What Is a Mortgage Refinance?
A Mortgage Refinance is a second mortgage on a home that pays off the first mortgage, typically with a lower interest rate than the first. A mortgage refinance works the same way that a first mortgage does. The homeowner must get approval from the lender and agree to the home loan terms and interest rate. While a mortgage refinance can be a sound decision, financially, if done at the wrong time or for the wrong reasons, it can create even bigger debt problems than before the mortgage refinance.
Good reasons to refinance a home mortgage
When done for the right reasons, a mortgage refinance can make monthly mortgage payments smaller. Sometimes a mortgage refinance will lower monthly mortgage payments by extending the loan back to 30 years. This typically means that the total the homeowners ends up paying for the home is much higher than it was originally. If this is the only option you have to getting your mortgage payments lower, make sure you know the bottom line.
In other instances, a mortgage refinance can save the homeowner money in the long-term instead of immediately, or it may even decrease both monthly mortgage payments and the bottom line. A cash-out mortgage refinance is an option that gives the homeowner cash to use for a home remodel, education or upgrading to energy efficient appliances.
When is the right time to refinance my home mortgage?
Homeowners interested in a mortgage refinance should keep a close eye on the real estate market. Mortgages follow in close line with the real estate market, in interest rates and loan terms. Lenders often raise interest rates in a falling market, unless the government is encouraging lenders to keep rates low. In a rising market, lenders often decrease home loan interest rates due to competition.
A low home loan interest rate is very important for homeowners who are considering a mortgage refinance. Refinancing your home loan at a higher interest rate is almost never a good idea.
- The market is not the only thing that influences home loan rates. Debt is almost just as important. If a homeowner has spent a few years improving their credit score, mortgage lenders are more willing to offer that homeowner a better interest rate, making a mortgage refinance a good idea.
- The amount of equity in the home is another thing to consider when thinking about refinancing a home. Equity is the value of the home minus the amount still owed on the mortgage loan. Homeowners with high equity in the home have a better chance of refinancing at a lower interest rate. This is because the new loan will be enough to pay off the first mortgage in full.
Are There Fees for a Mortgage Refinance?
Yes. Some mortgage contracts contain penalties for early pay-off, taking refinance off the table. Other fees involved negate any savings the homeowner could gain. Find out what the fees are before making a decision to get a mortgage refinance and make sure the current interest rate is a big enough drop to make the fees worth it. In most cases, it is not beneficial to refinance a home very often.
Consider a Loan Against Home Equity Instead
Borrowing against the equity in your home is typically easier to do than a refinance. Equity loans are low risk for lenders but could end up being a bad decision if the housing market takes another down-turn. If that were to occur, the homeowner could end up owing more money than the home is worth. It can be of great benefit to speak with professionals in the real estate business before deciding which way to go.
Remember that obtaining a loan for a refinance or to withdraw some equity is negotiable and competition is high. Don’t settle for the first offer that lands on the table, get at least 5 offers and make sure each lender knows you have several options. Always get the offers in writing and do side-by-side comparisons.
If you have no equity in your home, have late payments or owe more for your home than it is worth. HARP is a good place to start. HARP.MortgageRefinanceRates.org
Once you have at least five offers on the table, from various companies and types of lenders, it is time to find the top three offers. Each offer should have and estimated payment in writing. Compare this to your current monthly mortgage payment. Divide the total cost of the loan by the difference in payments. The number you end up with tell you the number of month required to pay off the mortgage refinance.
Next, deduct the number of months needed to repay the mortgage refinance loan from the number of months you plan on living in the home. Multiply the answer by your monthly savings. For example, if the first refinance offer saves you $200 per month and requires $4,000 in closing costs, you need at least 20 months of savings to pay for the loan. If you plan on living in the home for 60 months (five years), then you should save $8,000 over the five years. Perform this calculation on all top-three mortgage offers.
Now you have the ammunition you need to negotiate for the best deal. Call the lenders who gave you the second the third best offers and ask them to beat your best offer. Continue this tactic until you feel you have the best offer possible.