There is no question that the housing market at the moment is a buyer’s market. As the economy recovers from harsh times, those looking to purchase a home can find better interest rates than in the past.
According to Bankrate.com, it is not uncommon to find an interest rate of 3.85% on a 30 year fixed mortgage. For those who already have a mortgage, it may be the right time to consider refinancing.
Your Current Interest Rate
The average homeowner can save $3,000 a year by refinancing. If your current interest rate is 2 points higher than the current market rate, refinancing may be a good idea.
When comparing your overall savings to the cost of refinancing, a 2 point decrease in your interest rate makes the cost worth it in the end. You must also ask yourself how quickly you want to realize your savings and will you see these savings before you purchase a new home?
Costs Associated with Refinancing
Refinancing your home is comparable to purchasing your home the first time. The fees you paid the first time can come back to haunt you during your refinancing. Expect the fees to total 2-5% of the loan amount. This covers:
- Application fee
- Appraisal fee
- Survey costs
- Hazard insurance
- Title Search
- Home inspection fees
- Credit report fee
You may also find attorney fees, mortgage insurance, loan origination, and title insurance fees in your refinancing costs. These are the typical fees associated with the initial purchase of a home, as refinancing is similar to repurchasing your home.
Staying Long Enough to See the Savings
If you are planning to refinance, you need to understand your savings won’t be immediate. With the cost of refinancing, you must cover the initial fees before seeing the benefit of a lower interest rate. Many people believe refinancing will show immediate savings, this, unfortunately, isn’t the reality.
Many homeowners will take out a loan to cover the cost of refinancing. This is ideal if your interest rates on the loan are lower than adding the cost to the new mortgage. However, you will still need to pay back the loan, which decreases the initial savings of refinancing. Either way, you need to stay in the home long enough to see your savings.
If you have already considered selling your home, refinancing may not be a smart choice. It will be more beneficial to sell the home, take what you can get and purchase a new home at a lower interest rate.
However, if you love your current home and plan to stay long term, refinancing will lower your future mortgage payments. Decide before you start the process whether or not you can see yourself living in the home for another 30 years.
Refinancing is a financial move for those looking to take advantage of lover prevailing interest rates. As the economy begins its return to stability, you may want to consider refinancing today. Be sure you are a good candidate based on your current interest rates and your future plans for your home. Refinancing now will create a financial burden if you decide to sell your home earlier than suggested.
Home Affordable Refinance For Various Loans and Types
The loans available to buy a new home were limited a few years back. The buyers had only a few options like the fixed rate conventional mortgage, an FHA loan or a VA loan. However, with time, various loan plans were introduced and today, buyers can select from the numerous options that are available to suit their needs.
The most common loans that are usually available are the fixed rate mortgages and the adjustable rate mortgages. These mortgage plans have some variations as well. Apart from this, another loan available is the reverse loan. This loan plan supports the homeowners above 62 years by converting some part of the home equity into their source of income.
30 Year Fixed Rate Loan
The 30 years fixed rate loan is the most common type of home loan. In this mortgage plan, the borrower has a period of 30 years to repay his loan, and the interest rate is fixed. This loan plan is appreciated by people, as the loan payments are steady as well as predictable.
15 Year Fixed Rate Loan
The second most common loan plan is the 15 years fixed rate loan plan. This assists the borrower in purchasing the home in just half the standard time. The monthly loan payment of this loan plan is higher because the loan is of shorter duration compared to the 30-year plan. The qualification requirement for this loan is not easy to meet.
Adjustable Rate Mortgage
This type of loan plans has lower monthly loan payment as well as a low rate of interest because of the rate of interest changes. Many borrowers prefer this loan plan, as the initial payments that have to be made are smaller. However, the borrower has to accept an increase in loan payments, and this can sometimes be significantly high.
Loans Having Interest Only Payments
This type of loan plan is usually available for a short period, and the monthly payments would thereafter increase largely. However, this permits borrowers to make lower monthly payments without any significant increase in loan balance. Since the borrowers do not build up equity until the time value of the property is not increased, the loan balance remains the same.
With the help of this loan, homeowners aged above 62 years or more can convert a part of their equity into income. This mortgage plan is quite secure. In this plan, the owner does not have to pay the loan amount until their death, unless they permanently shift from the place or sell it.
In the buydown loan, the rate of interest is low. There are two types of buydown loans, temporary and permanent. The monthly loan payments and interest rates of temporary loans are low for some time, whereas, in case of permanent loans, the interest rate is low and is fixed.
Fixed Rate Mortgage Plan
This is the most famous loan plan. The loan amount is entirely amortized in this loan plan. For borrowers who are taking home loans for the first time, the FHA Loan is the most suited option. The requirements for the down payment are reduced to a minimum and the loans get insurance from the government.
VA Home Loans
VA loans are given to veterans by the government. The main benefit of these loans is these loans require no down payment. Another loan option is an interest-only loan, where the applicant has the option to only make payments on the interest amount.
Mortgage Plans with Adjustable Rates
In this loan plan, the rate of interest fluctuates periodically. The borrower also has several options for the payments as well as index rates. In the combo mortgage loan, there are two loans. The loan in this type can be either fixed or adjustable or a combination of these two. Most of the borrowers prefer taking both the loans in order to avoid paying private loan insurance.
The rate of interest keeps on fluctuating in the adjustable rate loans. The individuals who wish to pay lower interest rates initially choose mortgage buydown. The interest rate in this plan is lower because the fee is paid at a lower rate, therefore the name buydown. The buyers can buy down interest rates for the borrowers in this plan.
Streamlined K Mortgage Plan
This loan plan rolls up the entire funds in a single mortgage. It is very easy to get this loan, and the paperwork required is very less. The bridge loans are utilized when a buyer puts up the property that is not sold as well as the seller borrows the equity in order to buy a new home.
These loans are used in obtaining cash from various financing agencies. The loans are either adjustable or fixed, and the applicant can choose one to draw funds when required. The lender makes monthly payments to the borrower in this loan as long as the borrower stays in the house.
A Quick Introduction to Home Affordable Refinance As Well As Loan Modification
The Home Affordable Modification Program helps and supports homeowners who are struggling to make the monthly loan payments. This loan program significantly lowers the loan payments, makes it convenient, and at the same time sustainable in the end for the borrowers. If a person is currently occupying a house but has no employment, he becomes eligible for HAMP or home affordable modification program.
This program has been a great support to the homeowners who are trying to avoid foreclosure on their loans that comprises of FHA loans as well as equivalent programs for VA home loans.
Under the latest loan program, there are many modifications and refinancing options from which to choose. The homeowners, who have FHA loans have many options to save their property, prevent default and make the loan payments smoothly.
What Is Home Affordable Refinancing and Loan Modification?
In this plan, the qualified borrowers are supposed to pay a lower rate of interest, and the monthly payments are more affordable. Refinancing is a process of replacing the old loan with a new one by using the new interest rates as well as other terms.
The refinancing loan options are for those borrowers who are presently making loan payments for the last year. The HAMP is slightly different where the borrowers qualify when they have a conventional home loan of the FHA loans from some years back and are finding it difficult to make the monthly loan payments.
Who Is Eligible?
A person qualifies for HAMP or Home Affordable Loan Modification when he is not able to make the monthly loan payments. The borrower finds it difficult when there is a sharp increase in monthly payments on the variable rate loans.
It also comprises of the financial hardships because of any reason. The circumstances to qualify may vary, thus it is better to find out the specific issues, which are related to loan payments, to know if you can qualify for HAMP.
A refinancing loan is different from FHA loan modification. Whenever a loan is modified, a part of the original mortgage might be forgiven. The terms of an existing loan are negotiated again or interest rates and loan payments are lowered. Such changes are made to the original loan plan instead of getting a new loan. A qualified borrower can select from any of the mentioned options.
Five Advantages of Refinancing Your Home
Many people hear news about the benefits of refinancing their home loans. It might be their bank, a television commercial or they might be hearing friends talk about it. Refinancing is a popular option for plenty of homeowners because of the good interest rates and because the housing market is recovering.
Too many people do not understand the process of mortgage refinancing or the many advantages it offers. Below are five advantages of refinancing your home.
Lowering Monthly Payments
There are plenty of homeowners who have higher interest rates than what is available today. Homeowners who purchased their homes during the housing “boom” probably got an adjustable rate mortgage loan and have watched the interest rates go up and up. The main reason homeowners refinance is to lower the interest rate which lowers their house payment.
Change of Loan Type
Some homeowners want to change the type of loan they have to save money. Most homeowners want to get out of an ARM (adjustable rate mortgage) loan and get into a fixed rate. For homeowners planning to stay in their homes for a while, it is better to get out of an ARM loan and into the fixed loan.
For those planning to move in a few years, getting an ARM loan is beneficial because of the lower initial interest rate and lower closing costs.
With a VA hybrid loan or a VA hybrid ARM loan, you can potentially save thousands of dollars on your home loan. Any veteran of the military who has served or is serving can qualify for a VA loan. Veterans with a general or honorable discharge qualify as well.
This loan mimics a 30-year fixed-rate loan with no changes in the interest rate during the first 36 to 60 months. After that time, the interest rate can go up or down, but there is a cap that does not allow the rate to move more than one percent a year. You can refinance a VA loan like this at any time.
Cash From Equity
Homeowners who have built up some equity in their homes like to use it to their advantage by refinancing and getting cash back from the equity. Some homeowners use their equity money after refinancing to remodel their homes, pay off bills or for other reasons.
Paying Off the Loan
For homeowners in a better financial situation than they were when they took out the loan, they might want to pay off their mortgage loan. Some homeowners do this by refinancing the mortgage and cutting 10 to 15 years off of the loan. The monthly payment might be a little higher, but the savings are substantial, and the loan paid off much quicker.
Mortgage refinancing might not be the answer for everyone, but it certainly has helped a lot of people save a lot of money.
How To Shorten Your Term For Refinance Mortgage Loan?
The mortgage is the biggest single financial commitment anyone will make in their lives. For that reason alone, any decisions on mortgages and remortgages should be following considerable research and comparisons about what is available in the market place.
There are a series of the variable in mortgage loans whether they are fixed interest or variable, how long a term they run, what percentage of the valuation a lender will advance against the purchase and the terms and conditions involved.
The lender, of course, has title to the property until the loan is paid off in full. Circumstances change during the life of a mortgage which may be up to thirty years and those changes may be a reason to reevaluate the mortgage and look at whether changing to another lender or indeed refinancing with the same lender to release equity is a good idea.
There are historical trends on interest rates to help to make the initial decision on a mortgage but there are also times when rates may be low and money can be saved in refinancing or the term of a mortgage reduced in a similar way.
While the real estate market has struggled in recent years, there are still instances where there is substantial equity in a property or where someone secure in employment can afford to pay substantially more per month on the mortgage and decides he or she would like to reduce the number of years before the mortgage is paid off in full.
It is important in any revision of a mortgage that the costs of refinancing are taken into account when calculating whether refinance for a better interest rate will really be a saving in the long run; often it is not because of the arrangement fees ranging between 3-6%. There will need to be a reduction in interest rate of 1% and preferably 2% for it to make sense.
When it comes to reducing the number of years left on a mortgage, the decision may be based on more than the saving involved. It is a decision to be free of a mortgage earlier in life, perhaps with a view to early retirement.
Unless a mortgage is at a fixed rate over the whole term of the mortgage, drops in interest rates can produce the possibility of finding a mortgage with similar money payments but with a reduced number of years to pay.
Sometimes when rates drop appreciably, homeowners have the chance to halve the term of the loan outstanding by switching from a fixed rate to a mortgage based on the current interest rate in the market.
The internet provides sufficient information on the industry if these circumstances occur or if someone is happy to increase payments to reduce the term and can afford to do so. As long as refinancing is done carefully and not merely to pay off debts such as credit cards only to build that debt up again, it can make sound financial sense.
How often Should You Consider Refinancing a Loan?
All of us get itchy feet from time to time when things stay the same for too long – whether we want to change it up by traveling, getting a new job or having another baby, we all get the feeling that perhaps we could be doing things better, and getting more out of life.
Therefore, considering you are locked into your home loan for upwards of 20 years, it is not surprising that at some stage you will get itchy feet for a change in your mortgage set up – but does that necessarily mean it’s a good time to refinance your loan?
As financial products are changing all the time, it is a good idea to regularly consider refinancing your loan to give yourself the chance to review new options and home loan deals. At the same time, this doesn’t mean it is a good idea to regularly go through with refinancing, and to help you make that decision, consider the following tips.
When to consider refinancing
Typically refinancing will cross your mind when interest rates drop, especially if your bank is one of the ones holding out on passing on those savings to its customers, or if you have locked your home loan into a fixed interest rate.
However, refinancing when interest rates are low can bring with it its own issues, because when interest rates are dropping, that also means the economy is slowing, and you want to maintain as much stability in your finances as you can.
Therefore, before you consider refinancing because of interest rates, look at how much they have dropped, and what that means for your particular circumstances. There are all sorts of rules about how much rates should drop before you look at refinancing.
Some experts say that you shouldn’t refinance unless you will save at least half a percent because the closing costs will eat into your savings, and even if you can avoid closing costs, you still shouldn’t refinance for less than a saving of a quarter of a percent.
However, a simpler way to decide is to look at how much money you’re going to save on your mortgage, based on what you still owe. For example, a 1% saving is a lot more worthwhile for someone with a $500,000 mortgage than someone with $100,000 remaining on their mortgage.
When considering whether to refinance you also need to look at how much longer you intend to keep the mortgage. For example, are you planning to move and sell your home or turn it into an investment in the near future?
If you are you’re going to need a new loan at this time anyway, and you won’t have had a chance to recoup the losses from your refinancing costs in the short time before you refinance for a new loan again.
However, a good time to consider refinancing is when you can afford to structure your loan to pay it off sooner. In many cases, people will refinance a 20-year mortgage into a 30-year mortgage to make their monthly repayments lower and more affordable.
However, with the longer loan term, there is more opportunity to accrue interest, so this will actually cost you more in the long term. On the other hand, if you can afford to refinance a 20-year mortgage into a new 15-year term then you can be saving thousands of dollars, especially if you can negotiate a lower interest rate at the same time.
The fact that everyone else seems to be refinancing their mortgages may make you think about refinancing yours too, but that doesn’t necessarily make it a good idea. Luckily the banks are looking at lending again and are loosening their lending criteria and offering incentives for those who refinance with them.
Just make sure that the incentives being offered are worthwhile, and beneficial for your needs. For example, some banks will offer a discount off of your home loan amount while others will waive the fees for refinancing.
Types of refinancing to consider
There are also a number of ways to refinance your loan, depending on your motivations for refinancing and your financial situation based on the value of your home.
For example, you can refinance your mortgage to make it more affordable, which is especially useful if your home has dropped in value. This will help to improve the long term affordability of your mortgage and reduce the risk of you losing your home to foreclosure.
Alternatively, you may consider refinancing to take advantage of better loan features which can, in turn, save you money, or which simply better suit your changing needs.
For example, you may refinance to a home loan which has a linked offset account as you are now able to keep a significant amount of savings in your offset account to reduce your loan interest. Or as you get older and closer to the end of your mortgage, you may refinance to a simple loan type to save money on features you no longer want or need.
Or, as we’ve already considered, you may refinance your home loan to take advantage of a lower inters rate. Just make sure in this case that you carefully consider the costs of this refinance, as breaking a fixed interest rate term can be particularly expensive, and often not worth the added expense for the minimal interest savings.
Why consider refinancing a mortgage?
You should consider refinancing your mortgage when you have something important to gain from the exercise. Look for both immediate and lasting benefits to refinancing such as:
- A better home loan. A better home loan will look different to different people, so use the tips above to work out what you need from your home loan, how much it will cost you to get it and what the benefits to your new loan product will be. You will be increasing your long term and your short term financial security and your home is less likely to be a risk in hard financial times.
- Increasing your net worth. Your net worth is the true indicator of your wealth, as it is calculated on what you own, less what you owe. For example, a house valued at $250,000 with $50,000 remaining on the mortgage is more valuable to your net worth than a house valued at $500,000 with $480,000 remaining on the mortgage, even though the $500,000 house appears bigger and more opulent, the occupants actually have a lower overall wealth. Therefore, if you can refinance your home loan to reduce the interest you are paying and shorten your loan term, for example, you have the opportunity to increase your net worth.
- Short term cash flow. Refinancing your home loan with the intention of reducing your monthly mortgage repayment can mean you have more money left over to reduce the day to day financial pressures on your household budget and reduce the risk of overextending and turning to credit, as well as giving you the financial breathing room you need to consider other investment options.
When you shouldn’t consider refinancing your mortgage
While there can be a lot of benefit to refinancing your mortgage there are also dangers involved which you need to look out for. Don’t refinance your mortgage if:
- There are significant costs. Both the home loan you are closing down and the new loan account you are opening can hit you with costs when refinancing. Therefore, make sure you compare and add up all of the costs before committing to refinancing, to make sure the savings you will be enjoying will make the refinance worthwhile.
- Seeking low interest rates at any cost. There is more to the cost of a mortgage than just the interest rate, so if you are lured into refinancing by the promise of a much lower interest rate, don’t just pay whatever fees you have to to get it.
- You can lose equity. That’s right, the valuable equity you’ve been slowly and steadily building up over the years as you repay your loan and your home increases in value is at risk when you refinance. This is because you are often changing the ratio between what you owe and what your property is worth so make sure if you are refinancing to access that equity that it is for a cause which will bring you greater wealth in another way.
- Reducing your net worth in the long term. If you refinance your loan to a longer term you need to be aware of the extra interest you will be paying over that longer loan term. While you may be refinancing to reduce your monthly repayments because your budget is stretched, it can be worthwhile to allow you to hold onto your house, but make sure you have a plan for getting your finances back on track, and your home loan costs back under control, and that you refinance to a mortgage that will be saving you money again, as soon as you can.
Remember, that you don’t always have to refinance with a new lender to save money. When you are considering refinancing talk to your existing lender first because they are actually very keen to keep you as a customer, and may offer you a discounted interest rate or added features on your current loan. This saves you the hassle of paperwork, and the costs of refinancing.
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