With interest rates at a 50-year low, you may be considering refinancing. Here are the five things to keep in mind before doing so.
Congratulations! You own a home. As we know it is the best way to build the wealth of the generation (and also, you know, have a roof over your head). Here is what is not so good: The chance is that you pay a higher interest rate than you would be if you bought the same house today.
This is why: The average interest rate on a 30-year fixed rate earned at a record 2.88% in early August – the lowest reported level in almost 50 years. So if you bought a house in the last five years, it's a bit like the feeling of buying, for example, a sweater, and seeing it for sale just a few days later.
The good news is that you can almost certainly refinance your home and get a mortgage on this newer, lower interest rate. In fact, because interest rates are so low, it may sound like a good idea to refinance your mortgage. After all, why not trade for a lower interest rate at a lower rate? But the reality is that interest rates are only one factor, albeit an important factor, when it comes to things you should think about before refinancing. This
When you take into account fees and your future plans in the equation, refinancing may not always give you a financial peak. We spoke to two mortgage experts who broke down these five factors to consider when deciding to refinance your mortgage.
In this article:
Factor No. 1: What Happens in the Mortgage Interest Market
Let's start with the above mentioned interest rates.
Whether you want to lower your payment or change from an adjustable interest rate to a fixed interest rate, start looking at how interest rates move so you can lock in the best possible interest rate. "Right now, the time is perfect with interest rates at a historically low level," said Benjamin Schandelson, a loan manager at MJS Financial LLC in Florida.
Although mortgage rates have been around 3% for two months, the interest rate you actually qualify for may vary. "[Lenders] adjust your interest rate based on risk factors," says Ralph DiBugnara, a New York City-based mortgage lender and president of Home Qualified, a digital home for homebuyers.
The three main risk factors are the type of property you own, the capital you have in the home and your credit score, according to DiBugnara. To secure the best possible interest rate, you can consider taking steps to increase your credit score before refinancing. These steps include correcting any errors in your credit record and making sure you pay all your bills on time (if not early). Also trade with several lenders to compare offers – today and today there is no shortage of mortgage lenders you can consider.
"Right now the time is perfect with interest rates that are historically low."
19659015] —Benjamin Schandelson, loan manager
Factor 2: The cost of refinancing versus the potential savings
Do you know the old saying that you have to spend money to make money? Anyone who said that must have refinanced their mortgage, because it absolutely applies to the process. What
Here's what we mean: Remember the fees you paid when you bought your home? Those with weird, vague names like fees and evaluation fees, not to mention credit report fees and more? We hate to break it to you, but they will all reappear when you refinance.
In fact, the closing costs of a mortgage loan can be up to 3% to 6% of the loan amount, says Schlandelson. In addition, your lender may charge you what is called an advance fee to pay off your current mortgage early with a refinance.
Add everything and you pay a decent portion of the change to get the lower interest rate. So the question becomes: When does refinancing make economic sense? "You want to be able to recoup the closing cost of less than two years' savings," says Schandelson. "This is a good rule of thumb to know if refinancing is worth it."
Why two years? If it takes longer than two years to level up, the refinancing may not be worth it, especially if there is a chance that you can move. (And a lot can change in two years, from having children who require more space or changing jobs.)
The time it takes you to get the cost back is called the break-even point and calculating the break-even point is simple. Here are the three important steps:
1. Add refinancing costs
Look at the loan amount you get from the lender to see what the closing costs would be; add the advance fee if there is one.
2. Calculate your monthly savings
Subtract the new monthly payment from your current monthly payment. The difference is how much you save each month.
3. Find the break-even point
Divide the refinancing costs by the monthly savings to see how long it takes for the savings to cover the refinancing. be $ 1475 – that's a saving of $ 250 per month. If your estimated refinancing costs are $ 5,000, it would take less than two years to settle ($ 5,000 divided by $ 250 equals 20 months). The monthly savings over the last 20 months will be money in your pocket.
Factor # 3: What you have available to pay out-of-pocket
Say your closing costs are $ 5000 – it's no small amount of money, and you have to pay it in advance. And because interest rates are at a record low, you can feel the pressure to strike while the iron is hot, even if you do not have much cash. In this case, alternatives such as free refinancing can look tempting.
A "free" refinancing is not a free refinancing; instead, the lender will pay the closing costs for you and charge you a higher interest rate to cover the cost. Even if you take a higher interest rate, streamlining an FHA loan with a free refinancing can still lower your payments because the interest rates are so low, says DiBugnara. It's a lot of math, to be sure, but running those numbers can save you money in the long run.
Another way to pay less in advance is to roll your closing costs into the loan balance. This can increase your monthly payment, which means it may take longer to even out. Ask the lender to calculate each scenario – pay costs in advance or pay them throughout the loan period – so you can compare the monthly payment and savings before making a decision.
Factor 4: How long do you plan to stay in the home
19659010] The usual advice is not to refinance if you plan to move soon. Again, it's just math. Let's use the example above. If it costs you $ 5,000 in refinancing fees and you move after six months, you have spent $ 5,000 to have saved $ 1,500. It's … not perfect.
As I said, we are in an unusual time: Schandelson notes that interest rates are low enough that your savings in just two years could still add up.
If You Are In Your "Eternity" "Home, you need to pay close attention to the long-term cost of refinancing and not just monthly savings. Refinancing five or six years to a home loan with an additional 30-year mortgage can extend your repayment period, which can make you pay more overall.
In some cases, however, an increase in total costs may not be a dealbreaker. For example, if you are in a home or planning to move across the country within the next five years, your monthly payment savings are probably more important than long-term savings because you plan to sell anyway.
Factor # 5: Your Income and Approval Odds
In addition to the external factors to consider, such as interest rates and fees, there are also internal factors to consider. The economic downturn caused by the pandemic has made it cheap to borrow money at a time when millions of people are facing loss of income. If you have experienced a job loss or a job in recent months, you may have trouble qualifying for refinancing.
“Since COVID, lenders have become serious about paperwork. They want to see that you are still working and signs of continuous work, says Schandelson. Having W2, pay stubs or bank statements that show you are back at work and making a consistent income can help you get through the refinancing process faster.
For the self-employed, it may have been challenging to obtain a loan before COVID-19. Now, says DiBugnara, lenders have become stricter. Lenders usually look at your income in recent years to calculate an average for your application because self-employed people do not have the same tax records as employees.
Now, past earnings are not always a good indicator of current performance as many companies have received a COVID-19-related financial hit. Because of this, lenders may request additional paperwork such as bank statements or a letter from your accountant to confirm that you are earning enough to repay the loan before offering you refinancing.
To refinance or not to refinance: that is the question.
Ultimately, it depends on a number of factors that only you can know if refinancing is the right move for you or not. Again, these include both the terms of your current mortgage and the terms you can get for a refinanced mortgage; the amount of cash you have on hand; how much you save in the short and long term; and how long you plan to stay in your house.
If the amount you save is minimal considering the cost, it may not be worth refinancing. But if refinancing can cut your payments by several hundred dollars a month and you can go smoothly relatively quickly, it can have a positive impact on several areas of your finances. The monthly savings can go into other financial goals such as saving for retirement, building up your emergency fund or repaying student loans – the options are endless. If all goes well, congratulations: There is nothing like the satisfaction of saving a little – or a lot – on a payment that you literally make every month for decades to come.
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