Posted by: Bill & Gayle McCord | March 10, 2010

Tips for Refinancing Your Home

It has been a tough economy, and people are looking for ways to save money.  A great opportunity is the extended and expanded tax credit for home buyers .   Even if buying a home may not be on the horizon for you, you may still be looking for a way to save money.  Refinancing is a term that gets thrown around a lot, and sometimes it’s easy to lose sight of the purpose and outcome of it.

Rates as of 3/10/10, as stated by one of our favorite lenders, Glen Colley, are:

Conv 30 year 4.875%

Conv 15 year  4.25%

FHA 30 year 4.875%

FHA 15 year 4.5%

There’s a good chance that those rates might be lower than what you currently have.  So, here are a few pointers we have found that may help you determine if refinancing is a good move for you.

What is refinancing exactly?

When you refinance, you replace your current mortgage rate with a new, more favorable loan rate.  The new loan is offered against the same property as the collateral and may or may not exceed the current loan balance. The new loan funds are used to pay down the current mortgage while any remaining cash can be used to your best advantage.

Common wisdom is that a refi only makes sense if you can lower your interest rate by at least two percentage points- so from 9 percent to 7 percent, for example. But it wouldn’t make sense to go to the cost to refinance if you’re not going to stay in the home long enough to reap the benefit.  In other words, make sure you understand- and are comfortable with – the amount of time it will take for your overall savings to compensate for the cost of the refinancing.

Here is a great example of refinancing at its finest.

Reasons to refinance:

  • You want to save more:
    Your monthly payments will be reduced if you get a low rate or when your loan term is extended. However, with an extended term, your monthly savings will increase but you’ll be paying more in total interest for the life of the loan.
  • You want to pay down your mortgage quickly:
    You can shorten the length of your mortgage by reducing the loan term. Monthly payments will no doubt go up, but you will be able to save more in the overall interest payment. Moreover, you’ll be debt free in a shorter time.
  • You need extra cash to pay off credit cards:
    If you have enough home equity, you can borrow more than the current loan balance. With the extra cash, you can pay off high interest debts such as credit card balances or installment loans. You gain out of it as the interest on such debt is not deductible unlike mortgage interest.
  • You wish to consolidate 2 loans into one:
    If there’s enough equity (due to high appreciation), you can consolidate first and 2nd mortgages and refinance into a single first mortgage. The monthly payment on the new loan is likely to be lower than the combined payments on the first loan and the second mortgage.
  • You want to convert an ARM into FRM:
    This allows you to lock in at a low rate. You can thus repay the loan with stable monthly payments rather than variable payments over the loan term.
  • You want to get rid of PMI:
    If your current loan balance is below 80% of the new appraised home value, you can go for a home refinance and stop paying the PMI.

Things to keep in mind:

  • Refinancing is great for reducing debt, but is counter-productive if you borrow for consumer purchases, such as cars, weddings, and vacations.
  • Make sure you find out if there is a penalty for refinancing.
  • Make sure you know whether you have a fixed or variable interest rate and what the terms are.
  • Understand lender fees and points.  Be sure to discuss and ask questions regarding the lender fees and points on your new loan. Making sure you understand the parameters of the loan ensures that there are no surprises, such as last-minute closing costs or higher than expected interest rates.
  • Obtain a variety of refinancing quotes.  Shopping around for quotes from a variety of companies is a smart idea because each one will offer you something different. Comparing quotes and contract details helps you pick the best refinancing offer for your situation.

How Much Would You Save?

A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. The table below illustrates the potential monthly savings and the various break-even periods that would result from refinancing at different rates.
Rate After
Refinancing
New Monthly
Payment
Monthly
Savings
Months to
Break Even*
7.5% $1,398 $70 29
7.0% $1,331 $137 15
6.5% $1,264 $204 10
6.0% $1,199 $269 8
5.5% $1,136 $332 7
5.0% $1,074 $394 6
*Assumes $2,000 closing costs. Rounded up to the next highest month.

Our online sources: this site , this site, and this site.

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