Should I Refinance My Home Mortgage?
You hear everyone talking about refinancing their home mortgage. Refinancing means that you are replacing the current mortgage on your house with another mortgage with a different interest rate or amount or number of years. Home mortgage rates are lower than they have been in decades. If you took out a mortgage on your home when rates were high, you can definitely save money by refinancing. If you have an adjustable rate mortgage, also called a variable rate mortgage, one where the interest rate goes up every year or two, you can take advantage of refinancing to lock in a mortgage with a lower fixed rate. In this case, refinancing your home mortgage is probably a good idea.
When you refinance your mortgage, you might want to increase the amount of the loan. Then at closing, you'll get extra cash to remodel or to meet other needs. Some people refinance to pay off expensive credit card debt, which is at higher interest rates than a mortgage loan. This is possible if your home is worth more than the amount of your mortgage.
It is also possible to reduce your monthly payments when you refinance, and you can extend the period of the loan, if you prefer. For example, a mortgage amount of $100,000 for 15 years at a 4.25% interest rate will require monthly payments of $752.28. How does this sound to you?
How Much Does it Cost to Refinance Your Home Mortgage?
The closing costs of a refinancing are often as much as the closing costs banks charge on any new mortgage. Closing costs can be several thousand dollars. The bank will suggest adding the closing costs to the amount of the loan, so you can pay them off gradually with your monthly payment. This means that you will be paying interest on the closing costs. The interest on closing costs can amount to as much as the closing costs themselves over the life of the mortgage. Closing costs cover the appraisal fee, credit checks, and allow the bank to make extra profit. Banks don't really want you to refinance your expensive home mortgage.
Who Should Refinance a Home Mortgage
To decide if refinancing is worth the trouble, compute the interest you will be charged on your existing mortgage. Then see how much interest you will be charged over the life of the new refinanced mortgage. Subtract the two numbers to see how much you will save in interest. And then compare the interest saved to the closing cost on the refinancing. If the net savings are substantial, you should refinance.
If you have a jumbo home mortgage, it really makes sense to refinance it, as the interest savings will be a substantial amount over the life of the mortgage. A jumbo mortgage is a home loan for more than $729,750. They are called non-conforming mortgages, and the interest rates are always higher.
It's sometimes a good idea to refinance your home mortgage to pay down credit card debt, because credit card interest rates are much higher than mortgage rates. But remember, if you don't pay your home mortgage, the bank can foreclose and seize your home. On the other hand, credit card debt is unsecured. So if you fail to repay your credit card debt, the bank cannot take your home.
If you have ARM, an Adjustable Rate Mortgage, definitely consider refinancing. The general expectation is that interest rates will go back up to more typical levels in the next few years, and ARM rates will rise with them. The real benefit of refinancing your home mortgage is to lock in the lower fixed rates now available.
You can deduct the closing costs of refinancing your home mortgage on your Income Tax return. The closing costs, or points, cannot be deducted as a lump sum in the year you refinance. Instead, you must amortize the points over the life of the new loan. So if your points to refinance your home are $2,000, and the new mortgage has a 10 year life, you can deduct $200 in points each year. Some people forget to do this when they prepare their income taxes.
Who Should Not Refinance a Home Mortgage
If you plan to sell your home in the next few years, it doesn't pay you to refinance, because the closing costs will exceed the amount of interest you'll save.
Don't refinance your home mortgage if the new interest rate is higher than the fixed rate you are paying now. Shop around for the best interest rate and closing costs.
Instead of refinancing your home mortgage, banks may propose a home equity loan instead. A home equity loan is usually a loan for a short time, often just a few years. The closing costs will be much less on this type of loan.
Don't choose an ARM, an Adjustable Rate Mortgage when you finance your home mortgage. Although the initial rate is lower, sometimes as low as 3%, the interest rate will increase quickly within a few years. The real benefit of refinancing your home mortgage is to lock in the lower fixed rates now available.
The length of the loan will change when you refinance your home mortgage. If you have 12 years to go on your existing mortgage, you can't get a new 12 year mortgage when you refinance. Instead, the bank will offer either a 10-year mortgage, which will have higher monthly payments, or a 15-year mortgage, with lower monthly payments, but requires you to make more payments, and over the longer period you will be paying more interest.
If Your Home Is Worth Less, Can You Refinance your Home Mortgage
If your home is worth less than you paid for it, can you refinance your home mortgage? Suppose the value of your home has dropped lately, and is worth less than the amount you owe on it. This is called negative home equity. This is often the reason people don't refinance their home mortgage.
In this case, to refinance your home mortgage, you must either buy private mortgage insurance, or use cash-in refinancing. Here's an example.
If you want to take advantage of lower interest rates, you will have to put up a large cash payment at closing to qualify to refinance. For example, suppose you bought a $100,000 house a few years ago. Now it's only worth $80,000, and you owe $70,000 on it. When you refinance your mortgage, the lender will ask you to buy private mortgage insurance, PMI. With PMI, the homeowner pays for the insurance to protect lenders against default by the borrower. The cost of PMI runs about 1/2 of 1% of the amount of the loan, .005 x $100,000 or $500.
Your second option is a cash-in refinancing. In this example, the refinanced loan can't be for more than $64,000, which is 80% of your home's current value. So, if you owe $70,000 on your current mortgage, you will need $8,000 cash to pay off part of your mortgage loan, so you'll qualify for refinancing. This is called cash-in refinancing. You can either buy mortgage insurance or bring cash to pay down your home mortgage principal. yes, if home prices continue to fall, you will still be in the hole. But if home prices and interest rates rise, you will have refinanced your home mortgage at a low fixed rate.
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