This question is one of the most important questions a homeowner should ask themselves. Should you refinance your mortgage? Why is this so important? There may not be a simple answer for someone who needs to add in their 2nd mortgage loan; so let’s discuss some reasons to contemplate if a refinance is right for you.
When a homeowner decides to refinance their mortgage loan, it is rule of thumb that you should lower your interest rate by at least 2 percentage points. If you cannot do that, and you are not paying the closing cost out of your pocket and adding it into you loans; you are probably need to think about it some more. If lowering your rate is the only reason you are thinking of refinancing. Most refinances will cost you anywhere from 3 to 5% of the loan amount.
Depending upon the rate, your credit, your loan to value and if you are adding in other debt to paid off; this is considered a “cash out” refinance. There will be pricing adjustments/rate adjustments for cash out refinance transactions. If you are paying off a first and second mortgage only (2nd mortgage made at the time of closing your first mortgage) this transaction can be in some cases, considered a rate/term refinance. If you are adding in other debts; the transaction will be considered a cash out refinance. The cash out refinance will cost you more than the rate/term refinance.
Let’s consider a 200K principal balance to be paid off, x 3% closing cost = $6000. If you do not pay this 6 grand at closing and add this into your loan; how long will it take you to repay this money so that your balance is back to where it was initially?
$206,000 @ 4.75% for 30 years with a payment of $1074.59 – it would take someone almost 2 years (23 months) to pay back the 6K principal. At that point you would have paid more than 18K in interest.
Questions for you:
• Are you going to lower your interest rate by at least 2%?
• Do you plan on staying in your home for a long time?
• Do you plan on selling your home within the near future?
• If you plan on selling your home; will the equity in your current dwelling be sufficient for purchase of another home if you refinance now?
• Could you lower the term on your loan to 20, 15 or 10 so that you could pay off your mortgage sooner?
• Have you thought about paying more principal each month; because making principal reductions will lower the amount of interest you pay? (You must make sure your mortgage note does not have a prepayment penalty that this would be affected by). The more principal reduction you pay the less interest will be in your regular payment. You are reducing your loan balance and your loan will pay out early. *you still cannot skip a payment if you pay principal reductions. Your payments are still due on the due date.
The positives: anyone who can reduce their current interest rate by 2%; reduce their payment amount and lower the term on their current mortgage; is indeed making a wise choice. If you can’t reduce your payment that much; lowering your rate and term will in the long term make your financial position better. Your loan will be paid off earlier and if you decide to sell you will definitely have more equity to invest in another purchase.