Mortgage Refinancing: The Overlooked Mistakes You Want to Avoid!

Mortgage Refinancing-The Overlooked Mistakes You Want to Avoid- 150x150Mortgage refinancing can be a true life saver when done correctly and at the right time. Making your monthly mortgage payment smaller will free up cash that can be used for other monthly expenses or be put in savings. But before you are lured by the smaller mortgage payments and interest rates, you must be sure that you understand how refinancing works. Understanding this process is the only way in which you can make sure that you avoid making mistakes that will cost you time and money.

Refinancing is expensive and it comes with considerable risk, especially for those who are first time home owners and for those that are refinancing for the first time. The most important thing when refinancing is finding out if the new loan is truly saving you money. Taking refinancing costs into consideration is very important when comparing your current loan to the new loan. Another important thing to consider is how long you plan on living in your home. In order to cover the cost of refinancing, you will have to live in your home for two or more years.

Making a mistake when refinancing is very easy and you will end up regretting making the decision to refinance. But do everything by the book and refinancing will prove to be exactly what you needed to make your life easier. Here is a list of the mistakes that you want to avoid making when refinancing.

Mistake #1: Refinancing Multiple Times

In rare cases, refinancing multiple times makes sense, especially if it is done over the course of a few years. But most of the time, if done very often, refinancing multiple times will result in losing money instead of saving it. Low interest rates are attractive for everyone, and most home owners will give refinancing a thought when interest rates are near record lows. Home owners who have recently refinanced might get the idea that they will save even more money if they refinance again, because the rates are so low.

Unfortunately, refinancing is expensive, costing up to 6 percent of the loan amount. Saving enough in interest for the closing costs to be covered is unlikely if you recently did another refinance. This means that your loan balance will increase, negating the savings that refinancing should bring, making you lose money. It is recommended that you don’t refinance before recuperating the closing costs from your last refinance.

Mistake #2: Not Shopping Around for a Lender

Lenders are always competing with each other, so shopping around for a refinance is a smart thing to do. Even if the first loan that you are offered has a low interest rate, good terms, and seems like exactly what you’re looking for, you still have the option of contacting other lenders. By comparing mortgage lenders and what they are offering, you could save thousands of dollars.

If you have a good relationship with your current mortgage lender, he might offer you a good deal on refinancing. Even if that is the case, it doesn’t hurt to take a look at what other lenders are offering.

Mistake #3: Ignoring Some of the Costs of Refinancing

If you are planning on refinancing your mortgage, you need to find out if the savings outweigh the cost of refinancing. Refinancing closing costs involve several fees, some high and some low. Not taking into consideration some of these fees, like the origination fee, which can be a few thousand dollars, can make refinancing more appealing, but there is no way of avoiding this fee. You might think that you are saving money by refinancing when in fact the closing costs will be much higher than the savings you are making by taking out a loan with a lower interest rate.

Mistake #4: Not Locking In Your Interest Rate

Not locking in your interest rate is like gambling. You hope that the interest rates will go lower before closing, and you end up with a more advantageous rate, but you are aware that there’s a risk that the interest rate will increase, making your payments higher than you anticipated.

Not locking in your interest rate is especially dangerous with refinancing, because you have to make sure that refinancing will actually help you save money. If you come to the conclusion that you are, indeed, saving money with the interest rate that your lender is offering, but don’t lock in and the interest rate increases, the whole refinance could become just a waste of time and money (Read: Mortgage Refinancing Guidelines).

Mistake #5: Extending Your Mortgage Loan’s Term

When refinancing, you are basically resetting the term on your mortgage loan. Your monthly payments will be lower, but you will be paying more in interest, especially because most of the payments go towards the interest when taking out a new mortgage loan.

Extending your mortgage loan’s term would be a mistake, and you should aim towards taking out a loan with a term close to what has remained on your current mortgage, or even shorter.

Taking precautions before refinancing will help you find out if refinancing is the right step for you, and make sure that the whole process goes smoothly. Your goal is to save money on your mortgage, so avoiding these mistakes should be your top priority when refinancing your mortgage.

Here’s What You Can Do When Turned Down for Refinancing

Here's What You Can Do When Turned Down for Refinancing- 150x150Refinancing is a great way of saving money on your mortgage when interest rates are low. Refinancing has strict guidelines, and making your mortgage payments on time may not be enough to convince your lender to allow you to refinance. Mortgage refinancing requires a home appraisal, a significant number of documents that show your income and assets, and a good credit score. Not meeting one of the lender’s requirements may result in a denial. Fortunately, being turned down for refinancing is not the end of the world and you should know that you still have options. Here are a few reasons why you may be denied and what you can do to make refinancing possible.

Little or No Equity in Your Home

The number one reason why home owners are being refused when trying to refinance is the lack of home equity. Your problems don’t even have to go as far as being underwater on your mortgage, or owing a larger amount than your home is worth. Simply having low or no equity in your home can trigger a denial from your lender, because they prefer a borrower who has a nice amount of cash tied up in his or her home. The simplest way out of this situation is to come up with more cash, but, if you take into account the high refinancing closing costs, you might realize that a few extra thousands will be hard to find.

An alternative would be the Home Affordable Refinance Program (HARP), designed by the government to help home owners with little or no equity in their homes. Recently, this program has undergone some changes, which should help you get approved easier than before. The program is designed for home owners who have less than 20 percent equity in their homes, but some lenders might use their own guidelines when deciding if you qualify for HARP.

Another alternative would be refinancing into a Federal Housing Administration (FHA) mortgage. FHA mortgages require a low down payment and equity, but you may be required to pay additional insurance on this type of government insured mortgage loan.

Low Credit Score

Your credit score has a large impact on not only your interest rates and the loan value, but also on whether you will be allowed to refinance or not. If your credit score is bad, your only chance of refinancing is by improving it. It might take a year or two, but if your credit score wasn’t affected by anything major, you should get it into a more favorable range with little effort. Paying your bills on time is the first and most important step when trying to increase your credit score. If, however, you have a large blemish on your credit report, such as a bankruptcy, then increasing your credit score will prove to be more difficult and can take up to 10 years.

Low Income

Lenders usually require your debt to not exceed 43 percent of your monthly income, while monthly mortgage payments, property taxes and insurance are limited to 30 percent. Reducing your debt can help tremendously when trying to look better in the eyes of a lender. You could quickly pay off some or all of your debt if you have access to savings or other investments. Some of these solutions might not be the best, and it all depends on your situation, and how much you want or need to refinance.

Of course, the simplest thing you can do when being turned down for refinancing is talking to another lender. Lenders are in competition and sometimes have significantly different offers for their customers, so shopping around is always a great idea, even if you are approved by one lender. You might find a more attractive offer with a lower interest rate or closing costs somewhere else. Don’t be discouraged if your refinancing is declined because there are ways in which you can drastically improve your chances in a very short amount of time.

Refinancing Your Home: The Complete Process

Refinancing Your Home-The Complete Process- 150x150Refinancing your home at the right time can bring you great financial benefits, but the process can be a little intimidating for those who are refinancing for the first time, and even for those who have done it before in the past. Changing your mortgage loan to a different loan with different terms can get a bit confusing, and you might be afraid not to make any mistakes and end up doing the exact opposite of saving money.

There are consultants who can guide you through the refinancing process, and it’s not a bad idea to use them, but it’s important that you understand how refinancing works, from deciding to refinance to actually taking out the new mortgage loan. Understanding the refinancing process will help you avoid making simple, but expensive, mistakes, which can end up ruining your plans.

Deciding to Refinance

Home owners generally refinance when the interest rates are lower than they were when they took out their mortgage loan, but interest rates should not be the only deciding factors when you consider refinancing. First of all, the advertised interest rates are usually reserved for those who meet some very strict requirements, like having a perfect credit score. Anything less than a perfect credit score and you will find that the interest rate that you’ll be required to pay on your new loan is not that attractive anymore. Secondly, you should not be blinded by the low interest rates that lenders are willing to give you. The closing costs of refinancing can be very high, and might make the overall value of your new mortgage loan even greater than the value of your current loan.

Getting Prepared to Refinance

If you have decided that refinancing is the right step for you, and you will be saving money by doing it, then it is time to get prepared. Like most mortgage loans, refinancing will require a good credit score and a significant number of documents. Before talking to a lender, you should check your credit score, and make sure it’s in good shape, without any inaccuracies. You are entitled to one free credit report check per year, and you should report any erroneous information to the credit bureau. Also, having some of the paperwork ready before applying for a refinance will save you a lot of running around, and it will make the whole process go faster and smoother.

Choosing the Right Refinance Loan

There’s no perfect mortgage loan that will benefit everyone. Depending on your financial situation and many other factors, you should closely look at all loans that will be made available to you and decide once you find one that meets all your requirements. For example, you may want a lower monthly payment, in which case you should look at 30-year fixed-rate loans. Alternatively, you may want to pay off your mortgage sooner, in which case you should look at 15-year mortgages.

Applying for the New Mortgage Loan

Like we’ve mentioned earlier, preparing certain documents, such as personal tax returns, bank statements, pay stubs, and others, will make the refinance application process go by very quickly and, in some cases, you can even apply over the phone. The quicker you submit the required information, the faster will your new mortgage loan be approved.

Appraisal and Approval

After submitting your application, you will normally have to get your home appraised by a home appraiser. These appraisals usually cost a few hundred dollars and are paid by the borrower. The home appraisal is required in order for the lender to find out how much your home is worth and if you have enough equity in your home to support the new mortgage loan. All your paperwork, including the appraisal, will then be reviewed by the lender. If the lender comes to the conclusion that you are able to repay the new loan, your refinancing loan will be approved.

Locking in the Interest Rate

Once your new mortgage loan is approved, you will have the choice of locking in the interest rate or letting it float until closing. By locking in your interest rate, you are protected from an increase in interest rates before you close on the loan. If you don’t lock the interest rate, there is a chance that the rate on your new loan might increase, but there’s also a chance that it might decrease by closing time.

Signing the Loan Documents and Closing

At closing, you will be required to sign all of the loan documents. You should carefully review each document before signing, making sure they contain everything that was agreed upon. When closing, you will also be required to pay various closing fees, which can be pretty costly. However, some of these closing costs can be reduced at your request, or even waived, if you have a good relationship with your lender.

Refinancing is a pretty straight-forward process once you understand it, but you should still pay attention to the details. Refinancing can turn into a costly nightmare if you don’t carefully take all of the aspects into consideration. Doing your homework before refinancing will ensure that the whole process goes by smoothly and making your mortgage payments will be much easier.

Addicted to Refinancing Your Home Multiple Times? You’re Not Alone

Addicted to Refinancing Your Home Multiple Times- You're Not Alone- 150x150A few years ago, when the housing market was booming, many home owners started to take advantage of the lower interest rates by refinancing their mortgages. For many borrowers refinancing is a great opportunity to save money on their mortgage, but there are other factors besides the interest rates that should be considered when determining if refinancing is a good choice.

Refinancing a mortgage multiple times has become a trend among borrowers, with more than 2.2 million refinances recorded since 2009. Because interest rates are still near record lows, there really aren’t any reasons for home owners to stop refinancing. Normally, refinancing a mortgage is an expensive process, so the high cost doesn’t always financial sense for home owners to go through with it, even if the interest rate on the new loan is significantly lower.

But lenders are coming up with ways of attracting refinances by lowering the closing costs or waiving certain fees, making refinancing much more accessible. Closing costs are not the only factor of what home owners should consider before refinancing. Many mortgage loans also include a prepayment clause, which force the borrower to pay a steep penalty if they wish to pay off their mortgage earlier. Some lenders are even willing to waive the prepayment penalty. Don’t be fooled, though. Lenders usually recover the waived and lowered fees by charging a higher interest rate.

Should You Refinance Multiple Times?

Through history, as interest rates went down, the number of home owners who refinanced went up. Right now, with interest rates on the rise, but still near record lows, and the job market recovering, people are in a rush to refinance their mortgages. Refinancing more than once makes sense, but only if you do your homework, and come to the conclusion that it will actually save you money. Many borrowers refinance thinking that a lower interest rate will save them money, while the cost of refinancing may actually cause them to end up with a more expensive loan, which will result in losing money.

Refinancing and getting a lower interest rate will not only reduce your monthly mortgage payment, but will also reduce the principal on your mortgage. Having a lower mortgage payment will free up money that can be used to make other purchases or even pay off other debt, which will increase your credit score, making future loans more accessible.

The downside to mortgage refinancing is that, with each refinance, you are basically resetting your mortgage term to a longer term, such as a 30-year term. This means it will take you a longer time to pay off your debt. Refinancing also requires a lot of running around, gathering several documents and more scrutiny on your credit score. The biggest downside of all is that refinancing is normally an expensive process, which can actually cause you to lose money.

Refinancing isn’t really a viable option for borrowers with low credit scores. Even if the lender is willing to waive some of the closing fees, applying for refinancing with a low credit score will either get you rejected, or you may find that there is no way to receive a loan with a lower interest rate.

Refinancing multiple times pays off for many home owners, especially if they manage to secure a lower interest rate and the lender is willing to waive some of the closing costs. When trying to determine if refinancing again is a good idea, make sure that you take all of the costs into consideration, or you might end up paying more than on your previous mortgage loan. Saving money by refinancing is more than just getting a lower interest rate from your lender. If you do the research and come to the conclusion that refinancing again is worth it, then doing it multiple times is a wise choice.

How is Your Mortgage Affecting Your Net Worth?

How is Your Mortgage Affecting Your Net Worth- 150x150Buying a home and becoming home owners is a dream come true for many people and families. But most of the time, making such an expensive process involves borrowing money. A mortgage loan is very beneficial, and will help you become the owner of a home, but it will also affect your net worth, especially if you are refinancing. Refinancing a mortgage is a good way of lowering your monthly mortgage payment, but before you consider refinancing, you should take a close look at what you are getting into and ask yourself if this is only a temporary solution or one that will actually save you money.

How to Determine if Mortgage Refinancing is Worth It

The most widely used method of determining if mortgage refinancing is a good choice for you is by calculating a payback period. This is done by finding out in which month the sum of the monthly savings made by refinancing will be larger than the overall cost of refinancing. If reaching that sum takes less time than the amount of time that you will be living in the home, then you can conclude that refinancing is a wise choice.

Another way in which you can determine if refinancing your mortgage makes sense is to compare the amortization schedule of the original mortgage loan against the amortization schedule of the new loan, while including the refinancing costs into the equation. Then, subtract the difference between the two monthly payments from the new loan’s principal. Find the month in which the principal of the new loan will be less than the principal of the original loan. That’s when the economical payback period will be reached.

Will Refinancing Lower Your Net Worth?

Home owners refinance in order to reduce their monthly mortgage payment and free up money for other purchases or investments. While refinancing offers great benefits, its long-term effect is that it will have an influence on your net worth. Mortgages are considered good debt, but the balance sheet doesn’t differentiate between good or bad debt. Refinancing could make repaying your debt take longer and take thousands of dollars from your net worth over time.

Refinancing without lowering your net worth can be done by keeping the amortization the same and continuing to make the same or even larger monthly payments.

Home refinancing is an expensive process that, if you are not being careful, will lower your net worth. Before refinancing, try to compare the cost of refinancing against your savings. That is the only way of finding what kind of an effect will refinancing have on your net worth.

Quick Tips on Mortgage Refinancing

Quick Tips on Mortgage Refinancing- 150x150Refinancing can be a great way of reducing your interest rates and monthly mortgage payments. With refinance rates on the rise but still near record lows, now may still be the most opportune time to refinance, as rates are predicted to continue to increase in the future. Unless you’re a few years from paying off your mortgage, by refinancing you can lower your monthly payments and free up cash that can be invested or used to remodel and repair your home.

Refinancing also has its negative sides, like being a fairly expensive process, but it is up to you to take a close look at your financial situation and decide if refinancing is worth the cost, and if it will, indeed, save you money over time. Here are a few quick tips for those who are considering refinancing their mortgage:

Quick Tips

  • Check your credit score. Before applying for refinancing, make sure that your credit score is in great shape. Refinancing takes a lot of work and time, and all this would be wasted if you get rejected because your credit score is not good enough.
  • Don’t rely on the advertised interest rates. Lenders will usually advertise their best interest rates in order to attract more customers. The truth is that the rate that you will get will probably not be the one that you have seen advertised. Your interest rate will depend on many factors, such as the size of the mortgage loan, mortgage points, if the rate is locked in and many others.
  • Know what you want. Carefully weigh in on all of your options before contacting a lender to refinance your mortgage loan. Knowing what type of a loan you want, like a 15-year or 30-year mortgage, can make it easier for the loan officer to find a better rate for you. Also, it’s recommended that you know how much you are willing to spend on points in order to get a lower interest rate.
  • Contact your current lender first. If you are a good borrower, pay your mortgage on time and have good credit, chances are that your lender will do anything in his power to keep you as a customer. Your lender may even offer to waive some of the refinancing costs, like appraisal and inspection fees.
  • Shop around for a refinance. Closing costs and interest rates vary from one lender to another, so it doesn’t hurt to shop around a little. You might actually be pleasantly surprised and find a lender that will give you a much better rate than the others or waive some of the closing fees, making refinancing cheaper than you thought it would be.
  • Try to avoid “no cost” refinancing. “No cost” doesn’t actually mean free. The closing costs are bundled into the mortgage, which means that you’ll be paying interest rate on that amount, making the closing costs more expensive than they would have been if you paid them beforehand.
  • Save money by avoiding tax and insurance escrow services. Having a little discipline and paying your property taxes and insurance on time will save you money over using an escrow service that charges for something that you can easily do yourself.
  • Make sure you don’t have a prepayment penalty on your mortgage. Chances are you will find refinancing options that save you money, but it may all be for nothing if you haven’t been paying attention to your current mortgage contract. A prepayment penalty can make refinancing turn from a money saver to something that will end up costing you more than your original mortgage.

Whether refinancing is a good idea or not is up to you, as it largely depends on many factors. Refinancing can be a good choice for some, helping them save some money on their mortgage. Between the closing costs and all of the requirements, refinancing can turn out to be a bad choice for others, which can result in wasted time and money. At the end of the day, it is up to you to evaluate your situation and budget, and decide if mortgage refinancing is your best choice.

How These Alternatives Can Help You Avoid Foreclosure

How These Alternatives Can Help You Avoid Foreclosure- 150x150Going into foreclosure can happen for various reasons, such as money problems, divorce, or job loss, and it is never a pleasant experience. However, there are several alternatives that can help you avoid foreclosure, and they are generally considered a better substitute to losing your home.

What is Foreclosure?

Foreclosure happens when a borrower cannot make monthly payments on his or her mortgage loan anymore. This leads to the property being taken by the bank and sold.

Foreclosure involves several stages: after 3 to 6 months of missed mortgage payments, the lender notifies the borrower that he or she is facing foreclosure. This is done through a Notice of Default. A reinstatement period begins, in which the borrower has a chance to correct the default. If the borrower can’t correct the default, he or she will receive a Notice of Sale and the property is listed in a public auction. The winner of the auction will gain possession of the borrower’s property.

Alternatives to Foreclosure

Before you give up and accept that you are going to lose your home, you should know that there are alternatives to foreclosure. In order to determine what your best alternative is, you must discuss this with your lender. By contacting your lender as early as possible, you will have access to more options. Here are some of the alternatives to foreclosure that you could take advantage of:

  • Bankruptcy. Bankruptcy offers individuals the chance of a fresh start by forgiving debts that they are unable to pay, while giving lenders the chance to recover some of their losses through the debtor’s assets. Bankruptcy can become a very expensive process, and it’s recommended that you consult a professional before choosing this option.
  • Reinstatement. If you are able to repay the missed monthly payments, you could make your mortgage loan current, which will help you avoid foreclosure. This alternative is valuable if you use it early on, because you won’t have that many missed payments. Reinstatement can be very helpful if you are recovering from a short-term money problem, and can show the lender that you can repay what you owe and start making monthly payments on time. Be aware that you will most likely have to pay late charges and penalties.
  • Refinancing. Refinancing may be able to reduce your monthly payments by securing a lower interest rate than your current mortgage rate. You are required to be current on your monthly payments and have a fairly acceptable credit score in order to qualify for refinancing. You may also be able to qualify for refinancing through the Home Affordable Refinance Program (HARP).
  • Forbearance. When facing money problems, your lender is able to grant you a “forbearance,” meaning that your monthly payments will be put on hold for up to 6 months, giving you time to get back on your feet. In many cases, forbearance is combined with reinstatement, in order for you to pay the missed monthly payments on your loan, once your financial situation has improved. Forbearance may be extended for another 6 months in case you are unemployed.
  • Repayment plan. If you are a few months behind on your mortgage payments, you may also qualify for a repayment plan. The missed payments and late fees are combined with your regular monthly payments. However, you must be able to prove to your lender that you can afford to pay the past due amounts, and start making monthly payments on time.
  • Short sale. When selling your home through a short sale, the property is put up for sale, and sold for a price that is less than what you owe to your lender. After the sale is completed, you will have to negotiate with your lender to accept the sale price as payment in full. This option will still damage your credit, but, if you are successful in convincing the lender to accept it, you won’t owe anything anymore, unlike foreclosure.
  • Renting. While this option has nothing to do with your lender, you will need to rent the property for an amount that will cover your monthly mortgage loan payment.

Almost all of these options will affect your credit negatively, and are not ideal, but they are better alternatives than losing your home. But this doesn’t mean that you should just go ahead and pick one blindly, without knowing what it involves. Having knowledge about all of the alternatives that are available, how they work, and how they will impact you, is very important and should be thoroughly researched.

When is the Right Time to Refinance?

When is the Right Time to Refinance- 150x150For most homeowners faced with the constant ups and downs of the housing and credit markets, knowing exactly when to consider refinancing existing mortgages can seem much like a roll of the dice. Crunching a few numbers into online mortgage calculators is a good way to get a sense of where things stand on a preliminary basis, but examination of the long-term effects need to be evaluated. Factoring each of the motivations behind the decision involves weighing both sides of the equation – the potential savings and the realistic expenses – to determine the feasibility of the refinancing plan.

Closing Costs Vs. Monthly Savings

Common sense dictates current interest rates are the primary factor behind most refinancing decisions. Usually, when the prevailing rate drops by at least one percent, most mortgage advice will steer homeowners towards refinancing as it is worth the effort. The bottom line is best evaluated in regards to what effect the refinancing formula has on the monthly payment when compared to the associated mortgage closing costs. By performing a simple comparison, and using an average closing cost of around $3,000 for a typical home loan, assume the monthly repayment figure to be in the neighborhood of $1,800. Refinancing may reduce this number by approximately $200 each month, which appears to be acceptable, especially when applied to budget savings.

Up-Front Cost Vs. Long-Term Gain

However, the real benefit can only be factored in by determining the length of time the homeowner plans on staying in the residence. If the refinancing option has any value, it is advisable to take the numbers one step further. Use the $3,000 closing cost, and divide it by the projected monthly mortgage savings estimate of $200. The answer yields a 15 month duration before the effect of refinancing produces a positive influence on the result. If the homeowner relocates before the 15 months is up, there is no monetary benefit to the refinancing decision. Only if the homeowner stays in the residence beyond this ‘cut-off’ date will refinancing options begin to make any economic sense.

Things to Remember Before Refinancing a Mortgage

Things to Remember Before Refinancing a Mortgage- 150x150The option of refinancing a home mortgage requires serious analysis. It is a financial mechanism that allows a homeowner to pay off their existing or original home loan by renegotiating a new mortgage with better terms, ultimately providing budget-saving benefits. It can potentially allow a homeowner to save significant amounts of money in interest payments over the long-haul, or it can boost the equity time-table as well. The refinancing option can also be less than favorable if it is not approached with a good plan and sound motivations for doing so before signing the bottom line.

Evaluate All Costs

While most lenders would be happy to discuss refinancing, there are costs involved that might not be presented as clearly as they should be in the initial discussions. It is advisable to request a complete list of all costs and fees, especially hidden ‘third party’ or ‘padded’ fees for services. In addition, there may be prepayment penalties on the original mortgage that can be quite steep, but must be factored in. These costs could negate the refinancing benefits.

Switching Loan Types

The primary motivation for refinancing is usually the interest rates applied to the original loan. If the original loan was an adjustable rate loan type (ARM), the best advice is to switch to a fixed rate mortgage to stabilize the monthly payment. At the very least, the previous ARM interest rate was set higher than the current mortgage rates, so renegotiating for a lower rate with either loan type is usually advantageous.

Seek Multiple Loan Offers

The best advice is to shop around for the best available offers, either from local lending sources or those found online. Refinancing can be expensive if it is not researched adequately. However, there are often many fees in the lending and closing process that can be negotiable and the competition for business in the current market is in the borrower’s favor. While the lenders are out to make a profit, the goal in mortgage refinancing is to make owning a home more cost-effective for the homeowner.

Refinancing Loan Types and Closing Costs

Refinancing Loan Types and Closing Costs- 150x150With the economy having a favorable effect on interest rates, many homeowners are considering the viability of refinancing existing mortgages to take full advantage of this downward trend. Depending on which type of mortgage program the original loan was (fixed-rate loan, adjustable-rate, interest-only, or hybrid ARM), refinancing is proving to be a favorable option. Careful consideration needs to be applied to the feasibility of refinancing because each has an array of advantages and disadvantages. Whether the focus is on extending the loan term, cutting down on monthly payment amounts, or accessing the equity, there are both short-term and long-term benefits and consequences to be evaluated.

 

Lengthening the Term and Lowering Payments

Lowering the interest rate can be the primary focus, but it is not the only factor. It is important the borrower understands the complete package and ramifications of refinancing. This includes understanding that to extend a loan term means more overall interest is paid out in the long run and that the loan type chosen can decrease or increase monthly payments. There are other ‘hidden’ costs involved with refinancing as well, such as a reevaluation of tax liability, along with the property insurance coverage, and whether or not the new loan will require private mortgage insurance. Make use of online mortgage calculators to establish which refinancing scenario works best for your budget.

Factoring in Closing Costs

Another consideration are the refinancing closing costs. If a borrower is fortunate enough to refinance their old loan with the original lender by simply renegotiating loan terms, then the majority of closing costs may not be a factor. If that will not be the case, then the closing costs will become a major part of the equation. Typical closing costs can run from 3% to 5% of the loan value, which can be anywhere from $3,000 to $11,000 on a $200,000 loan, depending on how many points the lender chooses to apply to the loan package.