Refinancing can lower your monthly mortgage payment and reduce the total amount of interest that you will pay on your home. With interest rates at an all-time low, it may seem like a no-brainer to refinance.
But before you jump on the "refi" bandwagon to secure a new loan for your home, you should know the pros and cons, as there are some situations when refinancing might not be worth it. So what's the biggest benefit of refinancing today? A lower interest rate. You'll just have to take into consideration how much it costs to refinance, and how long it will take to recoup the costs. If the savings will outweigh the costs, scoring a lower interest rate is great reason to refinance. Depending on your financial situation, refinancing to adjust the length of your mortgage and in effect, your monthly payments, could offer significant benefits. Just like paying off credit card debt in one year versus five years, shortening the loan term means you will pay less total interest on the mortgage.
On the other end of the spectrum, if you're having trouble making payments and are looking for a way to reduce your monthly payments, refinancing could help with that, too. You could go from a 15-year mortgage, for example, to a 30-year term and thereby lower the amount that needs to be paid per month. The other big perk is you can lock in a Fixed-Rate Loan for security purposes. Now is a great time to let go of the uncertainty of an ARM in favor of a loan with a fixed rate that will never change.
However, like most things that seem too good to be true, there are some pitfalls. The biggest is you will have to pay Closing Costs (and Prepayment Penalties), which most view in their minds as the amount it costs to refinance your home. According to the Federal Reserve, closing costs can add up to 3 to 6 percent of the outstanding principal of your loan, and include application fees, loan origination fees, and appraisal fees, among other things. The costs and penalties add up, but if you calculate that your savings from refinancing will outweigh these closing costs, then you're in the clear. Just make sure to do your due diligence and consider your options wisely.
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Any loan officer knows that rates and price aren’t everything - service and experience count for a lot. But despite the low rate environment, many homeowners are not seeking out a refinance to take advantage of the low rate environment. Why not?
Reasons for the unenthused attitude towards refinancing may be due to that fact that people are unaware of their current rate or don’t have the drive to refinance. A recent Bankrate survey found that only 65 percent of homeowners said they are very confident they know their rate, while 35 percent are only somewhat confident, not confident or don’t know their rate at all. In 2014, the rate on a 30-year fixed mortgage was about 4.25% and has dropped more this year, around 3.875%. This is in stark contrast from the 6% and higher interest rate environment seen in 2008. And the MBA is predicting that rates will rise to about 5% by the end of the year as well.
According to a publication by the National Bureau of Economic Research, (NBER) there’s always a fraction of the U.S. population that never takes advantage of a refinance, even it makes financial sense. According to NBER’s working paper “Failure to Refinance”, “In December 2010, approximately 20 percent of households that appeared unconstrained to refinance and were in a position in which refinancing would have been beneficial had failed to do so.”
For example, refinancing a $200,000, 30-year fixed rate mortgage from 6.5 percent to 4.5 percent will save more than $80,000 on interest payments over the life of the loan. If this type of homeowner took advantage of long-term mortgage rates of 3.35 percent, they would save $130,000 from a refinance. This type of refinance could equate to hundreds of dollars in savings each month, by switching a $200,000 from a rate of 6 percent to 3.8 percent could mean saving $267 per month.
And with many markets continuing to appreciate, and borrowers having more equity in their homes, it makes all the sense in the world for them to ask an originator about their situation.
Rates have not changed much in recent weeks, and borrowers refinancing are still a noticeable portion of many lender’s business. Borrowers have to contend with the usual underwriting process for credit, have an appraisal done, and qualify for the mortgage. But one somewhat surprising issue that some lenders and borrowers are encountering, that often halts a refinance, is a remodel!
Lenders are having borrowers, who are almost through the process, tell them that not only has there been some remodeling done, but it is still going. Remodeling done without a permit is a problem (it changes the value of the home, but is often illegal), and remodeling in process can take months while waiting for the required building permit.
These events will often hold up the refinance. On the face of it, the lender should not be concerned about improvements in the property that increase its value, since that makes the loan a safer investment. But in fact the lender is concerned that in the process of making an “improvement”, the owner may have violated local building codes, which could make the property unsalable in the future. This danger is greatest when the owner does the work himself and doesn’t want to be bothered with (or doesn’t know about) the local building codes.
If a loan officer asks about improvements, it is because he or she is following the instructions of the underwriter, who wants to make sure that work on the house has been done legally and is in compliance with building codes. The underwriter will want this verified by the local government entity that enforces the codes.
Any borrower refinancing while having improvements in process may be asked by the loan officer to come back after they have been completed and document that they are in compliance with the codes. Generally speaking, borrowers should not refinance and remodel at the same time.
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