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When is the Right Time to Refinance?Interest rates are at historic low’s and there is no doubt there is some confusion as to when it is a good time to refinance. There are many things to consider if you’re thinking about refinancing your home and this article should be able to get you on the right track and educate you enough to so you can make the right decision. The deciding factor for you should be, does it make sense? Is there a tangible net benefit in refinancing? This article should educate you enough that you make the right decision that could result in you saving thousands of dollars! Interest Rates
The interest rate is a very important part in making the right decision but it’s not the only thing to consider. As a rule of thumb, the new interest rate should be decreased by at least 1% in order for the refinance to make sense. This, however, will vary depending on loan type and loan amount. For example; if your loan amount is $250,000, a .5% decrease in your interest rate may result in enough of a monthly savings for it to make sense to go forward with the transaction. Rather, a loan amount of $100,000 would need a larger reduction in interest rate to see any substantial saving benefit. How do I determine if it’s worth it to refinance?
This is a great question and it’s one that should be asked anytime you decide to re-calculate your mortgage. The best way to determine this is to look at how much you’re paying right now on your principal and interest. Then look at the proposed payment from your mortgage company and determine the monthly savings. Next add up the investment to do the transaction, figure out how many payments you will skip by refinancing, and finally add the savings over the course of 1-2 years. If that number is a significant positive number it will make sense to refinance. If the number is negative, the refinance costs more than the savings per month and should be carefully considered. An example of this is the following:
Current Monthly Payment
Current PITI: $2,158 *6.5%*
Proposed Monthly Payment
Principal & Interest: $1,810.08 *5.5%*
Estimated Taxes: $150.00
Estimated Insurance: $66.00
Total PITI: $2,026.08
Monthly Savings: $131.92
Estimated Closing Costs ($3,405.96) Financed
No Payment for 2 months $4,316
Monthly Savings x 12mo $1,583.04
Total savings after only 1 year: $2,493.08
In this example, after only one year, the client is ahead almost $2,500. That is a huge savings and most definitely makes sense for them to proceed with the transaction. Just think how much they can save or invest in other places over the course of 5-10 years!
Financing closing costs versus no closing costs
Many companies out there would like you to believe that there are true no closing cost loans when in fact that just doesn't exist. Throughout the loan process, there are costs that get incurred that have to be paid such as credit report, appraisal, title fees, doc prep fees, processing fees, etc. There are basically only two ways these get paid. #1: the closing costs will be financed in your loan amount so you wont have to come out of pocket at closing with any money, or, #2: the interest rate is increased to cover all the costs associate with the transaction. To determine the best way to pay for this, you must first determine how long you plan on keeping the new loan or keeping the property. For example, if you plan on keeping the loan for a minimum of 5 years, it would not make sense to pay a higher rate because over the course of time you will pay more than just financing the costs into the loan amount. However, if you plan is short term, less than 5 years, paying a higher interest rate may make more sense and save more money. A good mortgage consultant will give you all your options and help guide you to the right decision. Different Types of Refinances
There are many types of refinances available to you. Below is a list of them and a brief description of the purpose of each one: Cash Out Refinance: this allows you to access your homes equity and pull cash out to pay for things such as home improvements & debt consolidation. Rate & Term Refinance: this allows you to simply re-calculate your mortgage at a lower interest rate resulting in lower monthly payments and monthly savings.Streamline Refinance: this allows anyone with a FHA loan to simply reduce their interest rate and monthly payments without the hassle of re-verifying income, assets, full credit disclosure, and an appraisal. IRRL (VA rate reduction): this allows anyone with a VA loan to simply reduce their interest rate and monthly payments without the hassle of re-verifying income, assets, full credit disclosure, and an appraisal. Please consult your Limetree Lending Group Mortgage Consultant to determine the best options for your individual situation. The information contained is this document is for educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors. Limetree Lending Group is a team of licensed mortgage consultants representing Clarion Mortgage Capital. 303.325.3578 » Back to articles |
