With interest rates at historic lows, you might be wondering if it’s a good time to refinance your mortgage. But before you get a new loan, take a close look at your personal and financial situation, including how much equity you have in your home, your current interest rate and terms, and monthly payment details.
It may turn out that refinancing your mortgage is the right choice for you. On the other hand, refinancing does come with additional expenses, which could cancel out any long-term financial advantages. To determine if refinancing is a financial solution for you, take a look at what it may cost to refinance a home mortgage loan.
All about costs
While refinancing could offer a savings benefit in the long-term, it’s important to consider the short-term impact on your budget. Why? Because refinancing is not free. There are various costs and fees associated with the refinance process that can add up quickly.
Today, the closing costs on a home refinance average $5,000, according to The Federal Home Loan Mortgage Corporation, a government-sponsored entity more commonly known as Freddie Mac. They can include increased payments, government recording costs, appraisal fees, credit report fees, title services, tax service fees, survey fees, attorney fees, underwriting fees, and more.
You’ll receive a Closing Disclosure that contains an itemized list of all charges and costs associated with your refinance. Make sure you review it carefully and address any concerns or questions with your lender prior to closing. You’ll receive a Closing Disclosure that contains an itemized list of all charges and costs associated with your refinance. Make sure you review it carefully and address any concerns or questions with your lender prior to closing.
Have you heard of no-cost refinancing? This may be an option if you’re interested in refinancing but don’t want to pay closing costs up front – just know you might still pay them even with these types of loans. The difference is that instead of paying closing costs upfront, you’ll either borrow money at a higher interest rate, or the charges will be rolled into your overall loan balance (at which time you’ll not only pay costs – but you’ll also pay interest on them, too). Depending on a number of factors, including how long you plan to stay in your home, the long-term benefits of no-cost refinancing might make this the right type of financing for you.
In most cases, if current interest rates are more than 1% lower than what you’re currently paying, refinancing could significantly reduce your monthly payment – especially if you combine that lower interest rate with a reduction in the amount you borrow (because you’ve already paid off some of the principal on your current loan).
2. To reduce the length of your mortgage.
Want to pay off your house quicker? If you have a 30-year mortgage, you could consider a 15- or 20-year loan. Depending on your current loan balance, your monthly payment may go up, but you’ll be saving significantly on interest over the life of the loan.
3. To switch to a different type of mortgage.
With rates as low as they are today, you may want to look at changing the type of loan you have for one that offers more financial benefits. Many homeowners have benefited by moving from adjustable-rate mortgages (ARMs) to low, fixed-rate loans with rates that won’t fluctuate over the life of the mortgage. Others have looked at switching from one ARM to another with better rates.
If you have substantial equity in your home but are paying private mortgage insurance (PMI), you might benefit from a refinance. It all depends on how much equity you have. If your loan-to-value ratio is lower than 80%, refinancing your mortgage could mean that you won't need to pay for PMI – which would significantly lower your payment. Contact us for more information.
And three that probably don't
Refinancing isn’t always the right move. Depending on your homeownership goals, these three insights – most of which center around interest payments – might lead you to hold your current course:
1. You’re deep into your current fixed-rate loan.
If you’re 27 years into a 30-year fixed-rate mortgage, you’ve already paid most of the interest on your loan, thanks to a process called loan amortization. This means the vast majority of your monthly payment is going straight towards the principal, bringing your mortgage closer and closer to a zero balance. Refinancing now would not only cost you money, but you’d also be paying unnecessary interest.
2. The break-even point doesn’t make sense.
To win the refinance game, you need to stay in your home long enough so that your long-term savings surpass any short-term expenses. If you’re planning to upsize, downsize, or move across the country before that happens, refinancing may not be right for you. Give us a call to determine your break-even point.
3. You want to pull cash out of your home.
If you currently owe less than what your home is worth, that means you have equity in your home. If you’re thinking about exchanging that equity for cash that you’ll use to make home improvements, to pay down debt, or to fund a large purchase, you might turn to a cash-out, mortgage refinance. Keep in mind, though, that with a cash-out refinance, your new loan balance could end up higher than what you currently owe on your home – which means you actually own less home when it’s time to sell. This might not be the best approach to gain access to those funds. A home equity loan or home equity line of credit offer similar financial benefits.
Get real advice about refinancing
Our experienced mortgage professionals are ready to help you discover the real cost to refinance your mortgage. Refinance rates change quickly, so call (800) 649-0193 to speak with one of our friendly real estate loan specialists today.