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Six Factors to Evaluate Before Mortgage Refinance

Written By:
September 07, 2012 at 12:15 AM

Mortgage Home Loans

The Mortgage Bankers Association says that ultra-low mortgage interest rates have motivated many homeowners to mortgage refinance. Homeowners thinking about making a similar move need to possess a solid understanding of mortgage refinancing and available options. In addition, each borrower should evaluate any possible gains or shortcomings of refinancing their home loans based on personal and financial circumstances.

Following are three advantages and three disadvantages borrowers should consider before applying for a new home loan.

Three Advantages of Mortgage Refinance

1) Refinance to Save Money

Some homeowners with the good credit and home equity have refinanced their homes two or three times, over the past few years, to save money by taking advantage of falling interest rates. A homeowner who finances a mortgage of $250,000, at an interest rate of 5%, has a mortgage payment (principal and interest) of $1,342.05 a month.

Refinancing the same $250,000 loan, at an interest rate of 3.5%, reduces the monthly payment to $1,122.61. The borrower saves $219.44 a month or $2,633.28 a year.

The amount of money a homeowner saves by refinancing depends on the loan amount, interest rate on the existing mortgage, and interest rate on the new loan.

2) Change the Term of the Loan

Borrowers who can afford a larger monthly mortgage payment could save a significant amount of money by refinancing from a 30-year fixed-rate loan to a 15-year fixed- rate mortgage. Using the above example, refinancing a $250,000 mortgage for 30 years, at an interest rate of 3.5% equals a monthly payment of $1342.05. Over the life of the loan, the borrower would pay a total of $233,139.00 in interest.

Financing the same amount for a term of 15 years, at an interest rate of 2.89%, results in a monthly payment of $1,713.26 and total interest payments of $58,386.60. By paying an additional $271.21 per month, a homeowner can save $174,752.40 in interest payments and own the home free and clear 15 years sooner.

Conversely, a borrower can lower the monthly payment by refinancing to a loan with a longer term. However, the homeowner has to pay more interest in exchange for freeing up money to save or spend on other items.

3) Refinance from an Adjustable-Rate -Mortgage to Fixed-Rate Mortgage

Borrowers who have adjustable-rate-mortgages have enjoyed seeing their monthly mortgage payments decrease when their loans reset because of lower mortgage interest rates. However, rates have move off records lows set in July.

It’s difficult to predict the direction of interest rates. Therefore, many homeowners want peace of mind. They can lock in a new mortgage at historic low interest rates and avoid future increases in their mortgage payments by refinancing from an adjustable-rate-loan to a 15-year, 20-year, or 30-year fixed-rate mortgage.

Three Disadvantages of Mortgage Refinancing

1) Closing Costs

It is critical for borrowers to calculate fees associated with refinancing their mortgages. Any savings realized from refinancing must justify closing costs for the loan. Refinancing charges include the following items:

  • Mortgage origination fees
  • Points (one point equals one percent of the loan amount)
  • Appraisal fee
  • Underwriting fee
  • Title insurance
  • Transfer taxes

Fees vary from lender to lender. Therefore, when shopping for loan products, borrowers should obtain a written list of closing costs for each loan. Compare costs and negotiate the removal or reduction of refinancing fees prior to making a decision.

Borrowers will need to stay in their home long enough to recover closing costs to justify refinancing their current mortgage.

2) Low Credit Score Equals Higher Mortgage Interest Rate

The low interest rates advertised by lenders are reserved for customers with credit scores around 760 and higher. Many homeowners have experience financial hardships and may have damaged their credit. Those who can qualify for mortgage refinancing will have to pay a higher interest rate on their home loans.

Obtain a copy of your credit report and review the information. By law, each of the three main credit bureaus (Experian, Equifax, and TransUnion), must allow consumers one free credit report every year. Consumers must pay a fee to find out their credit scores. Correct outdated or inaccurate information before applying for a mortgage.

3) Unforeseen Circumstances Could Cost You Money

After completing the necessary calculations, many borrowers will find they can save money by refinancing their mortgage. Even so, unanticipated events can cause a borrower to end up losing money on a home refinancing transaction. For instance, job relocation, marriage dissolution, or other event could mean a borrower who computed it would take four years to recoup refinancing costs, but must move out after two years, ends up in the red.





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