Get this straight. A refinance is still a loan. Although you can pay off the old loan you add more years to pay off the new one, your refinance. The refinance comes with new everything – rates, terms, and loan agreement but you can make the new loan work for you and squeeze out some savings or break even just a few months shy of two years, that is if your loan is a little bit over $900,000.
People get a refinance for different reasons. The top reasons are lower interest rates, debt consolidation, use home equity, and to get rid the insurance fee. Don’t rush headlong into a refinance because interest rates have gone down. If you are going to stay in your home for 20 or 30 years, getting a refinance may be costly in spite of lower interest rates.
Lower interest rates might be tempting but if you are in the 15th year of a 30 year mortgage, you will end up the loser. All the money saved from the existing loan will go up in smoke. But if your mortgage is just eight years old and the interest rate is 2% or 1% more than the new rate, go ahead, get a refinance.
Check out every detail of the new loan which includes closing costs that is rolled into the principal balance, interest rate, years left to pay the mortgage, monthly equity building, monthly increased equity, and break even estimate. If the difference can hardly be felt, there’s no reason to get a refinance. The trick is to compare principal and monthly payments of the previous and new loans based on the number of years you are going to pay off the loan.
Before you do the math, check out your FICO score, the prevailing equity of your home, and your current debt to-income ration. These are the three considerations that will impact on your refinance. A low FICO score earns you higher interest rates and the problems worsen if the equity of your home is low and your current debt-to-income ration is high. If this is the case, a refinance is not for you.
Fees also add up the cost of the refinance. There’s the origination fee lenders require and be as high as $4000 for a $200,000 loan amount. This is to cover the cost of getting the loan processed. Another fee to pay is the closing fee that is generally 2% or 3% of the new loan.
Government programs instituted by the O’Bama administration allow for a waiver of the origination fees and closing costs in certain cases. If you lost your job because of the recession, or because you suffer from a serious medical condition, you may be eligible for a waiver of all or part of your loan fees. Since the waivers are decided on an individual case basis, each person must apply for the waiver before they receive their loan.
The people most likely to benefit from refinancing are those with adjustable rate mortgages and those with balloon payments. People who have a fixed interest loan will see far less benefit unless their interest rate is very high. Shop around for the lowest possible interest rate before deciding where to get your loan. If you have a poor credit rating or FICO score, you will not be likely to find a low fixed rate mortgage. If you are not sure if refinancing is your best option, speak with an accountant or real estate specialist.
|
|