If you properly refinance a mortgage, you could save thousands of dollars over the course of the loan. However, there are many factors to keep in mind when considering if you want to refinance your mortgage.
Benefits of a Mortgage Refinance
Many people don’t realize just how many benefits are associated with refinancing your mortgage. In fact, there are numerous ways you could save money.
Improve Your Mortgage Rate
A mortgage rate is the interest rate of your mortgage loan. You will typically hear about “today’s current mortgage rate”. That just refers to the national interest rate average. The average mortgage rate will vary based on the setup of the mortgage. For example, the average of a 30-year fixed interest rate mortgage may be 2.75% while a 20-year fixed interest rate mortgage may be 2.64%.
It is also important that you know the difference between an interest rate and the annual percentage rate (APR). Your interest rate is essentially like a “fee” you get charged for borrowing money from your lender. Your APR on the other hand, is a reflection of multiple factors. The interest rate, mortgage points, mortgage broker fees, and more are considered in the APR. That is why when you look at mortgage rates, you will typically see the interest rate by itself as well as the APR. The APR is usually higher than the interest rate percentage.
A mortgage refinance provides you the opportunity to improve your mortgage rate. If your mortgage rate at signing was 2.68% but now you could get a rate of 2.53% then a mortgage refinance may be beneficial! When you get an improved mortgage rate you can see that translate into savings. You could see a smaller monthly payment and potentially save thousands of dollars over the course of the loan.
Update the Term of Your Loan
When you refinance your mortgage, you have the opportunity to change the term of your loan. You could either shorten or lengthen the overall time of repayment. Usually, borrowers shorten the loan in order to pay off the debt faster. Reducing your loan terms, on top of getting a reduced mortgage rate, can save you a lot of money in the end. However it is important to note that making the loan terms shorter could also lead to higher monthly payments since the debt will be dealt with sooner and repaid over less time. Sometimes people opt to make their mortgage longer but that is generally not beneficial.
If a borrower uses a mortgage refinance to lengthen their loan terms, they may be in for an unpleasant surprise. Increased loan terms can mean more interest over the course of your mortgage. This could cost you thousands. While it may help in reducing your monthly payment, it may not be worth it in the end.
Change the Type of Loan
There are two main types of loans. There is an adjustable-rate mortgage (ARM) and a fixed-rate mortgage. These names are pretty self explanatory! In an ARM, the interest rates are constantly changing. They are variable so there is no guarantee what they will be. Some months may be more expensive than others.
Fixed-rate mortgages are the opposite. Their interest rate terms stay the same! That means they can provide a good opportunity for improved financial stability. When you can anticipate the cost of your mortgage, you can better budget!
Get Cash Out of Your Home
Many people don’t realize that they may be able to get cash out of their home. There are three main types of mortgage refinances:
- Rate-and-Term Refinance: This is one of the more popular mortgage refinance options. In this refinance, the borrower can change the rate and term of the loan. Individuals typically tend to choose this type of refinance when their goal is to save money.
- Cash Out Refinance: When you choose a cash out refinance, you can take advantage of your home equity. When you refinance your loan, instead of financing the remaining loan balance of the original mortgage, a cash out refinance will be based on the entire value of the home. The loan amount would be more than what you actually owe on the loan. This provides you with the money for your home while getting some extra money on the side!
- Cash-In Refinance: This is the opposite of a cash out refinance. In this type of refinance, individuals provide more money during closing in order to reduce the overall loan amount. Borrowers typically do these types of refinances when they want to lower their loan-to-value ratio (LTV). One common motivation to reduce a LTV is to get rid of private mortgage insurance (PMI).
A cash out refinance provides you the chance to get cash out of your home. Not every refinance option may be a good fit for you. That is why it is best to speak to a professional to ensure you are making the right financial decision.
How Much Does It Cost to Refinance Your House
Unfortunately, refinancing isn’t free. Instead the cost to refinance can be pretty hefty and should be accounted for properly. However, as hefty as these costs may be, it still may be worth the mortgage refinance in the end. There are plenty of closing costs associated with a refinance. A borrower can expect to pay between 2% to 5% of the total loan amount in closing costs. According to Freddie Mac, on average individuals pay $5,000 for a mortgage refinance. The total amount of closing costs that you will pay can change based on factors like:
- The type of loan
- The loan amount
- Location of the home
- Mortgage points
- Appraisal fee
- Title insurance fee
- Recording fee
- Legal fees
- Credit report fees
- Prepaid interest charges
These are just some of the common closing costs that you may need to account for with your mortgage refinance.
A mortgage point (also referred to as a discount point) is a fee that the borrower can pay to reduce their interest rate. Lenders usually set limits on how many points the borrower is allowed to purchase. One point costs 1% of the mortgage amount. This means if your mortgage was $175,000 then one mortgage point would cost $1,750. At close, if you purchase mortgage points then you will need to deal with these costs. Mortgage points are typically only worth it once you’ve determined your break even point, how long you plan on staying in the home, your credit impact, etc.
In order to finance your home you will need a home appraisal. These appraisals provide an unbiased opinion from a professional to determine the home’s worth. In order to get an appraisal, an appraiser must be hired. Appraiser expenses can vary but usually can cost hundreds of dollars.
Title Insurance Fee
Mistakes happen. There could be issues with your ownership records. That is why borrowers should purchase a new title insurance policy. Title insurance policies can be expensive and can account for a large portion of closing costs that you may need to deal with.
Recording Fees and Legal Fees
Both recording and legal fees vary on many factors. For instance, recording fees are required in order to be recorded within your county. The location of your county will determine the cost of these fees. Any legal fees that you may encounter are the same. They will vary based on the legal help that was given, the professional involved, etc.
Credit Report Fees
Not every lender will require the borrower to be responsible for any credit report fees. When a lender wants to determine your creditworthiness they will look at your credit report. Usually lenders cover these expenses but if they don’t it could cost you roughly $50 give or take. Luckily, this isn’t one of the expensive closing costs that you may have to deal with.
Prepaid Interest Charges
Every lender is different. Some have different requirements for their borrowers. Your financial institution may have you pay your first month’s interest upfront during closing. The amount of interest that you will be responsible for depends on variables of your loan specifically.
What is a No Closing Cost Refinance Loan?
The world of refinance has many terms. One term that you may come across is a no closing cost refinance loan. Sounds too good to be true? Because it is. The name is pretty deceiving. Lenders will advertise their loans to have no closing costs. However, it’s not as simple as you may think. Instead of making the borrower pay the closing costs upfront, the lender will roll those costs into the loan. This spreads them out over time. So while you may think you aren’t dealing with closing costs, you actually are. There are other setups that lenders may use to try to persuade the borrower with. When you see this type of loan, make sure to have a detailed discussion with the financial institution.
Are There Ways to Save Money on Closing Costs When You Refinance a Mortgage?
There are some tips and tricks that you can follow that may be able to help you reduce the amount of closing costs that you need to deal with.
Improve Your Credit
A better credit score means a better interest rate. A better interest rate means less money you have to spend. When you are looking to refinance your mortgage, you should check your credit score. Before you refinance you want to make sure you spend time improving it so that you get the best rate possible!
This isn’t some random used car dealership. Nor is it a neighborhood garage sale. This is a mortgage refinance and should be handled properly. However, that doesn’t mean don’t negotiate! That just means negotiate in the best way that you can. If you have a strong credit standing and good flow of income, you may be able to negotiate some costs down. If your lender agrees you may be in for some nice savings.
Don’t Buy Mortgage Points
The goal of mortgage points is to provide borrowers the opportunity to reduce the amount of interest on their loan. If the borrower already has a good credit score then mortgage points may not be very helpful. Avoiding these can save you thousands at closing.
The best way to find your lender is to compare your lending options. Not every financial institution is the same. Some may be better equipped to handle your financial situation. Others may offer more rewards. Either way, it is best to compare your mortgage refinance lending options!
Is a Mortgage Refinance Worth It?
It may be! That all depends on your current financial situation. You want to understand your goal of a mortgage refinance. What do you aim to achieve? You want to look at some factors when deciding whether or not it makes sense for you to refinance your mortgage.
Save Money on Your Interest Rate
Many people choose to refinance their mortgage because they want to save money when they reduce their interest rate. If you want to determine if a mortgage refinance is worth it, then you should calculate the break even point. You can figure this out yourself, with the help of a professional, or by using free tools online.
Get a More Manageable Monthly Payment
Sometimes mortgages can have high monthly payments. Mortgage refinances can provide the opportunity for borrowers to reduce their monthly payment and in turn make it more manageable. It is important to look at the loan overall instead of month-by-month. Even if you have a lower monthly payment, you may not hit your break even point for years. A lower payment may be nice in the present but can mean less savings in the long run.
Mortgage refinances can be extremely helpful if handled properly. When deciding if a mortgage refinance is right for you then you need to consider multiple aspects. One aspect that should specifically be considered is the closing costs associated with the loan. There are plenty of closing costs that you may need to account for. The best way to plan for a mortgage refinance is to talk to a professional. Refinance professionals can help you understand all of the aspects of your loan, the tax implications, costs, fees, and more.
There are also ways that you can try to reduce the total amount of closing costs that you may be responsible for. Improving your credit, negotiating costs, avoiding mortgage points, and comparison shopping can save you hundreds or even thousands on your closing costs. When considering a refinance it is important to make sure you understand how these costs will impact whether or not the refinance is worth it. Take your time and the cost to refinance may be worth it in the end!