After you use this calculator, you’ll have a good sense of whether or not you should refinance your home loan at a lower interest rate. This tool can compute net interest savings and your monthly payment after a refinancing, as well as the number of months it will take to recoup your closing costs.
First enter the principal balance of your mortgage, the current monthly mortgage payment, current interest rate, and the interest rate you hope to refinance at. Then enter the term for the loan refi and its closing costs in either percentage points or as a dollar amount. Finish up by indicating whether or not you’d like to finance these closing costs.
Press CALCULATE and you’ll receive a detailed breakdown of the costs associated with the refinancing of a home loan. More importantly, you’ll see what you stand to save.
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This table helps homebuyers explore their mortgage options. You can click on the purchase button to switch away from refinance loans to purchase options & other loan features are included in the filter section which let you change the loan amount, the home’s location, the downpayment on the home, the loan term & more.
Refinancing Your Mortgage: Understanding the Pros and Cons
Refinancing your mortgage is a fancy way of saying you’re replacing your old mortgage with a new mortgage. If you bought a home when interest rates were high, you might want to refinance to get a better interest rate. It’s also possible that your financial status may have changed, and refinancing can offer better terms or a different monthly payment more suited for your current financial situation.
Refinancing your mortgage may save you money or give you cash to make upgrades or fix problems in your home. There are plenty of benefits to refinancing, which is why so many people do it; however, refinancing may not be for everyone, and there are certainly times when it’s not the best option for you or your family.
Reasons for Refinancing
You may decide to refinance for a number of reasons. Depending on the economy and a number of other factors, some people had to take out a mortgage when the interest rates were high. Refinancing is one way to lower your interest rate if you think you can get a better rate now, due to any number of factors. Also, the length of the mortgage may have seemed ideal when you applied for your loan, but now you may find that different terms may work better for you.
The interest rate typically is determined by the current economy, credit report, and current financial situation. If one or more of those things have changed since you first got your mortgage, you may be able to get better terms or a lower interest rate now, as opposed to when you first took out your mortgage.
Many people refinance to receive a better interest rate, better terms, or to cut their monthly payment, but those aren’t the only reasons why people refinance. Another reason people refinance is to take out a sum of money through the equity in their home. This money is often used for large purchases, such as fixing issues in their home. For example, if a person’s air conditioner breaks, it can cost thousands of dollars to replace. Therefore, people take equity from their home to cover that cost.
People also use the money to make upgrades on their home. A family may want to add onto their home or upgrade the kitchen or bathroom. People may also make upgrades if they plan to sell their home, as that money could be paid back to them exponentially because of the value they are adding to their home.
Finally, some people want to refinance because they are unhappy with their current lender. If they didn’t have many options or opportunities when they first received their mortgage, they might have a less than desirable lender. Although most people don’t change specifically because they don’t like their lender, it could be one of a number of reasons people decide to refinance.
Since refinancing is a popular choice for plenty of people, there are obviously plenty of good reasons to refinance. One of the biggest reasons people choose to refinance is to get a better interest rate. Although one-half of a percentage point, or one percentage point, may not seem like that much money, it can add up to tens of thousands of dollars, depending on the size and length of the loan. The market, as well as your credit, majorly factor into the interest rate, and even if your credit is the same, you may be able to get a lower interest rate, due to the current market.
If your credit score was low when you first got your mortgage, you could have taken a higher interest rate because you weren’t quite as a desirable candidate. If your credit has improved, then you may also get a better interest rate than when you first applied. Generally, there needs to be a rather significant change to get a better interest rate; however, it could save you a lot of money should you decide to refinance.
If your financial status has changed for the worse, refinancing can also benefit you and your family. If your current payments are overwhelming, then it may be possible to change your terms to cut your monthly payments. Although this could cost you much more over the life of your loan, it can give you financial reprieve on your monthly costs.
For example, if your original loan was for 15 years, changing to a 30-year-mortgage could cut your monthly payments significantly. It’s important to remember though, most interest accrues. Therefore, the longer loan may also mean it will take longer to pay off your principal and make the overall costs much higher. That may not matter, however, for someone who needs immediate relief from the monthly cost of a mortgage.
Finally, refinancing your mortgage could also help you to get rid of private mortgage insurance. Private Mortgage Insurance typically is required on loans where the down payment is less than 20 percent. PMI covers the lender in the case that you default on your loan obligation. Once you have paid off 20 percent of your loan, it’s not typically required. Although the lender will automatically drop the payments at 78 percent, refinancing can speed up the process.
Although there are a quite a few pros when it comes to refinancing your mortgages, it’s not all good news. You may receive high penalties on your current mortgage for paying it off early. When you refinance, the money you receive covers your current loan, and you may have it in your contract that you owe the lender money for paying off your mortgage early. If you aren’t sure, double-check the terms of early payment for your current mortgage. Incorporate those costs when you’re deciding if it’s a good financial decision to refinance.
You can also expect to pay a few fees when refinancing. Just as you had closing costs and fees when you took out your existing mortgage, most of those same fees apply to refinance your mortgage as well. Even the application fee is relatively high, and if, for whatever reason, you aren’t approved, you don’t get the money back for the application costs. That is why it’s important to check your credit report and to make sure you’re a good candidate for a loan before applying.
Even after you’re approved, there are more fees you have to pay. You’re also responsible for paying the attorney fees, bank fees, and title fees for refinancing your mortgage. Similar to your first loan, these fees typically must be paid upfront instead of being rolled into your mortgage, and can amount to thousands of dollars, as well. Your lender can give you an estimate of what the fees will cost you, so you can have a good idea on whether it’s worth it to refinance.
It’s important to thoroughly review your current financial standings and your financial future when considering refinancing. Even if you’re struggling with your monthly payment now, if it’s only short-term, there may be other alternatives. If you’re only struggling now because of unexpected bills, or losing a job, if it’s temporary, you may want to consider borrowing the money from a relative, or taking out a traditional loan. If you don’t foresee financial reprieve anywhere in the new future, it may be a good idea to go forward with refinancing.
Keep in mind that although switching from a 15-year mortgage to a 30-year mortgage may cut your monthly payments to something more manageable, you’re more than likely adding a lot of accrued interest on to your mortgage. Even though your payments are lower every month, all that interest adds up, and you will be responsible for that debt for a longer period.
Although it may sound attractive to refinance for a lower interest rate, getting a lower rate may have some strings attached, as well. Lower rates can sometimes mean higher fees or undesirable terms and conditions. It’s important to truly comprehend all the costs associated with refinancing to make sure you aren’t going to have to pay large upfront fees that can also be harmful to your current finances.
There are specific costs associated with refinancing your mortgage, and some of those costs can be fairly high. First, the lender will charge you a fee for accessing your credit report, which is just the beginning of the fees you will incur. There are also typically other administration fees involved with just the application to refinance your mortgage. The lender will also charge an origination fee for the loan, which usually is paid at the closing of the loan.
When you refinance, you’re also responsible for completing a title search and getting title insurance. Investigating your title is necessary to make sure the house is truly yours and for the lender to make sure you haven’t received any liens against your home or property since you first purchased the home. Title insurance is almost always required to protect you and your family should any issues arise about the title of your home. Even though it may seem like a nuisance, it can prevent many headaches in the future, in case something negative shows up against the title of your home or property.
Other fees are also common when refinancing. You typically have to pay for a real estate broker, the escrow company, and the attorney fees associated with the loan. Those fees may be covered by the lender, and then passed on to you, but expect to pay for them one way or another.
Understanding the costs and fees of refinancing is one of the most important aspects of deciding to refinance. Depending on how long you plan on living in your home, these fees may be too high to make refinancing worth it. Conversely, if you’re saving enough money in the long run, these fees may not be enough to discourage you from going forward.
Shopping for a Loan
The first step in shopping for a loan is making sure your credit score is good enough to qualify for the loan. You should be able to get a good sense by investigating several lenders and finding out what their qualification standards are for refinancing a loan. The application fees are fairly high, and you don’t want to waste your money applying if you already know you won’t qualify. Even if you’re borderline, it’s important to spend a substantial amount of time considering applying before you spend the time and energy.
Once you’ve decided to go ahead with the process, or even if you’re just thinking about shopping around, it’s important to understand what the lender will look for when determining whether you’re qualified. You should also try to anticipate what type of interest rates and terms you might get. A major factor in determining the terms beyond your current credit score is your current debt-to-income ratio. If you already have a lot of debt beyond your mortgage, you may want to work on paying that down before you decide to refinance. The lower your debt-to-income ratio, the better terms and conditions you can expect.
When shopping for a loan, another thing to consider is whether you have any equity in your home. If your mortgage is currently underwater, meaning you owe more than your home is worth, it will be difficult to refinance your mortgage. You typically need equity in your home to qualify for refinancing. Some lenders will still refinance your mortgage even if you have no equity or negative equity if they participate in the Home Affordable Refinance Program.
The Break-Even Point
Before shopping for a loan, or deciding whether it’s the right time to refinance, it’s especially important to consider your break-even point. The break-even point is the specific date or time at which the costs associated with refinancing justifies the lower monthly payments. For example, if your payments are $100 less per month because of lower interest rates, and you have to pay $3,000 in closing costs and fees, then it will take 30 months, or 2.5 years, to hit your break-even point.
If you plan to sell your house at some point, this break-even point is especially important. If you don’t break even before you sell your home, it doesn’t make much sense to refinance because you will never regain the costs you spent to do it.
If your break-even point can justify refinancing, then it’s also important to take into consideration your opportunities and chances of being able to refinance. Your lender will take a number of factors into consideration when applying for a loan, and just because you were approved for a loan the first time around, doesn’t guarantee your approval the next time around.
Your credit report is an important factor that lenders look at to make sure you’re a quality candidate for a loan. Any negative marks on your credit, especially that were incurred after you received your first loan, can hurt your chances of getting a better interest rate. Furthermore, incorrect listings on your credit can also hurt your chances. Make sure to get a free copy of your credit report, which you’re entitled to once a year, and spend the time correcting any mistakes before applying for the loan. Negative credit, even if it’s a mistake, can impact the chance to refinance, as well as the rates and terms of the new mortgage.
You also want to make sure there are no liens on your property before trying to refinance your mortgage. If you owe a person or a business money for any reason, it’s possible to place a lien on a home, which essentially states that when the home sells, part of the money goes to pay back the loan or outstanding debt. Since a lien affects the overall value of the home, many lenders are hesitant to refinance when your home has a lien on it.
Take the time to perfect your credit as much as possible, and do some research on your home before you start shopping for a loan. With this much money on the line, it’s important that you don’t get a worse interest rate because of a mistake. Also, you may want to consider taking the time to pay down any current debts to make sure you’re approved and end up with the best possible interest rate.
Picking a Lender
When you do decide to shop for a loan, don’t just take the first lender who wants to work with you. Many people forget that the lender is working for you. You’re paying that lender for their services, and you don’t have to go with a lender just because they are there. Even though you’re refinancing, you will still have to work with this lender for many years. You want to make sure they offer you good customer service, and you enjoy working with them. The lender should earn your business, so it’s a good idea to shop around. Many lenders offer different levels of service and different options for refinancing. Find the lender that works best for you.
Some people take the first lender that will approve them because of negative credit or difficulty getting approved. Keep in mind that if you’re having difficulty getting approved for refinancing, the company that approves you may have higher fees or other reasons that they will approve you when other companies won’t. Avoid any trouble or future headaches by repairing any negative credit or paying down debts before applying for refinancing. This helps you make sure you don’t have to deal with any less than desirable lenders.
Cash Out Refinance Loan Limits
When consolidating home loans many borrowers also choose to withdraw a portion of their equity from their home to pay off other debts. Lenders frequently allow borrowers to obtain up to 80% or even 85% of their home equity on conventional home loans.
Borrowers seeking to borrow above this amount will likely face additional scruitiny during the qualification process & if they are approved they are likely to pay significantly higher interest rates.
Government-backed programs have hard caps on the loan-to-value of refinances where equity is withdrawn. The limit on either FHA or USDA sponsored cash out refinance loans is a 80% LTV. Veterans who are refinancing VA home loans while taking cash out have an LTV limit of 90%.
There are plenty of aspects to consider when refinancing your mortgage. It’s not something you just wake up one day and do. It’s also not something you jump into just because you notice that interest rates are a little less, and you might be able to save some money.
It’s important to consider all the factors present before refinancing. You need to ask yourself how much it will cost you upfront, should you decide to refinance. It’s also important to figure out how long it will take you to make up those costs during the life of your loan. You also need to figure out your long and short-term plans. If you might be moving in the near future, it’s important to figure out if you will break even before you plan to move on.
Understanding the market is also important when you’re considering refinancing. The process is tedious, and it’s not something you want to do often. If the interest rates are low and terms are good, try to research whether they may go lower. It’s sometimes a gamble because it’s difficult to predict what the market is going to do, but you don’t want to rush into anything just because it seems like a good deal at the time.
Furthermore, take time to meet with multiple lenders, so you can find the right one for your needs. Know that many times lenders will sell hard to close the deal, and then won’t be there when you need them. Trust your instincts to make sure the lender is genuine and customer service oriented, instead of just wanting to make a sale. You will be dealing with this company for many years, and you want to make sure it’s the right fit.
Finally, there are many tools out there to help you decide if now is the right time to refinance. A mortgage calculator can help you understand when you will break-even on refinancing and what the overall costs will be. You can read reviews on lenders online to make sure other people have been satisfied with their experience, as well.
Refinancing your mortgage can save you money in the long run, get you the extra cash you need, or save you money on your monthly payment if you’re going through a financial hardship; however, it’s not something you should enter into quickly. Make sure you do the research, and think it through carefully before making that decision.
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