Home-buyers and homeowners alike are certainly aware of the affect the economy has had on home pricing and the housing market in general. While a great cross section of the global financial markets are re-tooling to adjust to the ‘newer normal’, for the time being, the positive side of the equation is the remarkably lower interest rates. This translates into many homeowners re-evaluating their options regarding refinancing existing mortgages for quite a few reasons. Whether the causes stem from a slow job market recovery, wage cut-backs, corporate down-sizing, or just trying to stretch a dollar a bit further, mortgage refinancing can be a great help in improving anyone’s cash flow problems. If the tactic is based on reducing the term of the mortgage, shaving off some of the monthly payment debt-load, or getting access to a portion of the equity, refinancing that mortgage is a great way to do it. There are, however, a few costs involved with the process, and they have to be factored into the plan before signing on the new bottom line.
Check for Pre-Payment Penalties
There are many variables to contemplate in the mortgage refinancing option. The primary consideration is the overall cost, which can run anywhere from 2% to 3% of the entire loan amount. Within this scenario, there may or not be pre-payment penalties on the original loan to be dealt with. Often these fees can be upwards of at least six months of interest should the mortgage be terminated within a specific time-frame, generally in the initial three to five years. Including pre-payment fee clauses in the new mortgage can sometimes result in lower interest rates, and void certain non-recurring expenses at closing. When evaluating the pluses and minuses of the refinancing equation, these are important numbers to be aware of.
New Loan – New Appraisal
Utilizing any one of the on-line mortgage or refinancing calculators is a very smart strategy, and can aid significantly when the time comes to crunch the numbers, and to evaluate the offers from different lenders. Factoring in the up-dated interest rate along with the new-and-improved monthly payment targets are just the beginning. There are the multitude of other expenses all wrapped up the closing costs that must be scrutinized and negotiated as well. One of these will be the new appraisal on the home, since most are only valid for three months. To hedge their bets in case the new mortgage rate will not be approved, lenders will generally request that the borrower cover this expense up front, which can run as much as $250 or more.
Equivalent Closing Costs
On top of this, there will be the costs associated with credit verification, origination, and loan processing, along with the third-party charges such as title search and insurance, document preparation, recording, attorney fees, and so on. The entire spectrum of estimated closing costs should be spelled out in the Good-Faith Estimate provided by the lender of choice, some of which are negotiable. Lastly there will be the ‘points’ associated with the loan, which are assessed by the lender as a form of pre-paid interest. On a long-term mortgage, these points lower the overall interest rate paid on the loan by as much as a quarter to a half percent, and represent approximately 1% of the loan amount, which are also paid up-front prior to closing.
In most respects, while refinancing a mortgage is a very wise approach to managing the budget more effectively, or gaining access to cash through tapping into the home’s equity, it is still much like getting a loan for the first time. Most of the costs involved are assessed in the same manner, and cover just as many procedures required by the lender as in the original loan process. However, as the financing, interest rate, and credit climate changes, so do the benefits. With access to a wide variety of lenders across the internet, and many quite eager to take on new business, shopping around for the most favorable offers for refinancing that old mortgage into new cash opportunities can be a very lucrative venture for many homeowners.