Refinancing your home loan can be a great way to save money, change the terms of your loan, consolidate debt, or even take some cash from your home equity for bills or renovations.
Mortgage refinancing
is a process that requires you to qualify for the loan, just as you had to meet the lender's requirements for the original mortgage. You submit an application, go through the subscription process, and go to the closing, just like you did when you bought the house. Refinancing a home loan involves replacing your current loan with a new one, usually through a different lender. Overall, the process is very similar to the traditional mortgage process.Refinancing your mortgage might be a good idea if it saves you money or makes it easier to pay your monthly bills. Some experts say that you should only refinance when you can lower your interest rate, shorten the term of your loan, or both, but those aren't the only reasons. For example, you may need short-term relief with a lower monthly payment, even if that means starting over with a new 30-year loan. Refinancing could also help you access your home equity or get rid of a loan backed by the Federal Housing Administration (FHA) along with your monthly mortgage insurance premiums. When you refinance, you get a new mortgage to pay off your current mortgage.
The process works just like getting a mortgage to buy a house. However, you'll be free from the stress of buying a home and moving, and there'll be less pressure to close on a certain date. In addition, if you regret your decision, you usually have until midnight on the third business day after the closing of your loan to cancel the transaction. When evaluating your options, be sure to consider the closing costs that refinancing will entail. These could include the opening fee, the appraisal fee, the title insurance rate, and the credit report fee.
You can generally expect to pay between 2% and 6% of the loan amount in closing costs. You'll also need to know the closing costs of the loan to calculate the break-even point where savings earned with a lower interest rate exceed closing costs. You can calculate this point by dividing the closing costs by the monthly savings from your new payment. If you think your new loan will be your last, be sure to consider the additional years of interest you are going to pay. For example, if you have 27 years left and you start over with a 30-year refinance, that's three additional years of interest and your break-even period is longer. When market interest rates fall, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments, or both.
Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly for longer years. You can access the equity of your home through a refinance with cash withdrawal if you have at least 20% of the capital left after the transaction. If your only goal is to get cash and not lower the interest rate or change the term of your loan, a home equity loan or line of credit may be less expensive than the closing costs of a cashback refinance. If you refinance a 30- to 15-year mortgage, your monthly payment will often increase. But not only is the interest rate on 15-year mortgages lower, but reducing the mortgage years will mean paying less interest over time. Interest savings from a shorter loan term can be especially beneficial if you're not going to include the mortgage interest deduction on your tax return. Eliminating private mortgage insurance from a conventional loan is not, in and of itself, a reason to refinance.
Unlike FHA MIPs, you don't have to get rid of your loan to get rid of the PMI. You can request cancellation once you have sufficient capital, usually 20%.Most of your monthly payments go to interest at the start of a 30-year loan. You'll have little home equity for many years, unless you can build it up faster by appreciating the home price or paying additional capital. Refinancing a 15-year mortgage helps you build up capital faster, but it can increase your monthly payment. For some people, getting a lower monthly payment is the most important reason to refinance.
It may not be an ideal long-term plan to re-commit to 30 years of payments, but it may be essential to keep your home and pay your bills in the short term. If things get better later on, you can pay off your capital faster to save money or even finance it again. Keep in mind that in some cases lenders may be willing to waive certain fees (for example for origination or processing), so be sure to ask if any of your closing costs are negotiable or if discounts are available. There are also several lenders that offer refinancing options with no closing cost which allow you to include closing costs in your loan amount. However this often translates into higher interest rates and higher monthly payments. If you plan on staying in your home for an extended period it's generally best to cover closing costs in advance in order to avoid paying more over time. In addition getting your financial profile in its best possible shape with good credit score stable income and low amount of debt can help qualify for competitive mortgage rates which will reduce costs over life of loan.
However don't just look at monthly payment but also how much each full interest loan will cost assuming pay off mortgage and don't sell house again or refinance.
