Posts Tagged ‘refinancing’
Should You Refinance Your Home?
November 4th, 2010 | 
Author: Whether ‘tis nobler in the hearts and minds of men to suffer the slings and arrows of refinancing your home?
Good question. With interest rates at a four-decade low for the last nine weeks should you and more importantly can you refinance your current mortgage? To help set your mind somewhat at ease, first note that yes Virginia banks are lending, however it is not as easy to get a loan as it had been in fact lenders are making it quite hard to get approved.
Lenders used to only require tax returns and pay stubs going back for 18 months. Now everyone is requiring 2 years worth of documentation and proof. Only borrowers with clean credit histories and high credit scores can get those super low interest rates. Unfortunately there are many would-be borrowers who have suffered a job loss or pay reduction. If your current income falls below the minimum required to qualify, you won’t be able to take advantage of today’s low rates.
However even those up-side down or under water can get a home loan. It isn’t impossible to do but it certainly isn’t easy either. If your loan is owned by Freddie Mac or Fannie Mae, as most are, you may be able to refinance through the Home Affordable Mortgage Program, or HAMP. This program was specifically designed to enable those homeowners with no equity to refinance their mortgages to a more affordable interest rate.
What if you’ve already refinanced? What if you just financed a new home in Chula Vista or Detroit?Recent interest rate drops have enticed homeowners who already refinanced to think about refinancing again. Is that a good idea? It depends on how long it would take you to recoup the refinance closing costs, including title insurance, points and escrow and appraisal fees. Refinancing an average loan costs about $3000. How many months of lower payments will it take for you to “get back” that amount?
New lower monthly mortgage payments do not necessarily translate into lower overall costs. Every time you refinance, you are restarting the clock on your loan. If you’ve been paying on your current mortgage for 10 years, you probably have another 20 years until it’s paid off. If you get a new 30 year loan, your payment will be significantly lower, but you’re starting the 30 years over. All that money you’re paying for the years when your house otherwise would have been paid off could outweigh the amount you save with a lower interest rate. Ask your loan officer about a 15 or 20 year loan. Often the interest rates are even lower on these shorter term loans.
You have to do your homework on mortgage financing, just like any other major purchase. Ask around. Talk to friends and family and see what rates they have been able to obtain and who they went to for their loan. Part of the problem with the housing meltdown was people were borrowing and not really doing their homework. You must understand the terms of the loan now and in the future. You have to pay back the loan according to these terms or you could lose your home as so many people are doing right now. Read all the documents that come with your new loan. Ask questions if there’s something that you don’t understand.
Be sensible. Do your own due diligence and homework and you will not only save yourself some headaches but you save some of your hard earned money in the long run.
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Refinancing Won’t Always Mean Fast Cash
The debate over refinancing
It is not always a sure-fire way to find fast cash with talks of refinancing with advertisers. Anyone that is considering refinancing needs to weigh the pros and cons of a refinance. People who are chronic refinancers and jump on the lowest interest rates dont always benefit in the long run. There are a lot of closing costs and fees that will add up and savings will suffer.
The reasons for refinancing
The first thing a homeowner should figure out is what their goal is for the potential refinance. Consumers need to be warned that refinancing doesnt pay off debt, it just reorganizes it. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, an economist with Bankrate.com, Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.
When to refinance
After honing on the reason a consumer wants to refinance, the next thing to decide on is when. The Bankrate 2008 Closing Cost Survey indicated the national average on closing costs for a $ 200,000 loan was $ 3,118. Of course, that is on top of taxes, interest, association dues, and insurance. A lower interest rate extends the length of the loan, and can cost more in interest, as one must be aware. For instance, a mortgage with 20 years left out of 30 will result in a higher amount paid in interest over the lifetime of the loan, and perhaps a larger interest payment if refinanced. There are two calculations to follow when trying to find fast cash from refinancing:
- One calculation where the new loan has the same term as the old loan
- One calculation where the new loan is the length of the planned refinance
From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.
When you shouldn’t refinance
There are specific instances when a refinance will not help. For example, if a homeowner doesnt plan on staying in a home for very long, its most likely a better idea to stay in the current mortgage. Taking the savings that people must accumulate to cover closing costs, the stay in the property could be longer than anticipated. People with underwater mortgages should probably stay with the current mortgage. It isn’t likely a homeowner with an underwater mortgage will find a lender.
A further reason not to refinance are prepayment penalties. The penalty payment is another expense for homeowners to add into the total cost of the refinance. Homeowners might be better off waiting until the initial two or three years of the active pre-payment penalty has passed. It’s likely refinancing down the road would be better.
The benefits of refinancing
Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can help consumers find fast cash if they are smart about making the decision. A financial planner or online banking tool can assist people make the right decision over refinancing or not.
Does It Pay To Re Finance?
This is a question many homeowners may have when they are considering re-financing their home. Unfortunately the answer to this question is a rather complex one and the answer is not always the same. There are some standard situations where a homeowner might investigate the possibility of re-financing. These situations include when interest rates drop, when the homeowner’s credit score improves and when the homeowner has a significant change in their financial situation. While a re-finance may not necessarily be warranted in each of these situations, it is certainly worth at least investigating.
Drops in the Interest Rate
Drops in interest rates often send homeowners scrambling to re-finance. However the homeowner should carefully consider the rate drop before making the decision to re-finance. It is important to note that a homeowner pays closing costs each time they re-finance. These closings costs may include application fees, origination fees, appraisal fees and a variety of other costs and may add up quite quickly. Due to this fee, each homeowner should carefully evaluate their financial situation to determine whether or not the re-financing will be worthwhile. In general the closing fees should not exceed the overall savings and the amount of time the homeowner is required to retain the property to recoup these costs should not be longer than the homeowner plans to retain the property.
Credit Score Improvements
When the homeowner’s credit scores improve, considering re-financing is warranted. Lenders are in the business of making money and are more likely to offer favorable rates to those with good credit than they are to offer these rates to those with poor credit. As a result those with poor credit are likely to be offered terms such as high interest rates or adjustable rate mortgages. Homeowners who are dealing with these circumstances may investigate re-financing as their credit improves. The good thing about credit scores is mistakes and blemishes are eventually erased from the record. As a result, homeowners who make an honest effort to repair their credit by submitting payments in a timely fashion may find themselves in a position of improved credit in the future.
When credit scores are higher, lenders are willing to offer lower interest rates. For this reason homeowners should consider the option or re-financing when their credit score begins to show marked improvement. During this process the homeowner can determine whether or not re-financing under these conditions is worthwhile.
Changed Financial Situations
Homeowners should also consider re-financing when there is a considerable change in their financial situation. This may include a large raise as well as the loss of a job or a change in careers resulting in a considerable loss of pay. In either case, re-financing may be a viable solution. Homeowners who are making considerably more money might consider re-financing to pay off their debts at an earlier time. Conversely, those who find themselves unable to fulfill their monthly financial obligations might turn to re-financing as a way of extending the debt which will lower the monthly payments. This may result in the homeowner paying more money in the long run because they are stretching their debt over a longer pay period but it might be necessary in times of need. In these cases a lower monthly payment may be worth paying more in the long run.
