Refinance a home

Here are some reasons for refinancing a home

Save on Interest Charges

This is the most common reason for refinancing a home loan because the rate you pay on the loan will have the greatest impact on the amount of money you pay for the home over time.

If you plan to be in the mortgage for more than five years, then it makes sense to pay close attention to the interest rates for the opportunity to profit from a refinance.

It comes down to a cost/benefit analysis. If you compare the costs of a refinance (roughly 2% of the loan amount) to the annual interest savings (don't use monthly payment, but get someone to help you calculate the actual interest savings) you'll be able to determine if it makes sense.

For example, If rates are available that are 1% lower than your current rate, you can expect to get your investment back in about two years. If you plan to stay in the home/mortgage for four years, you'll double your money.

The formula is "Closing Costs / Annual Interest Savings (don't use monthly payment!)  = Years to Breakeven" If your expected stay exceeds this number, then you may want to consider a refinance.

Reduce Monthly Payment

Refinancing your home to cut a few hundred dollars from your monthly expenses might seem like a good idea, but you'll want to talk to an expert before signing the paperwork!

Depending on the term of your mortgage and how long you've been paying on it, you could be exchanging a large increase in interest expense for cash flow relief that you could find somewhere else in your budget. Be very careful to avoid accepting a higher interest rate on a refinance for any reason.

 

Convert ARM to Fixed

With interest rates on the rise, ARM holders who plan to remain in their homes for more than 3 years are at risk of a large increase in interest cost.

If you're one of those people whose ARM is getting ready to adjust (or is already adjusting annually) you'll probably struggle with the idea of paying closing costs to lock in a rate that is the same or higher than your current ARM rate. Rightly so, because it doesn't make sense to pay for something that you don't need!

However, if you plan to be in the home long term, it's a no-brainer to lock in a fixed rate as soon as possible. If you plan to be in the home for less than two years, then you're probably better off riding out your ARM, but you need to stay in touch with your loan officer as the market and your situation changes.

Cash Out

Your home equity is a valuable asset that can be accessed through a refinance or a second mortgage. The decision to take out some equity should be evaluated against your other options, and unless you're really good at math and investments, it is wise to get some reliable help.

Cash Out Refinance - The decision to take equity out by refinancing your existing mortgage only has appeal if the interest rate on the new mortgage makes sense. Avoid using monthly payment as a means to decide, and don't let a loan officer sell you any of their own ideas without carefully examining the whole picture. Unless there are no other options for you, it usually isn't wise to refinance for cash out purposes if the interest rate on the new loan will be higher than the current one.

Home Equity Line of Credit - Many people feel that having two mortgages is a negative thing. And as a result, many people make the mistake of using a cash out refinance to access their equity. There are many good reasons to use a Home Equity Line of Credit (HELOC) and you should consider this option first. Here are a few:

  1. It is a revolving line that allows you to pay down/charge up at will. This flexibility encourages using it as a "high interest savings account".
  2. The closing costs are very low.
  3. Allow for interest-only payments (this isn't a negative, you can pay as much as you like)
  4. Easy to qualify for

The big negative is that they are adjustable rate loans - however many banks offer a "Fix It" option where you can convert it to a fixed rate at any time.

Fixed Rate Second Mortgage - If the HELOC makes you nervous, you can get a fixed rate second mortgage with relatively low closing costs.

Remove PMI

If you have Private Mortgage Insurance (PMI) on your current loan, you'll want to get it removed as soon as possible. There are three methods for doing this:

1. Refinance - If your property value has increased enough you may be able to get a new mortgage without PMI. You'll want to evaluate whether it makes sense at current interest rates and closing costs.

2. Lender Request -If the property has appreciated, and/or you wish to make a pre-payment to the principal, you can request the lender to order an appraisal and remove the PMI.

3. Automatic Removal - Once you've paid the loan down to 78% of the homes original value (at the time the mortgage was obtained), then the lender will automatically remove the mortgage insurance.

Add/Remove Borrower

Unless powered by a court order such as a divorce decree, most lenders will not voluntarily remove borrowers from the security deed. Refinancing is often necessary to accomplish this.

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What does it cost?

The costs of a refinance are very similar to the costs of a purchase loan transaction. Here is a list of what you can expect to pay:

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