December 17, 2018
Your home is your biggest investment. How many times have we heard that before? It really is true, though, and the rewards you can reap by refinancing your home mortgage can be immense and life-changing.
Refinancing your home mortgage is when you take out a new loan at a lower interest rate and concurrently pay off your old mortgage. There are many things to think about in making sure a mortgage refinance does, actually, make sense.
The first thing to think about, is the real reason you wish to refinance. Many people just want to reduce their monthly mortgage payments, and that is a great reason, but there are other reasons to refinance as well. Some homeowners refinance in order to make needed repairs or updates to their home, while others use the equity in their home to put their children through college. By taking cash back, you can do those things and still not have to take anything from your nest egg. Sometimes refinancing for this purpose will raise your payment but in turn you will have the money to do what is needed. Sometimes, if the rates are considerably lower, you may be able to solve your problem and lower your payment (or at least not have to pay too much more). When taking cash back, however, make sure you realize that whatever amount you take, you will be paying on for 30 years. Refinancing in order to get a new car or go on a vacation might sound good, but do you really want to pay for that vacation for the next 30 years?
Here is an example of a straight refinance (no cash), 30 year mortgage. The rates are effective 12/12/18 for a homeowner with a credit score of at least 740:
Home Value: $206,250 Balance of Loan: $135,000
Interest Rate: 4.599% P&I Payment: $ 684
The same scenario with $20,000 cash:
Interest Rate: 4.720% P&I Payment: $ 796
Before deciding to refinance your mortgage, there are a few other things to consider. Will you be dropping your interest rate by at least half a percent? Generally, there are fees such as attorney fees, appraisal fees, title insurance, etc. that usually range from $3,000 to $5,000. Determine how many months it will take you to recoup the cost of the fees. For instance, if your fees are $5,000 and you are saving $200 per month doing a refinance, divide $5,000 by $200. It will take you 25 months to recoup what you paid in fees. You must also look at how long you plan to stay in your home. If you only plan on staying in your home another two years, you won't even recoup the cost of those fees before you sell. Refinancing, in this situation, would be a bad decision.
To sum things up: It only makes sense to refinance your mortgage if you'll end up solving a problem (e.g., repairs, remodeling, education, etc.) or saving money on your monthly payments.
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