Refinancing your mortgage can provide benefits including savings on mortgage interest and lower payments. Depending on your existing mortgage loan, reasons for refinancing, and future plans, refinancing your mortgage can help with achieving financial goals. Here are three popular reasons for refinancing your mortgage loan, along with tips for finding your best deal.
Straight Refinancing: Reducing Mortgage Rates and Risk
Most homeowners refinance their home loans to lower their mortgage rates and monthly payments. Using a mortgage comparison calculator is useful for estimating potential savings. Here are a few things to consider when refinancing:
- Know the difference between refinance rates and APR: The annual percentage rate, or APR, is the total of all costs (including interest) associated with a mortgage expressed as an interest rate. Comparing the APRs of mortgage quotes you're offered can help eliminate mortgages that are too costly, or highlights the need for negotiating costs. Although the lowest mortgage rates are attractive, keep in mind that the lower the quoted refinance rates, the more you pay in points and other fees.
- Negotiate lender fees: Mortgage quotes offer a starting point for negotiating your best deal. Some mortgage costs are not negotiable, but you'll typically have some flexibility in negotiating lender fees. Third party fees including appraisals, recording fees, and title work are generally not negotiable,
- Home equity and loan-to-value ratio (LTV): Conventional mortgage lenders today may typically limit refinance mortgages to 80% of your home's current value because mortgage insurance is very hard to obtain. If your home has sustained a severe loss of value and/or you have a home equity loan or line of credit that boosts your combined LTV (CLTV) ratio above 80%, consider an FHA refinance mortgage.
- Closing costs and calculating the break-even period: Refinancing your mortgage requires paying closing costs; these must be factored in to your savings estimates when comparing your current mortgage to refinance options. Here's a rough method of estimating how long it will take to break even on closing costs before your realize any savings from refinancing:
Use a refinance calculator for establishing estimated monthly savings. Let's say that your new refinance mortgage payments (P&I only) are $250 less than your current monthly P&I payment. Your closing costs, points, and lender fees for your refinance mortgage total $5000. Divide closing costs by the monthly savings amount for estimating the break even period; in this case it takes 20 months to break even. Understand that some of your "savings" may be the result of stretching out your mortgage balance over a new term; the decrease in interest paid is a truer estimate of actual savings.
Refinancing for Debt Consolidation
The high of carrying credit card debt and other loans makes consolidating debt with a cash-out refinance an appealing option, but it's important to understand the full cost and potential risks of refinancing to a larger mortgage:
- A larger mortgage means less home equity: Home equity is the difference between what your home is worth and the amount of mortgages owed against it. Refinancing with additional cash out for debt consolidation will absorb some of your home equity. With housing markets fluctuating, this could lead to trouble if your home loses value.
- Incurring more debt after refinancing: You've taken a cash out refinance, and now have a larger mortgage and owe no credit card debt. It's important to to avoid adding credit card debt after refinancing for debt consolidation. Seek credit counseling help before refinancing if you need help with managing debt.
- Home value fluctuations can erode home equity: Today's volatile housing markets make it worthwhile to weigh the risk of cash out refinancing. If you are upside down on your mortgage you will have difficulty selling should the need arise.
Refinancing for Home Improvements
Home improvements can add to your home's appeal and improve your lifestyle. When planning home improvements, it's worthwhile to learn which improvements can add the most value to your home. If you're planning to sell your home, consult local real estate pros to learn which improvements buyers prefer in your area. Researching the cost of improvements, which improvements add the most value, and the types of improvements preferred by buyers is helpful for determining if refinancing is feasible.