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We are not home owners yet but, we have many home owners friends who recently refinanced their mortgage. We are in our 30’s so most of friends are and refinancing at this age, makes every sense. On a 30 year mortgage even a quarter percentage point gain in interest rate means saving a few thousands of dollars. This article is geared towards home owners who are looking to refinance
You may think that refinancing should bring some mortgage payment relief to you as long as you manage to lower interested rate. This sounds great, but in many cases, refinancing can cost more in processing fees than it could actually save you in monthly payments.
So, don’t form your opinion that refinancing is always good. Weigh all options, here’s how.
You do not want to deal with the hassle and expense of refinancing unless it will significantly improve your payment situation. There are a few things you can do before refinancing to make sure it is the best financial decision for you at this moment and for years to come.
The following points talks about steps you must consider taking before opting for refinance.
Make Sure Refinancing Will Benefit You
If you find out that by refinancing, you can lower your monthly mortgage payment, you may be hot to jump on the refinancing train. Before you do anything, enter your current mortgage status into a refinancing calculator. For the basic calculators, you only need to know your loan rate, the cost of your house, and how much you have left to pay.
If you are comfortable with getting detailed, there are also many of complicated refinance calculators online. This is a quick and free way to see where you stand in regards to refinancing your mortgage.
Let’s say the closing cost for refinancing is $4,000 and your monthly interest rate save comes out to be $100. So to recover the closing cost it would take 40 Months. If you have more than 40 months of mortgage payment left, then obviously financially refinancing makes more sense. Here’s one calculator from MSN, this is pretty handy tool and one of my friends mentioned about using this. You may use Zillow calculator as well.
Talk to a Broker
If your situation is more complex, you should consider talking with a mortgage broker. This costs money, but you can get help planning out your finances and investments, which will save you money in the long run.
A broker can offer good insight into whether a mortgage refinance is the right move for you. Perhaps you have already refinanced, but an online calculator indicated that you could benefit from doing it again. Consulting with a broker can help clarify these more complicated situations for you, so you do not accidentally jump in over your head.
Build Your Credit
One of the reasons you may be considering refinancing is that you had a bad credit score when you first bought your home. If so, you may not have had the best loan rates available to you and ended up with a higher monthly payment than you should have.
Once you have made sure that refinancing is the right choice, prepare yourself by repairing your credit score as much as possible. Improving your credit is an important step in alleviating your financial stress, and it can also result in a better refinancing rate for you. Good credit gives you more power over your loan situations.
Refinancing your home is not a decision to take lightly, as it could throw you into deeper debt if you are not careful. If you have already refinanced your mortgage, or if you will not be living in your current house much longer, you should generally stick with the mortgage that you currently have.
According to Daily Finance, people are refinancing less and less often, simply because they have already done it, and the obstacles are becoming too bothersome. If you feel that refinancing will improve your current loan and benefit you in the long run, do the best you can to prepare yourself for this major financial decision.
Sometimes waiting for rates to go down further or shopping for lower rates for little bit longer can also give you better rates. So, before closing the deal shop as much as you can, I would say.
Readers, if you have exercised refinancing option, do tell us more about your experiences, tricks and lessons.
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Good points. Often times people forget that refinancing a mortgage should be seen as an investment wherein the cost of the refinancing is your principle and the savings in interest your return. The annualized and total interest saved should be bench marked against other investment options available to you, with the safety of the non-refinance investment considered.
With the recent uptick in interest rates and the intermediate to long term outlook calling for a continued rise, I’ll bet the option for re-financing becomes less and less attractive. In fact, I saw a headline somewhere the other day that some mortgage companies are already starting layoffs because the re-finance action has dried up quite a bit. It’s always a good idea to keep an eye out on things and evaluate how it might help you personally though.
I don’t own a home yet, either, but one factor to consider is the refinances fees. If the fees will outweigh the savings, it’s not worth it. However, with interest rates still historically low, it’s a good idea to investigate for most home owners. I know plenty of people who have shaved off a 1/2 percent or more and are saving quite a bit of money allowing them to pay off their mortgages early.
My wife and I bought a house 2 months ago, and I still am having a hard time swallowing the total of the closing costs! And I work for the bank I got the mortgage from! Expensive stuff…
Great article! I recently refinanced and should have paid for attention to whether or not I’d save enough money to make the $5,000 refinance charge worth it. It was, but it would have been better if I went for a 15 year mortgae instead of the 30 year mortgage. Now I’m just paying it like a 15 year mortgage to get it paid!
Great article. All the points mentioned by you are worthy of consideration when someone is refinancing their home. Refinancing may not be right though if there is a high prepayment penalty on an existing loan. Prepayment penalties are something that must be considered when financing in the first place. Anyway, thanks again for the article and keep sharing your knowledge!
We recently refinanced (actually realignment or something like that) through our FHA loan. Many people get mail from lenders and ignore it, but we finally called and they adjusted our mortgage pretty much for free. No closing costs, and we saved $150/mth off our old mortgage…no credit check either. they (smartly) figure if you are making payments at the current rate, why would you have problems with a lower monthly payment? It was as much hassle with time and effort as any refinance, but we skipped the $4,000-$6,000 in charges and skipped 2 months of mortgage payments to boot!
In addition to looking at the monthly payments, people should also look at the amortization schedules for the old and new loans. Compare the amounts being paid towards principle and interest. Many people are shocked to see 80% of their payment going towards interest at the beginning on a loan with a 5% APR.
People might refinance far less frequently if they saw what they were doing to themselves.
Excellent point Kevin. People should also explore 15 year mortgages along with 30 year mortgages to see if they can afford it. The difference in price is not as big as people may think. Also, if people make their normal monthly payment and also include extra money, this goes directly to the prinicple. If your paying $300 towards principle and $1,000 towards interest on your next payment and you include another $300 on your current montly payment, you just shaved $1,000 off the total cost of the loan for $300 extra, which also shortens the life of your loan. When you start paying on your loan, you are paying a great deal more on interest than on principle, so this is the best time to put extra money into your payments. On a typical 30 year loan, you are paying more on the mortgage in interest than principle until around year 21 or 22, which is where your mortage payment is ~50/50 interest/principle. Shocking, isn’t it? If you could double up on your house payments, say the $1,000 for your normal payment and another $300-400 towards the pure principle, you could probalby have your house paid off in ~10 years. Imagine how much you would have in your pocket for the other 20 years of the loan by not having a mortgage payment. That is part of my our plane (my wife and me). My income can cover the mortgage, utilities, gas, car payment (if we had one) and the things needed to get by in life. Anything my wife makes will pad the bank account and make early payments on mortgages, save to buy any future vehicles with cash (again, lenders love taking your extra money here too), vacations, putting money away for our kids college and so forth. I was told once that your mortgage should never be more than 40% of your total household income. You don’t want to be house rich and cash poor. Take a little smaller house with lower payment and put the extra into paying debt and enoying life more!
Thank you for sharing the article. It’s very useful. Hope to hear more from you.