high payments. Because an interest-only mortgage is much more expensive than a usual mortgage, you should only consider such loans if you are having short-term difficulties with your payments and expect your financial circumstances to have improved by the time the interest-only period runs out.
Downsizing your property
Your financial and family circumstances may have changed or you may have simply overextended yourself. If you are struggling with your mortgage payments, you may consider moving into a smaller property. You should find the mortgage payments on a smaller home more affordable.
The basics of mortgage refinancing
Look at the costs and advantages of mortgage refinancing and decide whether it is suitable for you
Most homeowners periodically shop around for a better mortgage, irrespective of the terms which apply to their current loan. On average, American homeowners refinance their mortgages every four years, according to data published by the Mortgage Bankers Association. You may benefit from significant savings if you decide to take out a new mortgage to replace your current loan. However, there are costs associated with refinancing and you need to weigh both the costs and benefits carefully before deciding if refinancing is right for you.
Why should you opt for refinancing?
You may wish to refinance your mortgage for the following reasons:
- To benefit from a lower fixed interest rate if interest rates have fallen since you took out your mortgage. By refinancing, you may be able to significantly reduce your monthly payments. For instance, if you took out a $125,000 mortgage at an 8 percent rate of interest, your monthly payments will be in the region of $915. If you replace your current mortgage with one which carries an interest rate of 6 percent, your monthly payments would then be less than $750.
- To replace your loan with a fixed-rate or an adjustable-rate mortgage (ARM). If you take out an adjustable-rate mortgage, you are likely to benefit from lower interest rates to start with. However, some borrowers can find the adjustments difficult to deal with. When rates start going up, it might be wise to opt for a fixed-rate loan to benefit from fixed monthly payments. However, if you would like to decrease your monthly payments and do not mind the regular interest rates changes which are associated with an ARM, refinancing to an ARM may be financially worthwhile.
- To get better terms on your ARM. If you have an adjustable-rate mortgage, the amount by which your payments can increase each year and during the life of the loan will be capped. You may be unhappy with the current cap and might be able to obtain better terms if you decide to refinance your ARM.
- To build your home equity at a faster pace. If you can now afford to make higher monthly payments because your financial situation has improved, it might be worth considering refinancing your mortgage and opting for a shorter term. The higher monthly payments will enable you to pay off your mortgage more rapidly and you should be able to save a significant amount of money by reducing the life of your mortgage. However, you can also decide to increase your monthly payments towards your principal without having to opt for refinancing.
- To lower your monthly payments. You may wish to refinance your existing mortgage and opt for one with a longer term. By doing so, you will decrease your monthly payments. Although this means you will be charged more interest over the life of the loan, this option will give you some breathing space if you are struggling with your monthly repayments.
- To release cash from your home equity. You may wish to refinance your mortgage and opt for one with a larger principal in order to free some cash from your home equity to finance a large expense. This process is known as cash-out refinancing. Because the loan is secured against your property, the interest rate will be much lower than that charged by a lender for an unsecured loan or by a credit card company. However, if the interest rate quoted to refinance your mortgage is greater than your existing rate, you should consider a home equity loan or some other form of credit.
Is mortgage refinancing suitable for you?
If you are thinking of refinancing in order to reduce your overall interest payments, you are unlikely to realize any savings immediately. Indeed, you may incur a penalty for canceling your old mortgage and a fee is usually payable when taking out a new mortgage. Try to answer the following questions to see whether refinancing is right for you:
- How long are you likely to remain in your current home? If you are unlikely to remain in your current property for more than a year or two, the costs of refinancing may outweigh the benefits. Generally, the longer you remain in your home, the more beneficial refinancing is.
- Does your current mortgage contain a prepayment penalty? You are usually charged a penalty if you decide to pay off your mortgage early. The penalties vary between lenders and states but can range from a percentage of the outstanding balance to a few months’ worth of interest payments.
- What are the costs of the new mortgage? Taking out a new mortgage can cost several thousand dollars when all the fees are taken into account. These fees can include charges for the application, the appraisal, the origination, insurance fees, title search, insurance, legal costs etc. You may also be liable to pay for discount points. Discount points are an upfront charge which entitles you to a lower interest rate. Generally, the fees associated with a new mortgage cancel out the savings you are likely to make, unless the interest rate offered is at least 0.5 percent lower than the interest rate you are currently being charged.
- What is the true difference in borrowing costs? If you are thinking of refinancing, do not forget that the interest rate which is advertised does not represent the full cost of the mortgage. The total cost of the mortgage will depend on the duration of the loan, on whether the rate is fixed or adjustable, on the fees charged upfront and during the life of the loan and whether you are charged discount points. In order to compare mortgages like-for-like, pay particular attention to the annual percentage rate (APR). The APR includes not only the base interest rate but also all the charges and fees which will apply to the mortgage. The APR is the best comparison tool, since all lenders must by law use a determined template when calculating its rate.
- How will your tax savings be affected? If your personal circumstances enable you to claim mortgage interest back, taking out a new mortgage with a lower interest rate will mean the interest you are able to deduct on your tax return will be lower too. Although you should still be better off, the total savings might not be as significant as you first thought. You may wish to consult a tax advisor to accurately establish how refinancing will affect your tax situation.
Calculating the break-even point
Ultimately, you will need to answer a simple question in order to decide whether refinancing is right for you:When will I start saving money? Firstly, work out how much money you will be saving each month. Then, add up all the costs you will be liable for if you decide to refinance. Finally, divide the total costs by the monthly savings. The number you get will correspond to the number of months it will take you to recoup the costs of refinancing, or to reach the break-even point.
For instance, if refinancing reduces your monthly payments by $250 and the costs associated with refinancing amount to $5,000 (prepayment penalty, closing and discount costs etc), it would take you 20 months (5,000 divided by 250) to break even.
However, to calculate the break-even point more accurately, you will also need to consider your tax situation and whether the closing costs are payable upfront or can be added to the principal of the new loan. You may also be able to cancel you private mortgage insurance if your property is found to have increased in value when you decide to refinance.
You can use our refinancing calculator to work out the break-even point more accurately or discuss it with a RateWinner Mortgage Consultant by calling 1-888-262-0715.
How long do I need to wait before I can refinance my mortgage?
When can I refinance my mortgage? How many times can I do so?
You can refinance your mortgage when and as many times as you wish. You should consider doing so whenever there is a benefit.
You should benefit from refinancing if interest rates have fallen by at least 0.5 percent since you took out your home loan. The greater the drop in rates, the greater the benefits are likely to be. If, for instance, you took out a $125,000 30-year fixed-rate mortgage at an interest rate of 5.5 percent, refinancing at a lower rate of 4.5 percent could save you $76.38 each month.
You may also consider refinancing in order to pay off your home loan at a faster pace, even though interest rates have not decreased significantly. You might opt for a 15-year loan instead of a 30-year loan. Although your monthly payments would increase, you may be able to comfortably afford the higher payments if your financial circumstances have improved.
If you hold an adjustable-rate mortgage and expect interest rates to start or continue climbing, you may wish to opt for a fixed-rate loan instead. By locking in the interest rate, you would not be affected should interest rates rise.
Bear in mind that refinancing can be a costly process. You are likely to be charged for a mortgage application and a home appraisal, as well as being subject to legal fees. You may also incur discount points in order to benefit from a lower interest rate. As a rule, you will be charged 1 percent of the loan amount in order to reduce the interest rate by 0.25 percent. In some states, lenders are also allowed to penalize borrowers who decide to pay off their home loan early.
Before going ahead with refinancing, make sure the savings you are likely to gain outweigh all the costs involved. Remember that the longer you remain in your property, the more likely you are to recoup these costs. Only when you reach the break-even point will you actually start saving money.
When does it make financial sense to refinance a mortgage?
You can see significant savings if you decide to refinance. Here’s a quick guide to help you work out how quickly you can start saving.
Refinancing your home loan can help you save money and get better terms on your mortgage. However, although refinancing will enable you to make significant savings over the life of your loan, you will incur some costs which will be payable upfront.
Start by working out your break-even point: how long it will take you to pay off the costs involved in the refinancing process.
The following steps can help you determine when you can expect to break even:
1) Calculate how much money you will be saving each month.
For instance, if you took out a mortgage five years ago and the principal remaining on your 30-year fixed-rate mortgage is $150,000, and the interest rate is 8 percent, your current monthly payment will be approximately $1,158.
Taking out a new 30-year mortgage at 6.5 percent would reduce your monthly payments to $949.
You would therefore save $209 each month ($1,158 – $949).
2) Calculate the costs of refinancing (closing costs, discount points, etc.) and divide the total costs by the monthly savings to determine your break-even point.
Continuing with the loan scenario above, if the total refinancing costs amount to $4,500, you will need to divide 4,500 by 209. In this example, it would take you just over 21 months to reach the break-even point.
You will also need to consider the following points:
1) How will extending your loan term affect you?
The above example shows that the monthly payments will be reduced by over $200. This is due in part to the lower interest rate. However, the lower monthly payments are also due to the fact that the term of the loan has been extended. In fact, if you took out your current 30-year mortgage five years ago, you should finish paying it off in 25 years’ time. However, if you choose to refinance and replace your current loan with a new 30-year mortgage, you will end up with an additional five years of monthly payments, which the above example does not take into consideration.
On the other hand, if you decided to opt for a new mortgage with a 25-year term instead of 30, you would be able to pay off the remaining $150,000 within the same period of time as the old mortgage. As your monthly payments of $1,013 would be at the lower 6.5 percent interest rate, you would reach the break-even point in just over 31 months. Although it would take you longer to reach the break-even point, refinancing would still be worthwhile provided you intended to remain in your property for at least a few years. Indeed, you would not be paying as much interest overall with the new mortgage.
2) How will reducing your loan term affect you?
Using the same figures as above, let’s see how your monthly payments would be affected if you opted to refinance your current 30-year mortgage with a new 15-year mortgage in order to pay off your mortgage more quickly. With an interest rate of 6.5 percent, your new monthly payment would increase by $149. Refinancing would save you a massive $112,000 in interest charges over the lifetime of the loan. Because your increased monthly payments will pay off the principal more quickly, you will end up paying off your home loan 10 years ahead of schedule.
You may have noticed that the break even calculations earlier no longer apply in this case. Such calculations only work well when the terms of a new loan are not significantly different from the term remaining on an existing loan. Unfortunately, this is rarely the case.
You also need to take other factors into account when considering refinancing. These factors include associated tax considerations as well the cost of private mortgage insurance. You may wish to use the RateWinner refinancing calculator to obtain a more accurate break-even estimate, as our calculator incorporates several of these factors when working out the break-even point.