Most people think that if interest rates fall you can lower your monthly payment. It is important to understand the terms of the new loan and the possible fees associated with it before making a decision. There are a lot more reasons why you might want to consider refinancing. Refinancing your loan can be a great way to save money in the long run, so it is worth exploring if you think it could work for you.
In this article, we’re going to provide you with a helpful, easy-to-use refinance calculator and focus on answering the question, should I refinance my mortgage?
The benefits of refinancing will be explored. If you want to save money, reduce your monthly payments, or increase your cash flow, refinancing is a great option.
Should I Refinance My Mortgage?
Lowering your interest rate and monthly payment is one reason, but there are actually at least seven situations where you should consider refinancing your mortgage.
1. Lower Your Interest Rate and Monthly Payment
This is the most common reason to change the terms of your mortgage. Refinancing your mortgage can help you save money in the long run. It is one that involves numbers. Understanding the facts and figures related to the subject is important. It is worth doing if you are going to save a lot of money on your monthly payment. Refinancing can be a great way to improve your finances. Reducing your monthly payment or interest rate can improve your financial situation because of the large amount of time it takes to make payments on a typical mortgage. It is important to consider all options when choosing a mortgage.
In this article, we will get into the math of refinancing your mortgage. Let’s look at the different types of mortgage refinancing options. Though that may happen anyway, I want to focus on the less appreciated reasons to refinance that don’t involve lowering your monthly payment. Refinancing can give you access to the equity in your home, which can be used to make home improvements or consolidate debt.
2. To Reduce Your Mortgage Term
The second most common reason to do a refinance is to reduce your term. It’s a great way to save money in the long run, as you will pay less interest over the course of your loan. Most typically, homeowners will refinance from a 30-year mortgage into a 15-year loan. The benefit of cutting your loan term in half is that you will save tens of thousands of dollars in payments and interest once the loan is paid in full. Refinancing your loan can save you money in the long run.
Reducing your loan-term can result in a higher monthly payment. If you pay off your loan in a shorter period of time, you will save money because the monthly payments are more expensive in the short-term. Let’s say you have a $250,000 mortgage on a 30-year term with a 4% interest rate and a monthly payment of $1,193.
A 15-year mortgage with an interest rate of 3.5% is 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 888-739-5110 If you compare this to the cost of keeping your current loan, it may be better to keep the same terms and interest rate.
A hair short of $600, your monthly payment will increase by $594. It will stay that way for the next 15 years. I’m grateful for the opportunity and looking forward to seeing what the future holds. The payoff will be huge if your income and budget can accommodate a higher payment. The sooner you pay off the debt, the less interest you will pay overall, so it pays to make extra payments whenever possible.
You can cut your loan term in half, move up the date when you will own your home, and save tens of thousands of dollars in interest by doing this. Refinancing your home loan can be an excellent way to take advantage of these benefits.
If you experience a steep increase in income in the years after purchasing the home, you may want to consider refinancing. If you own the home for five years, and your income is now 30% or 40% higher than it was when you bought it, refinancing into shorter term is a natural progression.
3. Remove Private Mortgage Insurance
If you made a down payment of less than 20%, you will most likely be paying private mortgage insurance in your monthly payment. It’s important to calculate the cost of PMI when creating your budget because it’s required until you’ve paid off at least 20% of the loan principal. And while federal regulations do provide for the removal of PMI under certain particular circumstances, you may be ready to do it now.
If you live in an area where property values have been rising in the past few years, that is likely to be the case.
At the time you bought your house, you only had a 5% down payment. If you have been able to save more money, you may want to consider putting a larger down payment on your home. The value of the property may have risen enough in the last few years to cause your loan to fall to 70%. Refinancing your loan with a lower interest rate will allow you to save money on your mortgage payments.
If that’s the case, you can get rid of the private mortgage insurance on a new mortgage. If you have paid off enough of your mortgage, you no longer need to pay private mortgage insurance. If interest rates have fallen since you bought your house, you will get a lower basic monthly house payment and the elimination of private mortgage insurance. You could potentially save a lot of money on your mortgage payments.
If your home value has gone up a lot, it’s a good idea to get rid of the private mortgage insurance. You may be able to save a lot of money by changing your mortgage.
4. Consolidate a Second Mortgage or Line of Credit
People who have lived in their current homes for many years are more likely to be affected by this. It may take some time for those who have recently moved to get used to their new surroundings. There is a chance to take equity out of your home with the increase in property values. The equity could be used to finance other endeavors or investments. That usually takes the form of either a second mortgage for a home equity line of credit (HELOC).
The interest rate is a problem with both types of financing. It is important to compare and understand the terms of each option in order to decide which one is most beneficial for your particular situation. Second mortgage rates are higher than first mortgage rates due to a shorter term.
HELOCs have low interest rates and low monthly payments. They can be used for home renovations or college tuition. Both are illusions. The variable rate structure is to blame for the low interest rates. The prevailing market conditions can affect the interest rate. The low monthly payment is usually from an interest-only term. The loan is attractive to many borrowers who want to keep their payments low.
They eventually come to an end. It can be disappointing when the experience is enjoyable. When the prime rate rises, the interest rate will increase. If the prime rate goes up, your monthly payments will go up as well. When your interest-only term ends, you will need to make principal payments over a reduced term. Before you make a decision on an interest-only loan, you should consider how much you can afford.
Refinancing is the best way to get rid of a second mortgage.
You may not get a lower payment if you refinance a first and second time. Refinancing your first and second mortgage may have fees associated with it. It will get you a stable payment and interest rate, and reduce your housing expense to a single monthly payment. It can allow you to build more equity in your home by paying off your mortgage quicker.
This is one of the reasons for refinancing. Refinancing can help you save money and take advantage of lower interest rates. You should not add more secondary financing after you get rid of the first one. You could be at risk of foreclosure because of this.
5. Change from a Risky Loan to a Fixed Rate
Variable rate loans and balloon mortgages are still being used by some homeowners despite record low interest rates. The decision to choose such types of loans has been risky as they can leave homeowners vulnerable to payment increases or large balloon payments if interest rates rise. They saved a small amount of money because of the lower interest rates. They have taken on a lot of risk. Risk always has the potential for both reward and loss.
With an increase in general interest rates, your interest rate can rise. The lifetime cap on most ARM loans is 5%. It helps to ensure a fair and manageable repayment structure with the help of this cap. The potential to pay 8% is real even if your initial rate was 3%. The path to getting that 8% rate is not always straight-forward.
There is a stable rate on balloon loans. It’s important to be aware of the risks associated with balloon loans because they have a shorter repayment period. The balloon feature means that the loan will be due at the end of the term. It is usually between five and 10 years out. Before making a decision about how long to invest, it is important to consider all of the options.
Today’s balloon loans allow you to change the mortgage at the time the loan comes due. This can give homeowners the chance to lower their monthly payments. Refinancing out of your balloon mortgage is the best way to take advantage of record low interest rates. It would provide more financial security and peace of mind, but it would also save you a lot of interest over the life of the loan. When the balloon on your balloon loan is about to pop, you should take a chance that rates will behave well.
6. When Your Financial Situation has Improved
I bet you never thought of this one. You’re as surprised as I am. Many first-time homebuyers are not in the best of financial shape at the time of the purchase. A large down payment on a home can help first-time buyers improve their finances going forward. You may have accepted a high interest rate due to less than perfect credit, a small down payment, or even a high debt-to-income ratio. If you can improve your credit score, you can get a better interest rate on your car loan in the future.
If your financial situation has improved since you bought your home, it is time to get serious about changing your mortgage. It could save you money and help you meet your financial goals. With a higher credit score, a bigger paycheck, and more home equity, you should be able to get something close to the very best mortgage rates available. You can achieve your goal of securing the best rate with the right mortgage lender.
It is not always the direction of interest rates that determines when you should re-finance. The amount of equity you have in your home, your credit score, and other factors can all affect whether now is a good time to refinance. It is an improvement in your personal financial profile. This can help create more opportunities for financial success. It makes sense to investigate refinancing once that happens.
7. Remove a Cosigner from Your Mortgage
There is a rumour that you can remove a cosigner from a mortgage through a cosigner release. It’s best to check with your lender before attempting to remove a cosigner from a mortgage. Don’t bet on it! I don’t think it will happen, but you never know. A mortgage is a securitized loan and legally recorded. If a mortgage lender would even consider doing it, releasing a cosigner isn’t as simple as it is with other loan types. To be aware of the requirements and restrictions that come with cosigning a mortgage loan, it is important to do research.
Refinancing into a new loan in your own name is the best way to remove a cosigner. If you don’t have a cosigner attached to the debt, this is the best way to make sure you are solely responsible for the loan repayment.
Having a cosigner with a mortgage should not be a permanent arrangement. It is important to consult a cosigner before making a long-term decision. The loan will remain on the cosigner’s credit report until it is paid. If a person is willing to help you get a home by cosigning the loan, you should be very careful about getting them removed as soon as possible. It’s important that the cosigner is aware of the risks before agreeing to help. The easiest and final way to do that is a refinance. Refinancing could be the perfect solution for you if you want to lower your mortgage payments.
It is not possible to have a cosigner released from a mortgage by having them execute a quitclaim deed on the property. The cosigner must be released from the mortgage through the same loan servicer. They are removed from the title to the home. It has absolutely nothing to do with the mortgage, and certainly won’t enable them to be released.
Mortgage Refinance Calculator
Mortgage rates are at historical lows. If you obtained your mortgage several years ago, have improved your credit score, or just want to reduce your monthly payment, you can possibly save a ton on interest. You may be able to shorten your loan term and pay off the loan faster. Over the life of your mortgage, the difference of 1% can save you tens of thousands. It is important to compare different mortgage rates from different lenders in order to get the best rate.
You can get an idea of how much you could save by using our calculator.
Step 1: Current Mortgage Information
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Step 2: Refinance Information
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Step 3: See Your Results
Monthly Payment
Current: $599.55
New: $438.47
Remaining Interest
Current: $115,838.42
New: $53,848.55
Remaining Total
Current: $215,838.42
New: $157,848.55
Remaining Years
Current: 30
New: 30
Is It Worth It To Refinance a Mortgage?
This question only applies to doing a refinance to lower your interest rate. The total cost of the refinance should be considered, along with any closing costs that may be required. A simple math equation can be used to answer this question. You can find the answer to the question if you solve the equation. Refinancing comes down to the time it takes to recover your closing costs. It is important to consider the long-term savings you will receive, as well as any additional fees associated with the process.
Whether you are buying a new home or refinancing your current one, closing costs are a part of the mortgage process. Before you commit to a mortgage, it's important to understand what closing costs are and factor them into your budget. It is recommended by industry experts that you compare the savings you will get from refinancing with the amount of closing costs you will pay to get that benefit. Taking into account the long-term effects of refinancing is important.
You should be able to recover your closing costs within 24 to 36 months if you have monthly savings on your refinance. It's important to consider the long-term savings that can be gained as well as the short-term costs when you re-finance.
A couple of examples are the best way to show how this works. It makes it easier to understand by providing examples.
A Scenario Where Refinancing May Not Work:
You have a $200,000 mortgage. Before making a decision on how best to manage your mortgage, it is important to carefully consider all options. You have an opportunity to lower the interest rate on the loan from 3.5% to 4.50%. You can potentially save a lot of money with the lower interest rate. You will have to pay $5,000 in closing costs. It is important to consider the long-term benefits of refinancing and the short-term costs associated with closing. It is within the range of 2% to 3% for closing costs. You should shop around and compare offers to make sure you get the best deal.
Your monthly payment is $1,013. Automatic payments can be set up to make sure your payment is on time. The payment will be cut in half by refinancing into a 3.5% loan. The homeowner's monthly payment could be reduced by more than $500 a month. That will save you money. Canceling unneeded memberships can help you reduce your expenses.
The number of months it will take you to recover your closing costs can be determined by dividing the amount of closing costs by the savings in your payment.
$5,000 ÷ $115 = 43.5 months
The closing cost recovery period will exceed the upper range of the recovery period, so it may not be a recommended strategy. It is important to consider the long-term implications of this decision before committing to a closing cost recovery period. If this is your forever home, you may decide to go ahead with the refinance. If you plan on staying in your home for the foreseeable future, it's worth considering if you should re-finance. Saving $115 per month for 30 years is a lot of money. You could use the money to build a nest egg for retirement or other financial goals.
You need to be aware that the coveted forever home doesn't always turn out to be. It is important to research the situation thoroughly before making a decision. Sometimes a job change, career change, or need to relocate for a change in family status gets in the way of the long-term plan. Making changes to your life plan can be difficult, but it's important to remember that these decisions are often necessary and beneficial in the long run. That is the reason for the closing cost recovery period convention. All parties involved have been adequately compensated for their involvement in the transaction.
A Scenario Where Refinancing Definitely Works:
Your current mortgage rate is 5.5%, so let's take all the same numbers. Refinancing your mortgage may allow you to save even more money each month. The current mortgage payment is $1,135. The average mortgage payment for homeowners in your area is more than that amount. You will save $237 per month if you drop your payment to $898. Over the life of the loan, this can add up to hundreds of dollars in interest savings.
Let’s see how that plays out using the same $5,000 in closing costs:
$5,000 ÷ $237 = 21 months
It's a no-brainer to re-finance based on those numbers. The minimum recovery period for closing costs is 24 months.
It will be pure savings for the rest of your mortgage term if you recover your closing costs. Money will be saved each month if you stay in your home for a longer period of time.
Can I Refinance My Mortgage with No Closing Costs?
You can avoid closing costs, but be careful how a mortgage representative answers the question. If you're unsure of the answer, it's important to get a second opinion. If that person is a bit over-eager to get your business – especially if your objective is to get the lowest possible rate – he or she may answer that question by telling you that you can “roll your closing costs over to the new loan.”
That is a correct answer. It may not be the most complete answer. It addresses the concern that you may need to pay out-of-pocket for the refinance. Many lenders offer refinance options with no closing costs. Including the closing costs in the new loan will take care of that situation neatly, while preserving the sweet, low interest rate you are hoping to get. If you want to make sure that your costs are taken care of up front, this can be a smart move.
You may not be paying them out-of-pocket, but you will be paying them over the full term of the new mortgage and with interest added on to make those closing costs even higher. It's important to know that closing costs will be included in the total cost of the loan even if you don't pay them upfront.
There is a better way to do a no closing cost refinance. It is possible for a lender to waive certain fees in exchange for a higher interest rate.
Lender Paid Closing Costs
This can sound like a classic oxymoron to a person not familiar with the process. It is a powerful tool to help people understand complex systems and processes. After all, how – and why – would a lender pay closing costs owed to itself?
There is a relationship between interest rates and discount points. It's important to understand how interest rate and discount points work together, because they can affect the cost of borrowing for a home loan.
Paying discount points can lower your interest rate. The opposite is also true. Sometimes things seem to be going wrong, but it's important to remember that they are just the way they should be. You can increase your interest rate in exchange for having the lender pay points back to you.
If you increase your interest rate by a quarter of a percent, the conversion will be 1% of your new loan amount. If you want to lower your monthly payments but also save on closing costs, this exchange rate is a great option.
If your closing costs are 2% of your new mortgage, you can have the lender cover those costs by increasing your interest rate.
If the base rate is 3.50% with 2% in closing costs, you can make the closing costs go away by increasing the interest rate. It can make your mortgage payments more affordable in the long run.
Through the slight increase in the interest rate on your new loan, you are still paying for the closing costs. It is possible to have the seller contribute a portion of the closing costs. But it avoids at least two problems:
- The need to pay closing costs out-of-pocket, or
- Adding them to the new loan amount will increase your loan balance and monthly payment. Before agreeing to the terms, it is important to take into account the additional costs associated with the loan, such as interest and fees.
Lender Paid Closing Costs Make Sense Most of the Time
There is more benefit to lender paid closing costs. It allows buyers to keep more of their own money so they can put a down payment on a home. I worked scenarios based on the closing cost recovery period in the previous section. These examples can be used to understand the cost recovery period and how it applies to our own financial situation. But if you’re using lender paid closing costs, there are no closing costs to recover.
If you can get a lower interest rate while having the closing costs paid by the lender, it would make sense to do a refinance. A refinance can be a great way to save money on your mortgage and reduce the amount of interest you pay over time.
It will take you more than three and half years to recover the closing costs if you change your mortgage to a 3.5% loan. It's important to consider the long-term savings when making a decision like this, as it may be worth more than the initial cost of refinancing.
Refinancing at 3.75% would make perfect sense if you were able to do lender paid closing costs. Refinancing could save you thousands of dollars in interest payments over the life of the loan. It would make sense to lower your interest rate from 4% to 3%. If you switch, you could save hundreds of dollars in interest over the life of your loan.
The lower interest rate and monthly payment will benefit you, but you won't have to pay closing costs or increase your loan balance.
A major part of the discussion with your mortgage lender should be lender paid closing costs. It's important to know that closing costs can vary greatly and that lenders should be able to provide a breakdown of all the costs associated with refinancing.
Is Refinancing My Mortgage A Good Idea?
There are two main points I hope I’ve made clear this article:
- There are many more reasons to refinance your mortgage than just getting a lower interest rate and monthly payment, and
- Even if the interest rate is small, there is a way to get a new mortgage at no cost.
If you think about the various reasons you might want to re-finance your mortgage, focus less on interest rates. Refinancing your mortgage if rates are a little bit lower than what you are paying right now could be a good idea.
