Always Refinance Your Mortgage When You Can
We live in a goldilocks scenario where not only have real estate prices and stock prices gone up since 2009, mortgage rates have continued to go down. Always refinance your mortgage when you can breakeven in under 1-2 years and plan to own your property for years to come.
My favorite way to refinance is through a no-cost refinance. The lender pays for all your fees so that as soon as your new mortgage closes, you’ll be saving money immediately. There’s technically no such thing as a no-cost refinance since the borrower ends up paying a higher mortgage rate. But if the new mortgage rate is lower than your previous mortgage rate, then you’ve got nothing to lose refinancing, except for your time.
Let look as some more information that I think will help every single mortgage refinancer and borrower around.
Will the savings be enough to make refinancing worthwhile?
You’ll spend an average of 2% to 5% of the loan amount in closing costs, so you need to figure out how long your monthly savings will go toward recouping those costs. For instance, it would take 30 months to break even on $3,000 in closing costs if your monthly payment drops by $100. If you sell during that 30 months, you’ll lose money in a refinance.
Think about whether your current home will fit your lifestyle in the future. You’d be surprised, but a lot of people don’t. If you’re close to starting a family or having an empty nest, and you refinance now, there’s a chance you won’t stay in your home long enough to break even on the costs.
Homeowners who are deep into repaying their mortgages should also think carefully before jumping into a refinance. If you’re already 10 or more years into your loan, refinancing to a new 30-year or even 20-year loan — even if it lowers your rate considerably — tacks on interest costs. That’s because interest payments are front-loaded; the longer you’ve been paying your mortgage, the more of each payment goes toward the principal instead of interest.
How much would I save on my monthly payment?
To calculate your potential savings, you’ll need to add up your costs of refinancing, such as an appraisal, a credit check, origination fees and closing costs. Also, check whether you face a penalty for paying off your current loan early. Then, when you find out what interest rate you could qualify for on a new loan, you’ll be able to calculate your new monthly payment and see how much, if anything, you’ll save each month.
You’ll also want to consider whether you have at least 20% equity in your home — the difference between its market value and what you owe. Check the property values in your neighborhood to determine how much your home might appraise for now. Don’t rely on online home value estimates alone — they’re often way off — but online sites can point out recent sale prices for similar homes near you. A local real estate agent can give you an idea of what your home’s worth, too.
Your equity amount is important because lenders usually require mortgage insurance if you have less than 20% equity. It protects their financial interests in the event you default. Mortgage insurance is not cheap and is built into your monthly payment, so be sure you wrap it into your calculations about potential savings.
Once you add up all the costs of a refinanced loan, you can compare your “all-in” monthly payment with what you currently pay.