By refinancing your mortgage, you could save thousands of dollars, but much like a new home loan, a refinance has closing charges that may have an impact on your short- and long-term financial situation.
You can anticipate paying less to close on a refinance than on an equivalent purchase loan. The cost to refinance a mortgage ranges from 2% to 6% of your loan amount. Your specific payment amount will depend on a number of variables, including:
- Your loan amount
- The lender
- where you are
- Your credit rating.
- Your house’s available equity
- Term of your loan
- Fixed-rate vs. adjustable-rate mortgages
- Home loan programme
- Property class
- Housing type
Before refinancing, weigh the amount of closing expenses you’ll incur against the amount you might end up saving over time.
When is a refinance worthwhile?
Make sure a refinance genuinely makes sense for your financial circumstances before moving through with it. To do this, determine your “break-even point” to make sure the benefits of the refinance outweigh the expenditures. The maths is straightforward: Subtract your anticipated monthly savings from the total closing costs of your refinance. The outcome is how long you’d need to live there to make back your investment.
Let’s say, for illustration purposes, that a $5,000 refinance will result in monthly savings of $200. The result is 25 when you divide the $5,000 closing costs by the $200 monthly savings. If you live in your house for at least two years, or 25 months.
Five justifications for mortgage refinancing
Consider a mortgage refinance for the following reasons:
1. Reduce the interest rate. Your monthly mortgage payment and total cost of interest are decreased with a loan with a lower mortgage rate. You might refinance and get a lower rate if your credit has improved since you took out your present loan. Your new rate and the cost of refinancing into a new loan will determine how much you’ll save each month. To help you more accurately calculate your profit margin, use a refinance calculator.
2. Modify the loan’s term. You can either extend your term to earn a cheaper monthly payment or shorten it to pay off your mortgage sooner. Each option has trade-offs associated with it. If you can afford a considerably larger monthly payment, refinancing from a 30-year to a 15-year mortgage could help you lock in a lower rate and save on interest payments. On the other side, extending the length of your loan would result in a cheaper monthly payment but a higher total cost of interest.
3. USE YOUR HOME VALUE With a cash-out refinance, you can simultaneously tap your potential home equity and enhance your loan conditions. You’ll take out a new mortgage for a higher amount than you presently owe and keep the extra cash for other purposes, like home renovations or paying for college. Calculate the financial impact of this choice with our cash-out refinance calculator.
4. TRANSITION FROM AN ARM TO A FIXED-RATE MORTGAGE An adjustable-rate mortgage (ARM) is a loan with a low initial fixed rate that fluctuates over the course of the loan’s life according to the terms you choose. Your ARM payment is based in part on a “index,” a benchmark rate that changes in response to market variables. The index could make your payment unaffordable if rates increase over time. You can have the security of a fixed-rate loan while maintaining a predictable monthly payment by switching from an ARM.
5. TRANSFORM AN FHA LOAN INTO A TRADE-IN LOAN Unless you refinance into a conventional loan, if you have an FHA-backed loan and put less than 10% down at closing, you will be responsible for paying mortgage insurance premiums for the duration of your loan. You won’t pay private mortgage insurance fees on your new loan if you refinance with at least 20% equity.
Four steps to cut your refinancing expenses
STEP 1. IMPROVING YOUR CREDIT SCORE You’ll normally obtain the best terms and prices with a credit score of at least 780, and it might even be simpler to get your refinance application approved. Pay your bills on time, reduce your credit card balances, and dispute any inaccuracies on your credit report to raise your score.
Step 2. is to compare many lenders. If you don’t comparison shop, you won’t know if you’re obtaining the best refinance rates feasible. Compare the refinance costs of the three to five lenders with whom you apply for a loan.
STEP 3. NEGOTIATE YOUR REFI COSTS Never hesitate to negotiate for a better price. Some of the refinancing expenses are negotiable; a lender may lower or waive certain fees, particularly application or origination fees. Additionally, since appraisals are no longer the standard choice, you might be able to request an appraisal waiver or select a less expensive method of value.
STEP 4. A NO-CLOSING-COST REFI IS A CONSIDERED Ask your lender about a no-closing-cost refinance option if you don’t have the money to pay the whole amount of your mortgage refinance up front. Don’t be misled by the word, though; your lender will either increase your interest rate or spread your closing expenses payment over the life of your loan by adding the closing costs to the new loan total.