How to Refinance Your Mortgage? See 5 Ways to Refinance Your Mortgage
There are lots of benefits to refinancing your home if you understand the terms of the loan and know a little bit about your future financial outlook. Simply put, refinancing is adjusting the terms of your mortgage. You can adjust your mortgage to pay more per month so that the life of your loan is shortened. Or you can adjust your mortgage to pay less per month so that the life of your loan is lengthened. Both can be advantageous if used properly, and both can be hazardous if used recklessly.
This article is designed to give you the information you need in order to make the decision about what's best for your financial future.
|How to Refinance Your Mortgage|
Method 1: Doing Your Homework
1. Know what will influence the rate that you will receive. Here are the elements that will determine the rate you will receive:
- Loan size
- Your credit score
- Paid points
- When is the closure of the loan?
- Locked or floating rate
- Debt to income ratio
3. Know the costs associated with refinancing. It probably doesn't make sense to refinance if the costs and fees associated with refinancing are bigger than the amount of money you would have saved after refinancing. Figure out up front how much you're likely to be charged for refinancing. It is not uncommon to pay between 3% and 6% of your principal in fees. Some possible fees you could face include:
- Application fee: $100 - $300
- Appraisal fee: $300 - $700
- Loan Origination fee: up to 1.5% of the loan principal
- Points: up to 3% of the loan principal. One point is equal to 1% of the total mortgage amount.
- Inspection fee, Attorney Review fee, Survey fee, and Title Search and Insurance fee:
- $1,500 - $2,500
- Know, however, that some states have banned prepayment fees. Mortgages insured or guaranteed by the federal government, as well as loans insured by federal credit unions, are also barred from levying prepayment fees.
- How much can you expect to pay if you encounter a prepayment fee? Prepayment fees generally weigh in at one to six months' worth of interest payments.
1. Lengthen the term of your mortgage to reduce your monthly payments. If you desire smaller monthly payments on your mortgage, consider lengthening the term of your mortgage. Expect to pay more money (primarily in interest payments) over the course of your mortgage. Know, too, that you'll make payments for a longer period of time. This isn't always the most prudent move, but for many people, it's the difference between holding onto their home and giving it up.
- Say your existing mortgage is for $200,000 on a 30-year fixed at 6%. After three years, you get the option to refinance at 32 years and 6%. You'll be paying $134 less per month, but the total cost of the mortgage will rise to $111,791 over the life of the loan.
- Say your existing mortgage is for $200,000 on a 30-year fixed at 6%. After three years, you get the option to refinance at 15 years and 5%. You'll be paying $319 more per month, but you'll ultimately be saving a whopping $109,211 over the life of the loan. If you can manage the extra $319 per month, it's definitely worth refinancing.
- For example, if you're lengthening the term in order to pay $100 less monthly, but you'll pay $100,000 more over the life of the loan, you're literally mortgaging your future in order to bankroll the present. See if you can't rummage up the extra $100 a month in order to save you a fortune over the long term.
- Similarly, what if you're moving from a 30-year fixed to a 15-year fixed because you want to save money in the long run? If you can't afford the $300 per month, and this uptick puts you into debt, you may want to hold off refinancing until you can actually afford the change.
1. Know that the monthly payments of ARMs can shift according to interest rates. ARMs' monthly payments are tied to interest rates. Some months, you might get a very decent monthly payment because interest rates have gone down. Other months, you might get a bigger-than expected monthly payment because interest rates have gone up.
2. Beware the teaser rate on option ARMs. Many ARMs will feature a special "teaser rate" that advertises a lower-than-average initial interest payment on the loan. Often, this rate lasts for just a year or even several months, after which the interest payments skyrocket.
- These loans often seem too good to pass up. Remember, if something seems too good to be true, it probably is. Always read the fine print associated with a loan, but especially those loans which appear to give you the deal of the century.
Method 4: Knowing When Not to Refi
1. Consider not refinancing when you've invested in your current mortgage for a long period of time. The longer you make payments on a mortgage, the more equity you build up in your home. Equity is just a fancy name for how much of the home you actually own, or how much of the principal on your home you've paid off. The amount of money you pay towards your principal counts toward equity in your home, while the amount of money you pay towards interest does not.
- When you begin make mortgage payments, most of your money goes toward interest payments, not principal. In the beginning, you haven't built up much equity. After the 20-year mark or so on a traditional 30-year fixed, you start to pay off more and more principal in your mortgage and less interest. This means your stake of equity in your home grows.
- Refinancing after you've held onto the same mortgage for a long time restarts this amortization process. You spend the early years paying off interest instead of building equity in your home by paying off principal.
- Look at break-even calculators online to examine whether it makes sense to refi if you expect to move soon. Simply type in "refinance calculator break even" into a search engine.
Method 5: Starting the New-Loan Process
1. Factor in certain eligibility requirements. Lenders will look at a whole host of things in order to decide whether they're willing to give you the loan at your terms. Lenders will factor in your income and other assets, your credit score, the current value of the home, as well as the amount you wish to borrow. Primarily, lenders will look at the loan to value ratio (LTV) - that is, how much you're asking compared to the value of the home. If it doesn't fall within their acceptable range, they might not offer you the mortgage you're looking for.
- Credit score has a huge impact on the terms of your refi. If your credit score went up after you agreed on your current mortgage, lenders will be likelier to offer better terms. If your credit score went down after you agreed on your current mortgage, lenders may offer only higher interest rates.
- Note: if you're serious about staying debt-free, don't exaggerate how much money you need and then pocket the difference between the loan and the value of the house. While some mortgage loans can be advantageous, others are not. You might get a loan with better terms by shopping around a credit union or going to your local bank. Using a second mortgage as a source of cash is a sure way to lose money in the long run.
4. Shop around. This is one of the best ways to go with any kind of transaction. Know the credibility of your choice lenders. Don't be afraid to try to get better terms from different lenders. You're most likely going to be entering into a 30-year contract; you should trust the lenders and feel like you're getting the best bang for your buck.
5. Allow ample time for you to get the hang of all the mortgage terms if you're a newbie on this industry. Doing your homework will save you not just some money but also future headaches.