When Is It Right to Refinance Your Mortgage Plan?
September 6, 2017Mortgage payments make up to 33% of an average household income. It is no surprise that mortgage is the most expensive loan of its kind. You pay thousands of dollars in the interest rate for years. However, you can reduce the same payment if you can drop the mortgage rates. A rate of 6.5% can make a difference of $25k compared to a plan with 3.75% interest.
While these savings sound great, it is not always right to go for refinancing. There are several hidden costs related to refinancing which might sum up to 1.5% of the loan amount. You have to calculate all the fees before taking the decision.
Hidden Costs of Mortgage Refinancing:
Mortgage application fee
Refinancing is like closing current mortgage and applying for a new one. So you have to pay application and processing fees along with other documentation charges. The mortgage application fee is mostly $300. It includes loan processing and the cost of obtaining a new credit report.
Loan Origination Fee:
The loan origination fee is typically around 0.5%-1.5%. For example, if your loan is for $100,000 the loan origination fee can be $500-$1,500. This fee covers the origination fee, processing, and underwriting.
Appraisal report
These programs do not require an appraisal for refinancing:
- FHA’s Streamline Refinance
- VA’s Interest Rate Deduction Finance Loan
- HARP (Home Affordable Refinance Program)
Other lenders will require property assessment to determine the current real value of your property.
Mortgage Insurance:
If your equity share is less than 20%, then you may also need to pay for mortgage insurance or bring enough cash to cover the difference.
There might be other fees like:
Flood Certification: Many states and coastal requires mandatory flood certification fee.
Recording fee: Your Local County or city may charge a fee for handling the paperwork.
Title search and Title insurance fees might be applicable in some cases.
Amortization
Refinancing works best if you are planning to live in the same house for next 10-15 years. Similarly, it is also important to look at mortgage amortization.
In simple terms, amortization is a method of applying your payments to the loan. People think that a significant part of their installment goes to the principal loan and then the rest is deducted as interest. However, in actuality at the start, most of your payments are applied to interests, so principal amount decreases very slowly at the beginning. However, at the end of the loan, payments are first applied to the principal amount and then to the interest. If you have a mature mortgage plan and your payments are applied to the principal loan then refinancing is not the best decision. If you refinance, it will be like restarting from 0.
Top 4 Reasons to Refinance Your Current Plan
Secure Low-Interest Rates
Probably, the best reason to refinance is to get low rates on the mortgage product. A good rule of thumb is to look for a saving of 2% regarding interest rates. Take the example of a mortgage loan worth $300,000.
- At 6.5% Over 30 years you will pay $1,264 monthly and a total of $455,086
- At 4.5% Over 30 years you will pay $1,013 monthly and a total of $364,814
So with a 2% difference in the interest rate, you save $251 monthly, and your total saving is $90,272!! This saving is significant indeed. So go for at least 2% interest rate saving. If you can find it, then calculate rest of the points to go for refinancing.
Shortening the Loan’s Term
Even If you do not want that monthly saving then perhaps by paying the same monthly payment, you can reduce your loan term by refinancing.
Adjustable Rate to Fixed-Price Mortgage
If interest rates are falling and likely to fall in future going to adjustable rate will be beneficial but if interest rates are increasing, locking in on fixed price mortgage would be a better strategy. So you might need refinancing for this conversion scenario.
Divorce/Separation
When a couple separates, they have three options to consider:
- The couple can continue to pay their usual mortgage installments by mutual understanding.
- They might sell the property to get their share.
- One person can keep the house, and this is only possible through refinancing because the house was previously on joint ownership mortgage plan. To move it to sole ownership, it needs to be refinanced.
Borrowing Your Home Equity
You can borrow money against your equity in your home. It might be necessary to tap into the home equity for expenses like paying college fees or some other needs. Home Equity Loan is like taking a second mortgage with the fixed-interest rate. You can borrow a lump sum of money, and you can start making monthly payments to pay off your loan in 15-20 years.
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