Benefits and Costs of Refinancing your Mortgage
There are some good reasons why you want to refinance the mortgage on your new home. Perhaps you want to save more on your monthly expenditures and want a lower rate on your mortgage, or perhaps you want to pay off your mortgage quicker and want to change to shorter term, or maybe the you agreed to a bad mortgage loan and now you want to acquire better terms. Refinancing is the way to go if you have any of these issues in your existing mortgage. There are several benefits of refinancing your mortgage, however there are also some costs involved, which you should be aware of before making this decision. It all depends on your current situation, sometimes the cost of the process can outweigh the benefits of refinancing. We can guide you through the costs, advantages and all the other information you need to know while you consider refinancing.
What is Refinancing?
Refinancing is the process of attaining a new mortgage to pay off an existing mortgage. This new mortgage comes with a set of entirely new mortgage terms. Mortgage refinancing is a strategy that can help home owners meet their goals. When you refinance, your new lender covers your old mortgage replacing it with a new mortgage. Most people refinance to reduce their monthly payments, however some people do it to replace their 30-year mortgage to a 15-year mortgage terms so that they can pay off their debt more quickly. Refinancing is not like having a second mortgage, which gives you money from your home equity. Refinancing gives you an entirely new mortgage with more favorable terms for you.
Before considering a refinance, you must first make sure if it is worth your while. Once you have that figured out, you will have to look around for a lender that will offer you a better interest rate and monthly payments than your existing lender. You should further look for lenders that offer low closing costs and no pre-payment penalties. Then its all dependent on you, the better your credit score, the lower will be the interest rate you can get.
Costs involved:
When buying a home, you generally pay certain closing costs in order to complete the sale. When you go in for a refinance, you are basically replacing your existing original mortgage with a new mortgage, which means you have to pay these closing costs again. Firstly, you will have to pay an application fee. This fee covers your credit check, administrative costs and may also include the appraisal. This cost depends on your lender, where you can pay anywhere between $75 to $500 to apply for a refinance. This amount is not refunded even if the application is denied. On approval of the application, you will have to pay a loan origination fee. This fee is usually to cover the lender’s administrative costs and financing costs. The fee is usually one percent of your refinance loan amount. For example, if you refinance a $200,000 mortgage, you can look at an origination fee if $2,000. Additional fees that you might have to pay the lender would be an amount of around $200 to $400, which would be for reviewing your refinancing before closing.
Before you consider a refinance, you should find our whether you will be assessed a pre-payment penalty. Some lenders may charge you for paying off the mortgage earlier, even if you are refinancing. Few of the additional costs that you might have to pay would be title search fee, inspection fee, flood certifications, recording fees and attorney fees. These small costs can add up to a couple of hundred dollars.
Benefits of Refinancing:
The main reason why you would consider refinancing your mortgage is to get a lower interest rate. A lower rate means lower monthly payments, which in turn means that you will pay much lesser for your home. This means that you can increase your monthly savings and set money aside for your other small projects in life that matter. For instance, the monthly difference on a $250,000 mortgage loan with a 6% interest rate and a 4% interest rate is nearly $300 per month. A $300 mortgage decrease can help you save and give you the break you need.
Refinancing can be further beneficial if you want to clear off your existing debt much sooner than planned. This means you can own your home faster! The only downside is that you will have to make more payments each month which could pinch your wallet.
Taking out a fixed-rate loan also makes sense if you’ve got an adjustable rate mortgage or you want to consolidate a home equity line of credit (HELOC) into your primary mortgage. Adjustable rate loans can save you money in the short-term, but they can be dangerous if your payment suddenly shoots up due to a rate change. The same is true if you’ve got a HELOC that’s approaching the end of its interest-only repayment period. Once you have to start repaying the principal, you could see your payments increase substantially which can put a major strain on your wallet. Refinancing to a fixed-rate loan can help you avoid surprises in both situations.
Refinance or not?
When you need to decide whether or not you want to refinance, the best thing you can do is calculate to see if your costs are worth and you will be able to make savings happen soon. If closing costs are relatively higher, it might take longer for you to recoup the expense in terms of the savings you are making on a monthly basis. For example, if you pa $2,000 towards closing costs, and save around $200 on your mortgage, it may take you nearly 10 months to break even. If you don’t plan on moving to a different lender again soon, it may help you save big time on monthly interest costs making the closing fees and other transfer expenses irrelevant.
We at Oceanvale can help you through the entire refinance process, right from arranging the paperwork you need to finding lenders with lower rates. We are your first step towards mortgage savings! Reach out to us today and we can beat your current mortgage rate and help you save big money!