Five Things To Know Before You Refinance

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A home refinance might cut your monthly mortgage payment, but that doesn’t mean that it is the best move.

Since mortgage rates have risen after the election and will rise further in 2017, homeowners can benefit from a refi and possibly save $200 a month.  But there are some things to know before you act.

A refi costs money.

Free refinancing does not exist.  You will have to pay closing costs.  Closing costs are anywhere from 2-5 percent of the loan amount.  If you choose to refinance a $150,000 loan, you could pay between $3000 and $7500 in closing costs.

One variation on this is for the lender to cover the closing costs by using a non-closing cost refinance.  But if you choose to go that route, you will end up paying a slightly higher interest rate.

Before you choose a non-closing cost refinance, compare what the closing costs would be for a traditional loan, then calculate how long it will take for the monthly payment savings from a refinance to repay the proposed closing costs.  If you do this, you will be able to determine whether a non-closing cost refi makes sense for you.

Use a refinance calculator like this one here.  Calculate how long it will take for you to recoup the closing costs.  If the point that you break-even is 5 years away, but you’re only planning on living in the home for another 3 years, a refi won’t be a smart move.

Your savings should offset the costs quickly.

A refi makes sense when your interest rate on your mortgage is over 100 basis points above the current interest rates.

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However, everybody has different objectives when it comes to a refi, so there isn’t a rule, per se, on how much you should save.  A good rule-of-thumb is that your refinance costs should be recovered in 2 years or less.

As an example, if you get a 30-year fixed loan of $200,000 in March of 2011, your interest rate would have been 4.83%, now it is 4.13%.  So, if this refi cost you $2,800 and saved you $179 per month, your savings would recoup the closing costs in 15 months.  So, after 1 year and 3mo, you would benefit from the lower monthly payments.

Contrasted with this, if you get that same $200,000 loan on a 30-year fixed rate in August 2013, your interest rate would have been 4.45%.  If you paid $2800 in closing costs to refi into the current rate of 4.13%, your savings would be $93 per month and would recoup the closing costs in 30 months.  This is 6 months past the 2 year mark and would take a long time to get the benefit of the refi.  Your situation might deem this refi beneficial, you’ll have to talk with your mortgage lender.

Either way, before you do a refi, you’ll want to make sure and research all of your options from multiple mortgage lenders.

A refinance could cancel your private mortgage insurance.

You might be locked in to a private mortgage insurance on your loan.  But because you’ve gained enough home equity, a refi could enable you to cancel your private mortgage insurance (PMI.)

For this to happen, your loan balance must be 80% or less of your house’s appraised value for this to be possible.

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If your first mortgage is 80% or less of your house’s value at the time that it is appraised for the refi, your new home loan shouldn’t require private mortgage insurance.  The new home loan will replace the original loan with PMI, and consequently cancel your private mortgage insurance obligation.

You’ll be resetting the time on your loan.

If you refinance, you’ll be resetting the terms of your home loan.  If you’ve had a loan for a long time, you have probably reached a point where you were paying more on the principle of the loan rather than the interest.  A refi will effectively reset this and switch where the majority of your payment is being applied.

You’ll want to do your research and ask your mortgage lender to do a side-by-side comparison on the amortization so that you can see how quickly you will pay off your existing loan vs. a new loan.  In addition to this, ask how fast you will pay off teh new loan if you take the savings from the refi and applied them to the monthly payment of the new loan.

Your home equity can be a source of cash.

You may want to consider a cash-out refi.  This will allow you to take out a new mortgage for more than the amount you owe on your current loan and keep the difference, which is up to 80% of your loan-to-value ratio (LVR.)  This can be the right move, depending on how you’re planning on spending the cash.

If you use the money to build an addition, or to do some home improvements, it will increase the home’s value and makes sense.  Just take note that cash-out refi rates are higher than non-cash-out refi’s.

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If you’re thinking about using the money to go on vacay, think again.  This would be unwise.

Get in touch with your Downers Grove Realtor Beata Kolpek.

Beata Kolpek is Downers Grove’s premier Realtor with Platinum Partners Realtors.  Beata has years of experience in the Downers Grove area and it’s surrounding communities.  Contact her today and she can assist you in choosing the right lender, or help you with any and all of your real estate needs.

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