Men and women might find they wish to lower their mortgage payments thanks to the low rates available today, and refinancing offers them a way to achieve this goal. Some individuals choose to refinance to pay their mortgage off faster. Regardless of why a person takes this step, this option remains open to all with good credit, and now is a good time to get rid of an existing mortgage for one that offers more favorable terms. Homeowners must understand the advantages and drawbacks of taking this step, such as the fees involved. Every person who is considering this step should review the information below to determine whether it is the right move for them.
Homeowners often choose to refinance when they have goals they wish to meet. They might do so to get a lower interest rate or finance under a different mortgage term. However, they shouldn’t take this step lightly. The homeowner must consider the pros and cons of doing so as a refinance differs from a second mortgage. The refinance means they get a new mortgage, while a second mortgage provides money from the equity established in the home. Anyone looking to refinance must ensure they understand the difference between the two financial products.
How Does a Person Refinance Their Mortgage?
Before refinancing a home, the owner must know their credit score, as this affects the interest rate they pay on the new mortgage. They must calculate the current value of the home, and real estate sites on the internet become of great help in determining this value. Finally, a person must research current mortgage rates to find the best rate for their specific financial situation. The last step involves gathering the necessary documentation for a mortgage and presenting this to the selected lender.
Homeowners must know they will pay closing costs to complete the refinance process. Every time a person obtains a new mortgage, lenders collect these fees. The fees can add up to thousands of dollars, and the homeowner must be certain they have the cash to cover the fees. If a person isn’t planning on staying in their home for long, experts recommend they not take this step, as the borrower probably won’t recoup the closing costs before moving.
Lenders charge an application fee to cover administrative costs, the borrower’s credit check, and the appraisal, in some cases. This fee ranges anywhere from $75 to hundreds of dollars depending on the lender, and borrowers don’t receive a refund if the lender denies the application. When the application fee doesn’t include an appraisal, expect to pay up to $1,000 to have this task completed.
When a lender approves a loan, the homeowner pays a loan origination fee. This fee covers any financing and administrative costs incurred by the lender, and most lenders charge one percentage point of the loan amount being required. Furthermore, lenders review refinancing documents before closing on the loan, and they charge the borrower a separate fee for this service. Expect to pay a few hundred dollars for the review.
Ask about a prepayment penalty. Some lenders charge this fee when a borrower pays the loan off early, even if they refinance the loan with the same lender. Homeowner often find the prepayment penalty equals several months of mortgage payments. Finally, ask the lender if they will assess a title search fee, recording fee, attorney fees, an inspection fee, or flood certification fees. Again, the cost of refinancing could increase by hundreds of dollars if the lender adds these to the closing costs.
The Benefits of Refinancing
Most homeowners choose to refinance to lower their interest rate, and some opt to purchase points to bring the rate down more. Purchasing points involves paying a fee upfront to get a lower monthly rate and lower payments. The homeowner uses the money saved thanks to the lower payment however they desire.
Refinancing often allows a homeowner to clear their mortgage in a shorter time period. For example, a person who moves from a 30-year loan to a 15-year one will own their home in less time and build equity faster. However, more money will need to go to the payments each month to achieve this goal, so each person must evaluate their financial situation before choosing this option.
Anyone with an adjustable-rate mortgage should consider refinancing, and the same holds true for those who want to merge their primary mortgage and home equity line of credit. Certain loans come with an interest-only repayment period. Anyone about to exit that portion of the loan might want to refinance before the principal portion of the loan rolls into the monthly payment. When this happens, the payment could jump and lead to financial issues for the homeowner.
When to Refinance?
Homeowners often want to know if now the time to refinance is. The best way to determine this would be to run the numbers and see how much money they will save by going this route. Calculate the fees and add them into the equation to get an accurate picture of the potential savings. When closing costs are high, they will need additional time to recoup those costs and see the actual savings. Anyone moving in the near future might want to hold off on taking this financial step.
If you are unsure of whether refinancing is the right move speak to a financial advisor. These professionals know how to calculate the savings using a variety of scenarios, so you can see what will happen if you make different choices. Ask for help. Lenders want to work with individuals who can make the payments as agreed. They don’t want the hassle of foreclosing on a home. However, they can only go by the information provided to them. They don’t know the borrower’s full situation. For this reason, it remains the responsibility of the borrower to know how much they can afford. Keep this in mind when determining whether now is the right time for you to refinance. Many homeowners will find it is.