When I was in the bank the other day, the teller was telling me about the new rates on a 30 year fixed rate mortgage and how I could save by refinancing my current loan. So, it got me thinking about my mortgage.
So, I thought that I would consider refinancing my mortgage. Here are a few things to consider when looking at refinancing and what I look for when refinancing my mortgage.
Refinancing a Mortgage
My Current Interest Rate
When my wife and I bought our home in December 2008, we received a 30 year fixed rate mortgage from our bank of 5.325%. My current mortgage rate on a $191,000 loan is $1,063 per month plus taxes, insurance, and private mortgage insurance (PMI) which are separate to these calculations.
Savings from a Lower Interest Rate
The current 30 year fixed rate mortgage is approximately 3.43%. At that rate, a $191,000 loan would be $850 per month for 30 years. Since my wife and I have paid down our mortgage balance to $173,689, the monthly payment on that loan balance if we reset it to 30 years would be $773. You can find out how much you could possibly save by using a mortgage refinance calculator.
A 26 Year vs 30 Year Fixed Rate Mortgage
One point that you may not have picked up on in the previous calculation is that the $773 monthly mortgage payment would reset the loan back to 30 years. This essentially adds four more years on the total amount that we would pay.
So, if we refinanced our mortgage for the same 26 years that we currently have left on our 30 year fixed rate mortgage at the current interest rates, we would be looking at a monthly mortgage payment of $842 plus taxes, insurance, and PMI for another year or two until we hit the magic 20% mark in home equity.
The Fees and Potentially Wrapping Them In
Like when you purchase a home with a mortgage, there are a host of fees and closing costs. The same is true when you refinance. You can expect to pay fees such as appraisal fee, origination fee, application fee, credit check fee, document processing fee, and underwriting fee. You may even find that your lender may require you to pay points just like you did with your initial mortgage.
Of course, all of these fees can be expensive. Many mortgage lenders also offer the option to wrap these fees into your new loan which of course raises your monthly mortgage payment on your refinanced loan. It may pay to shop around for the best loan with the lowest interest rate and the least amount of fees and points.
How Long Are You Staying in the Home?
Another big factor is how long you are going to stay in your home after you refinance. Let’s take a simple example to illustrate the point. Assume that it costs you $4,000 in closing costs and fees to refinance your home, and you wind up saving $200 per month in lower monthly mortgage payments after your refinance.
You will need to stay in your home for 20 months or almost two years in this example for the cost savings to pay off and for you to break even. This, of course, does not apply to me in my situation for the most part because the home in question is the one that my wife and I recently rented out when we became landlords earlier this year.
The Verdict on Refinancing Our Mortgage
So, what am I going to do? I might just have to call my mortgage banker later this week to see exactly what refinance mortgage rates we can get and how much we can qualify to refinance for.
It would be very cool to save $200 or more every month on our home especially since I see us keeping it as a rental property for years to come. I will keep you all updated as we decide whether or not to refinance.
Costly Mistakes to Avoid When Refinancing Your House
A friend of mine just refinanced his house. And he’s not happy. You’d think that someone who lowered his interest rate by more than 1.5 percentage points and dropped his loan term to 15 from 30 years with a fixed-rate mortgage would be ecstatic.
But he’s not. In fact, he feels like he got a raw deal. But they were self-inflicted wounds; he made some classic mistakes when refinancing his house, and it cost him a lot of money in the end.
Mistakes When Refinancing Your Home
Here are some of his missteps, and what we can learn from them when refinancing your house:
1. Not Shopping Around for the Best Quote
The biggest mistake that most mortgage applicants make is not shopping around for multiple quotes. My friend simply applied to one mortgage company without checking around to see if he could find a better deal.
That locked him into a bad deal he later regretted. You have to shop around to not only get the best interest rate but also the best terms for your loan, whether you’re applying for a traditional mortgage or refinancing.
My friend’s error here stemmed from a misunderstanding about how credit agencies operate: He thought that shopping around with multiple mortgage companies would harm his credit score. What he didn’t realize was that credit bureaus like the Fair Isaac Corp. (FICO), the creators of the popular FICO credit score, understand that consumers will — and should — shop around.
A “hard pull” of your credit score for a new mortgage application and taking on new debt will slightly lower your credit score. But FICO treats it as only one pull of your credit score if you shop around and apply and receive multiple bids for the same loan in a short time period.
2. Accepting a Long Escrow with a Non-Adjustable Rate
When my wife and I closed on our first home, our mortgage lender offered us a one-time deal to change our rate if the available interest rate for our loan decreased. Banks peg mortgage rates against many factors, such as the LIBOR rate, supply and demand, and other factors, and they fluctuate constantly.
The mortgage company originally required my friend to pay a point on top of his closing costs for his refi. While he was waiting for the approval process to play out, the market shifted. Now his bank offers customers the same refinance mortgage for better terms and no points paid up front.
But, the mortgage company wouldn’t let him change his refinance application. He’s locked into the contract with the less beneficial rate. If he had shopped around and not settled for the first loan offer that was made to him, he could’ve probably gotten one with a clause allowing him some wiggle room to change if the rates moved before he closed.
Now he’s stuck with a less than optimal loan. The difference will cost him more than $1,000 in fees.
3. Settling for the Lender’s Appraiser
My friend also used the lender’s in-house appraiser — a mistake.
You should have the option to choose your own appraiser, real estate attorney, survey company, and other professionals to help you close on your home. My friend used the lender’s attorney for closing, as well. This is a big red flag.
Don’t settle for the people your lender chooses to help you; it’s a conflict of interest. No one should care more about your money than you do.
4. Not Understanding His Rights to Rescind a Mortgage
Most states have a lemon law clause when you buy a car. You can return it and walk away from the deal within the first three days if you’re not happy. Refinanced mortgages often have a return policy, as well, if the borrower has second thoughts. Consumers have rights under the Truth In Lending Act (TILA), which allows them to rescind a mortgage deal under certain circumstances.
As with cars, borrowers refinancing their mortgages have the right to void a deal within three days of their closing if they meet certain conditions. It must be a refinanced mortgage. And you can’t be refinancing with your current mortgage company.
Rescinding a refinanced mortgage might be the nuclear bomb reaction to a mortgage gone badly before closing. Borrowers should use it as a last resort. Consumers can prevent falling into a bad refinance deal, which is easier than getting out of one after signing on the dotted line.
Note: Portions of this article originally appeared on AOL Daily Finance and is reprinted with permission.