Refinance Articles / Resources:
Since there are several reasons a homeowner may choose to refinance, we’ll take a look at the top four circumstances.
A drop in mortgage rates, lowering current mortgage payments, debt consolidation, home improvements, shortening the loan term are just some reasons to choose a refinance.
…..(read more about Four Possible Reasons to Refinance)
Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.
For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.
A Home Equity Loan is similar to the line of credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed.
Both a Line and Loan would hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage.”
Since second mortgages are paid after the first lien holder in the case of default foreclosure or short sale, interest rates are higher in order to justify the risk.
Fees, Interest Rate, and Timeline are the three main factors to consider which option to choose in order to pull equity out of a property.
Frequently Asked Questions:
Q: Is there such a thing as a “No Cost” mortgage?
There are always costs involved with any mortgage transactions. Appraisal, inspection, underwriting, prepaid taxes, insurance, interest…. the list can go on. However, there is a way to structure the closing costs and interest rate that will decrease the amount of fees or how a borrower pays them.
You can either include the costs in the new loan amount or have them paid with a credit from the lender in exchange for taking a slightly higher interest rate.
Deciding on the best option involves weighing the difference in cost up-front vs the increased monthly payment over a set period of time.
Q: How long do I have to wait to refinance after a purchase transaction?
The rule-of-thumb is 6 months, but there may be exceptions. It’s important to check with your lender at the time of initial application to make sure there aren’t any short-term penalties for refinancing within the first year.
Another thing to consider is the cost of refinancing. If you’re watching the market and may want to lock in a lower rate in the near future, it may be more cost effective to pay a discount point for a lower rate vs paying for a full refinance a few months later.
Q: I heard that I should only refinance if I drop 1% on my mortgage, is that true?
It is a general rule of thumb but not an absolute.
Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.
If everything else is the same (interest rate, loan amount, etc) except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization