Posted on November 9th, 2020
A lot of homeowners are looking to refinance their mortgages at the moment. That’s abundantly clear based on the record volume of refis expected this year, per the MBA.
And while mortgage rates are in record low territory, thus making the decision to refinance an easy one for most, it still pays to shop around.
I think we all have a tendency to care less about prices when something is on sale, but there’s no reason you shouldn’t strive for even better, regardless of how cheap something is.
Look Beyond Your Current Mortgage Lender
- New technology is making it easier for lenders to improve borrower retention rates
- This means using the same lender for life even if their interest rates aren’t the lowest
- But like most things loyalty often doesn’t pay when it comes to a home loan
- So take the time to shop around and negotiate like you would anything else
Thanks to emerging technology, it has become easier for mortgage lenders, mortgage brokers, and loan officers to improve their customer retention.
This means if and when a past customer looks to refinance their home loan or purchase a new home, they might be notified if they pay for such services.
There are companies that can keep an eye on your data over time to see if you’ve applied for a home loan elsewhere, if your home equity has increased, or if your debt load has gone up.
The same goes for your credit score, which if it’s improved enough, may prompt a call or email from a lender or broker you worked with in the past.
While this in and of itself isn’t necessarily a bad thing (sure, data collection is getting a little aggressive), it’s how you react to the sales pitch if and when it comes your way.
Ultimately, if you receive an inbound call or email regarding a mortgage refinance, HELOC inquiry, or even a referral from a friend or family member, don’t stop there.
They are just one of the many individuals/companies you should contact and consider before finalizing your home loan decision.
What If You Receive a Mortgage Mailer?
- Consider an inbound solicitation a starting point if you’re considering a refinance
- Don’t simply call the individual/company back and call it a day because they can offer a low rate
- There are hundreds of mortgage companies out there and competition is fierce
- Your mortgage will be paid for decades so every little bit matters if you care about saving money
I get mortgage solicitations all the time – and they’re often from a broker, lender, or loan servicer I worked with in the past.
They’re certainly appealing, don’t me wrong. Who doesn’t want to save potentially hundreds a month for simply redoing their home loan, especially if it’s from a trusted source?
But why stop at that mailer? Why not use that as a stepping stone to reach out to other lenders and get additional pricing and offers, then make your decision?
When we’re talking about something as important as a mortgage, which you pay each month for decades, the price you pay matters.
And even a small difference of say an eighth of a percent can equate to thousands of dollars over the life of the loan term.
As noted, companies are getting smarter every day when it comes to customer retention. Unfortunately, a customer retained is likely to miss out on even bigger savings elsewhere.
Don’t simply take the path of least resistance. Put in the time and you should save money.
This is even more critical for low-credit score borrowers, as a wider range of mortgage rates are quoted for those with lower scores.
But all homeowners can benefit from multiple mortgage quotes, as pointed out in a survey from Freddie Mac.
Those who gather just one additional mortgage quote can save between $966 and $2,086 over the life of the home loan, while those who take the time to get 5+ can save nearly $3,000.
So while your old company may make it easy for you to refi, you might be better served looking someplace else.
Read more: Mortgage Rate Shopping: 10 Tips to Get a Better Deal
About the Author: Colin Robertson
Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.
Posted on November 4th, 2020
Mortgage rates keep on marching lower and lower, with new records broken seemingly every week.
But with all the fervor surrounding mortgage rates, some lenders are playing the “how low can we appear to go” game.
For example, mortgage lenders may be talking about their lowest rates (with multiple points required), as opposed to offering their par rates, the latter coming at no extra cost to the consumer.
So instead of being presented with a mortgage rate of say 2.75% on a 30-year fixed, you may see a rate as low as 1.99%. Or even a 15-year fixed at 1.75%!
Here’s the problem; with mortgage rates breaking record lows time and time again, 10+ times so far in 2020, many homeowners are finding the need to refinance the mortgage twice. Or even three times.
And those who chose to pay points at closing, only to refinance within months or a year, essentially left money on the table.
Or they decide not to refinance to an even lower rate, knowing they’ll lose that upfront cost that’s already been paid, which is also a tough situation.
Mortgage Rates Aren’t as Low as They Appear
- In order to advertise lower mortgage rates lower than the competition
- Lenders will often tack on discount points to their publicized rates
- Meaning you’ll have to pay a certain amount upfront to obtain the low rate in question
- Make sure you’re actually comparing apples to apple when mortgage rate shopping
Guess what? That absurdly low mortgage rate you saw advertised isn’t really as low as it seems.
Typically, when you see a rate that’s beating the pants off the national average, and all other lenders, mortgage points must be paid.
And when the rate is really, really low, it usually means multiple mortgage points must be paid.
In other words, you wind up paying a substantial amount of money, known as prepaid interest, to secure an ultra low, below-market interest rate.
Assuming your loan amount is $200,000, two points to obtain a rate of 1.99% on a 30-year fixed would set you back $4,000.
If the loan amount were $400,000, we’re talking $8,000 upfront to secure that super awesome low rate.
Tip: Watch out for lenders and mortgage brokers who quote you a low mortgage rate, but neglect to tell you that you must pay a point (or two) upfront to obtain it.
Often, this tactic is employed to snag your business, and once you’re committed, the truth comes out, which is why mortgage APR is so important.
Is Paying for an Even Lower Mortgage Rate Right Now the Smart Move?
- When mortgage rates are already really low (record lows at the moment)
- It becomes somewhat less attractive to pay points at closing
- It could be pretty expensive to get just a slightly lower rate that will save you very little
- And your money might be better served elsewhere, especially if inflation worsens
Here’s the thing. Mortgage rates are already so low that paying mortgage discount points to go even lower isn’t all that attractive.
There’s a great chance mortgage rates will surge higher in the future as inflation finally rears its ugly head. And at that point, you’ll already have an insanely low interest rate.
On top of that, you’ll be able to invest your liquid assets in other high-yielding accounts, likely something pretty darn safe with a rate of return that will beat your low mortgage rate.
So why keep going lower and lower if you’re already paying next to nothing on your home loan?
Additionally, you won’t want to spread yourself too thin, especially if you’re buying a new house.
There are a ton of costs associated with a new home purchase, so committing all your liquidity to an even lower rate could mean that you won’t have money for relocation costs, furnishings, necessary repairs, or an upgrade.
And as mentioned, mortgage rates do have the potential to move even lower than current levels, meaning it could make sense to refinance again, favoring those who didn’t pay much to anything at closing.
Or better yet, just went with a no cost refinance to avoid paying anything to the bank or lender.
As always, do the math to see what makes sense for you. If you’re super serious about paying off your mortgage early, then buying down your rate could be the right move.
It will certainly vary based on your unique financial situation, the loan amount, the cost to buy down the rate, and how long you plan to stay with the loan/home.
Certainly take the time to compare mortgage rates with and without points, but don’t just chase a low rate below an emotional threshold, like 2%.
And determine how long it’ll take to pay back any points at closing with regular monthly mortgage payments.
Personally, locking in a 30-year fixed rate below 3% seems like a tremendous bargain.
Investing the money elsewhere, such as in stocks or bonds or wherever else, could end up being a lot more rewarding than paying prepaid interest at closing.
Perhaps more importantly, you’ll have access to that money if and when necessary for more pressing matters.
Lastly, you can always pay extra each month if and when you choose to reduce your principal balance and total interest paid. So that’s always an option regardless of the rate you wind up with.
Read more: Are mortgage points worth the cost?
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Any application for credit should be taken as a serious matter. Simply applying and allowing the lender to pull your credit report has an impact on your credit score, so it’s not a good idea to apply for things on a whim. But mortgage applications tend to be more serious than most other apps because they’re for such large amounts of money and longer terms.
When you’re borrowing hundreds of thousands of dollars for 15 to 30 years, the lender wants to ensure you’re a sound investment. They actually have an obligation to their shareholders, employees and other customers to try to take on mortgage accounts that are likely to result in a return instead of a loss.
For these reasons, you usually have to show up to the mortgage application process with a lot of documentation. Here’s a rundown of the documents needed for a mortgage application.
The first document is the mortgage application itself. Whether you complete it online or as a physical piece of paper at a broker’s office or bank, this is the document that launches the process.
Typically, mortgage applications require the same type of information. That includes:
- What type of loan you want. You may need to check or click boxes to indicate whether you want a conventional loan, VA loan, FHA loan or other type of loan.
- Why you need the loan. Is it a refinance or new purchase, and are you purchasing a single-unit home you plan to live in, a rental property or a business property?
- The property itself. You must fill in the address and some other basic information about the property you want to buy.
- Demographic information about the person or people borrowing the money, including name, address, phone number and Social Security number.
- Employment history for all borrowers.
- Income and assets for all borrowers.
- Debts and other liabilities for all borrowers.
You’ll also need to sign various agreements and disclosures. That includes whether you have a bankruptcy or other issue in your financial history and an agreement that the creditor can pull your reports.
You can’t just list items like assets on your mortgage application, though. You also have to prove your statements with documents. Documents that prove your assets can include bank statements showing current cash balances, investment statements showing current values and life insurance policies. If you’re including gift funds in your assets, you’ll need letters or other documents demonstrating where the money came from.
Debts and Expenses
Most of the time, the mortgage company can see evidence of your debts and expenses on your credit report. If the underwriter has any questions or concerns during the approval process, they may reach out for additional information such as copies of credit card statements. This is especially true if you’ve recently paid down debt and that isn’t yet reflected on your credit report.
When it comes to debts, one of the major concerns is your debt-to-income ratio. If it’s too high, the lender is less likely to approve you. Calculate this ratio by adding up all your monthly debt payments along with the estimated mortgage payment and dividing it by your total monthly income.
For example, if you have a car payment of $400, credit card bills with monthly minimums of $200 and student loans of $500 a month, that’s $1,100 in debt. Add a $1,500 mortgage and you would have $2,600 in debt. If you make $7,000 a month, your debt-to-income ratio is 37 percent.
The Consumer Financial Protection Bureau notes that the preferred debt-to-income ratio for mortgage approval is 43 percent or less. This is because you can’t use all your income up on debt—you still need money for utilities, food, fuel, savings and other critical expenditures.
Income and Employment Verification
You do have to prove the income amounts you put on a mortgage application. Common ways of doing so are summarized below.
Tax returns from the past few years can demonstrate that you make a certain amount per year and have done so consistently. If you’re planning to apply for a mortgage soon and don’t have copies of your tax returns, consider proactively ordering a free transcript from the IRS.
W-2s and Pay Stubs
Copies of W-2 forms or a handful of pay stubs from your employer are also good ways to demonstrate your income. Start saving your paycheck stubs if you think you’ll apply for a mortgage soon.
Additional Information (Self-Employed)
If you’re self-employed or have forms of income that aren’t from an employer, you’ll need documentation. Some options can include statements from checking accounts or payment systems that show money you received. You could also provide a profit and loss statement if you’re self-employed.
While the lender can get most of what they need from your credit report, you may need to be available to answer questions. Specifically, be ready to explain any negative items on the report. It’s a good idea to get a copy of your credit report for yourself before you apply for a mortgage so you know what might come up.
- Photo IDs, such as a driver’s license or passport
- Your rental history if you don’t already own a home, especially if you want to use it as demonstration of your payment history
- Divorce records to prove that certain debts are no longer yours or that you don’t have access to funds from a previous spouse
- Foreclosure or bankruptcy records, if applicable
- Documentation of residency status if you’re applying as a noncitizen
Who Do You Give These Documents to?
You give the documents as requested to a mortgage broker you’re working with or to an underwriter with the mortgage company. You might be asked more than once for some documents, especially if you go through a preapproval process.
During preapproval, the mortgage company evaluates you as a borrower in general and lets you know what amount, terms and interest you can qualify for. Once you move to buy a home, the mortgage must go through a final approval process, and someone may need to look at your documents again or request additional documents.
Start Preparing for a Mortgage Early
A lender might ask for documents and require that you respond in a certain amount of time or it will deny the application automatically. So, you don’t want to get caught searching for documents during the process. Prepare for a mortgage app early by gathering everything that you anticipate that you might need. Another way to boost your chances for mortgage approval is to check your credit and resolve any negative items you can.
You might also be able to take actions to positively impact your credit before you apply for a mortgage—especially if your report has mistakes on it. If you want to repair your credit before making a big financial move, contact Lexington Law to find out how we can help.
Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.
Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Before you start picking out tile and paint chips, be sure you know how much it will cost to remodel your house.
Have you just moved into a new place and want to spruce it up? Or maybe you’ve been in your home for a while and feel ready for a change. The easy part is knowing your goal for home remodeling — whether you’re trying to keep up with your growing family, add office space, modernize dated features or generally increase your home’s value.
Even if you’re ready for a kitchen renovation or anxious for a bathroom remodel, figuring out how to plan a home renovation that doesn’t break the bank can be tricky.
Here are five key steps in planning your home remodeling project.
1. Estimate home renovation costs
As a general rule of thumb, you should spend no more on each room than the value of that room as a percentage of your overall house value. (Get an approximate value of your home to start with.)
For example, a kitchen generally accounts for 10 to 15 percent of the property value, so spend no more than this on kitchen renovation costs. If your home is worth $200,000, for example, you’ll want to spend $30,000 or less.
Something else to keep in mind: Contrary to popular belief, kitchen renovations offer among the lowest return on investment. Every dollar you spend on a kitchen remodel increases the value of your home by approximately 50 cents.
The highest return on investment? A mid-range bathroom remodel.
2. Consider home remodeling loan options
If you plan on borrowing money to fund your home renovations, there are a number of loans out there to help with just that.
- Refinancing. Depending on your current interest rate, you might be able to refinance your mortgage at a lower rate and/or for a longer loan term, which could lower your monthly payments and help you save up for your renovations.
- Cash-out refinance. If you have enough equity, you could also consider a cash-out refinance, which means refinancing your existing loan for an amount that’s higher than what you owe. Going this route, you pay off your original mortgage and have cash left over. Use a refinance calculator to see if refinancing makes sense for you.
- HELOC. If refinancing sounds like too big of a leap, a home equity line of credit (HELOC) might work better. A HELOC works a lot like a credit card in the sense that it has a set limit that you can borrow against.
- Home equity loan. Although it sounds similar to a HELOC, a home equity loan is a bit different. This loan requires you to take out all the cash at one time. They’re often referred to as “second mortgages” because homeowners get them in addition to their first mortgage.
Refinancing, getting a HELOC or taking out a home equity loan are all big decisions, and it can be tough to know which one makes the most sense for you. As with any new loan, consult with a lender to see which option is best for your situation.
3. Get home renovation quotes from contractors
Some contractors will give you an estimate based on what they think you want done, and work completed under these circumstances is almost guaranteed to cost more. You have to be very specific about what you want done, and spell it out in the contract — right down to the materials you’d like used.
Get quotes from several contractors, but don’t necessarily go for the the lowest estimate. A bid that comes in much lower than the others could be a sign of a contractor who cuts corners — which can lead to extra costs in the long run.
4. Stick to the home remodeling plan
As the renovation moves along, you might be tempted to add on another “small” project or incorporate the newest design trend at the last minute. But know that every time you change your mind, there’s a change order, and even minor changes can be costly. Strive to stick to the original agreement, if possible.
5. Account for hidden home renovation costs
Your home may look perfect on the outside, but there could be issues lurking beneath the surface. In fact, hidden imperfections are one of the reasons renovation projects often end up costing more than anticipated.
Rather than scramble to come up with extra money after the fact, give yourself a cushion upfront. Factor in 10 to 20 percent (or more) of your contracted budget for unforeseen expenses, as they can — and do — occur. In fact, it’s rare that any project goes completely smoothly.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
Originally published June 2015.
Millions of Americans struggling to make their monthly mortgage payments because of COVID-19 have received relief through the Coronavirus Aid, Relief, and Economic Security Act.
But mortgage forbearance is only temporary, and set to expire soon, leaving many homeowners who are still struggling perplexed on what to do next.
Enacted in March, the CARES Act initially granted a 180-day forbearance, or pause in payments, to homeowners with mortgages backed by the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Furthermore, some private lenders also granted mortgage forbearance of 90 days or more to financially distressed homeowners.
According to the Mortgage Bankers Association, 8.39% of loans were in forbearance as of June 28, representing an estimated 4.2 million homeowners nationwide.
So what are affected homeowners to do when the forbearance goes away? You have options, so it’s well worth contacting your lender to explore what’s best for you.
“If you know you’re going to be unable to meet the terms of your forbearance agreement at its maturity, you should call your loan servicer immediately and see what options they may be able to offer to you,” says Abel Carrasco, mortgage loan originator at Motto Mortgage Advisors in St. Petersburg, FL.
Exactly what’s available depends on the fine print in the terms of your mortgage forbearance agreement. Here’s an overview of some possible avenues to explore if you still can’t pay your mortgage after the forbearance period ends.
Extend your mortgage forbearance
One simple option is to contact your lender to request an extension.
Homeowners granted forbearance under the CARES Act can request a 180-day extension, giving them a total of 360 days of forbearance, according to the Consumer Financial Protection Bureau.
The key is to contact your lender well before your forbearance expires. If you let it expire without an extension, your lender could impose penalties.
“If you just stop making regular, scheduled payments, you could have a late mortgage payment on your credit,” warns Carrasco. “That could severely impact refinancing or purchasing another property in the immediate future and potentially subject you to foreclosure.”
Keep in mind, though, a forbearance simply delays payments, meaning they’ll still need to be made in the future. It doesn’t mean payments are forgiven.
Refinance to lower your mortgage payment
Mortgage interest rates are at all-time lows, hovering around 3%. So if you can swing it, this may be a great time to refinance your home, says Tendayi Kapfidze, chief economist at LendingTree.
Refinancing could come with some hefty fees, however, ranging from 2% to 6% of your loan amount. But it could be worth it.
A lower interest rate will likely lower your monthly payment and save you thousands over the life of your mortgage. Dropping your interest rate from 4.125% to 3% could save more than $40,000 over 30 years, for example, according to the Consumer Financial Protection Bureau.
“Lenders have tightened standards, though, so you will need to show that you are a good candidate for refinancing,” Kapfidze says. You’ll need a good credit score of 620 or higher.
As long as you’ve kept up your end of the forbearance terms, having a mortgage forbearance shouldn’t affect your credit score, or your ability to refinance or qualify for another mortgage.
Ask for a loan modification
Many lenders are offering an assortment of programs to help homeowners under hardship because of the pandemic, says Christopher Sailus, vice president and mortgage product manager at WaFd Bank.
“Lenders quickly recognized the severity of the economic situation due to the pandemic, and put programs into place to defer payments or help reduce them,” he says.
A loan modification is one such option. This enables homeowners at risk of default to change the terms of their original mortgage—such as payment amount, interest rate, or length of the loan—to reduce monthly payments and clear up any delinquencies.
Loan modifications may affect your credit score, but not as much as a foreclosure. Some lenders charge fees for loan modifications, but others, like WaFd, provide them at no cost.
Watch: 5 Things to Know About Selling a Home Amid the Pandemic
Put your home on the market
It may seem like a strange time to sell your home, with COVID-19 cases growing, unemployment rising, and the economy on shaky ground. But, it’s actually a great time to sell a house.
Pending home sales jumped 44.3% in May, according to the National Association of Realtors®’ Pending Home Sales Index, the largest month-over-month growth since the index began in 2001.
Home inventory remains low, and buyer demand is up with many hoping to jump on the low interest rates. Prices are up, too. The national median home price increased 7.7% in the first quarter of 2020, to $274,600, according to NAR.
So if you can no longer afford your home and have plenty of equity built up, listing your home may be a smart move. (Home equity is the market value of your home minus how much you still owe on your mortgage.)
Consider foreclosure as a last resort
Foreclosure may be the only option for many homeowners, especially if you fall too behind on your mortgage payments and can’t afford to sell or refinance. In May, more than 7% of mortgages were delinquent, a 20% increase from April, according to mortgage data and analytics firm Black Knight.
“When to begin a foreclosure process will vary from lender to lender and client to client,” Sailus says. “Current and future state and federal legislation, statutes, or regulations will impact the process, as will the individual homeowner’s situation and their ability to repay.”
Foreclosures won’t begin until after a forbearance period ends, he adds.
The CARES Act prohibited lenders from foreclosing on mortgages backed by the government or government-sponsored enterprise until at least Aug. 31. Several states, including California and Connecticut, also issued temporary foreclosure moratoriums and stays.
Once these grace periods (and forbearance timelines) end, and homeowners miss payments, they could face foreclosure, Carrasco says. When a loan is flagged as being in foreclosure, the balance is due and legal fees accumulate, requiring homeowners to pay off the loan (usually by selling) and vacating the property.
“Absent participation in an agreed-upon forbearance, deferment, repayment plan, or loan modification, loan servicers historically may begin the foreclosure process after as few as three months of missed mortgage payments,” he explains. “This is unfortunately often the point of no return.”
For more smart financial news and advice, head over to MarketWatch.
Posted on October 28th, 2020
Mortgage Q&A: “When to refinance a home mortgage.”
With mortgage rates at or near record lows, you may be wondering if now is a good time to refinance. Heck, your neighbors just did and now they’re bragging about their shiny new low rate.
The popular 30-year fixed-rate mortgage slipped to 2.80% last week, per Freddie Mac, well below the 3.75% average seen a year ago, and much better than the 4-6% range seen years earlier.
Historically, mortgage interest rates have never been lower, making a mortgage refinance a veritable no-brainer for many homeowners out there.
In other words, there’s a good chance you won’t be holding off from refinancing because interest rates are too high (unless you just recently refinanced).
But even if you did, there’s a possibility it could make sense to refinance a second time.
Should I Refinance My Mortgage Now?
- Consider your current interest rate relative to today’s available rates
- Along with required closing costs and how long it will take to break even
- Think about how long you plan to keep the mortgage/property
- And any other factors like removing mortgage insurance or shortening your loan term
Well, the answer to that question depends on a number of factors that will be unique to you and only you.
First, what is the interest rate on your existing mortgage(s)? Is it higher or lower than current mortgage rates?
If it’s higher, how much higher? If it’s lower, is your current loan adjustable? Or do you want to refinance for another reason, perhaps to tap equity?
Once you’ve got those basic questions answered, let’s talk about the new loan. What will the rate and closing costs be on the new mortgage?
Have you started shopping rates yet? Do you even know if you qualify?
How long do you plan to keep this new mortgage? What about the house? Are you sticking around for a while?
Assuming you’re still here, it might be a good time to take a look at a common scenario to illustrate the potential savings of a refinance.
Let’s look at a quick home refinance example:
Loan amount: $200,000
Current mortgage rate: 4.25% 30-year fixed
Refinance rate: 2.75% 30-year fixed
Closing costs: $2,500
The monthly mortgage payment on your current mortgage (including just principal and interest) would be roughly $984, while the refinanced rate of 2.75% would carry a monthly P&I payment of about $816.
That equates to savings of roughly $168 a month if you were to refinance. Not bad. But we aren’t done yet.
Now assuming your closing costs were $2,500 to complete the refinance, you’d be looking at about 14 months of payments, give or take, before you broke even and started saving yourself some money.
Yes, you need to consider the cost of the refinance too…
So if you happened to refinance again or sold your home during that window, refinancing wouldn’t make a lot of sense.
In fact, you’d actually lose money and any time you spent refinancing your mortgage would be wasted as well.
But if you plan to stay in the home (and with the mortgage) for many years to come, the savings could be substantial. Just imagine saving $168 for 200 months or longer.
This “break-even” point is key to making your decision, at least financially speaking.
You also need to consider whether it makes sense to buy down your interest rate by paying points, which will increase the time to this break-even point.
For example, those who paid upfront points on their refinance a year ago might be kicking themselves, knowing they’ll benefit from a subsequent refinance thanks to today’s even lower rates.
So sit down and determine your future housing plans before you decide to refinance to determine if it’s the right move.
If you don’t know what your plan is for at least the next few years, you may want to hold off until you do.
[The refinance rule of thumb.]
How Long Have You Had Your Existing Mortgage?
- You also have to consider how long you’ve had your current home loan
- This can play a big role in determining whether a refinance makes sense
- Take note of how much it has been paid down since that time
- And how much of each payment is going toward interest
Here’s another consideration. If you’ve already paid down your mortgage substantially, it might not make sense to refinance, assuming you want to pay the thing off.
Even if rates are super low, as there’s a good chance you’ll pay more interest overall if you “reset the clock” and start your full loan term over again. But this isn’t always the case.
To determine if a refinance is still the right move, get your hands on an amortization calculator.
That way you can see what you’ll pay in interest if you keep your mortgage intact versus what you’ll pay in interest with the new mortgage, factoring in what you’ve already paid on the old mortgage.
You can also use my refinance calculator to plug in all the pertinent numbers, including what we discussed above, to get a quick answer.
If your calculations reveal that you’ll pay more interest over the entire term of the refinance mortgage, there’s an easy strategy to reduce both interest paid and the term of the new mortgage.
Simply make the same monthly mortgage payment you were making before the refinance, with the excess going toward principal each month.
This will shorten the loan term and could save you a lot of money. I explain this method on my mortgage payoff tricks page, which you can read about in more detail.
If you can afford it, you may also want to look into shortening the loan term by going with a 15-year fixed mortgage.
For example, if you’re already 10 years into your 30-year mortgage, reducing the term to a 15-year fixed will ensure you don’t extend the aggregate term.
And with mortgage rates so low, you may be able to retain your low monthly mortgage payment and pay the mortgage off even earlier than expected.
Also, 15-year mortgage rates are lower than those on the 30-year fixed.
Other Mortgage Refinance Considerations…
- Even if interest rates are comparable to what you already have
- It could make sense to refinance out of an ARM or an interest-only loan
- The same is true if you want to get rid of mortgage insurance
- Or if you’d like to consolidate two mortgage loans into one
If you’re currently in an adjustable-rate mortgage, or worse, an option arm, the decision to refinance into a fixed-rate loan could make a lot of sense.
Even if the monthly savings aren’t tremendous, getting out of a risky product and into a stable one could pay dividends for years to come.
Or if you have two loans, consolidating the total balance into a single loan (and ridding yourself of that pesky second mortgage) could result in some serious savings as well.
You’ll have one less mortgage to worry about and ideally a lower combined monthly payment.
The same might be true if you have mortgage insurance and want to get rid of it. Many homeowners will execute an FHA-to-conventional refinance to drop MIP and reduce monthly payments once they’ve got some equity.
Additionally, you might be able to get your hands on a no cost refinance, which would allow you to refinance without any out-of-pocket costs (the rate would be higher to compensate).
In this case, if the rate is lower than your existing rate, you start saving money immediately.
As mentioned earlier, a cash-out refinance could also contribute to your decision to refinance if you are in need of money and have the necessary equity.
Heck, with mortgage interest rates this low you could even make the argument to tap equity and invest it elsewhere for a better return.
Again, you’ll want to aim for a lower rate and cash back, but there could be a scenario where borrowing from your home is the best deal, even if you don’t save much or anything mortgage payment-wise.
This is really just the tip of the iceberg. There are countless reasons to refinance your home loan, including many seemingly unconventional ones you may have never thought of.
Whatever the reason, be sure to put in the time (and the math) to ensure it’s a good decision for you and not just the bank or a loan officer pushing you to do it!