by: Corey Schwartz

Mortgage Refinance: Should I Wait?

If it saves you money, the short answer is yes.  However, mortgage refinance is an important financial decision, and you should make it only after fully understanding the pros and cons. You’ll need to consider the rate and fees attached to the new loan, as well as whether a refi will entice you into further debt. In this article, we’ll explore the topic of refinancing in detail, examine the advantages and disadvantages, and work out a numerical example to illustrate the impact that a refi can have on your budget.

What Is a Refi?

When you refinance a home, you take out a new mortgage to repay the old one. Usually, you perform a refi when there is enough of a gap between the new mortgage’s annual percentage rate (APR) and the old one’s to provide net savings after accounting for fees & Expenses. Obviously, a refi makes sense when interest rates are declining. But sometimes, you might want (or need) to refinance an adjustable-rate mortgage (ARM) into a fixed-rate one, even if interest rates have risen since the original mortgage. You also might want to refinance so that you can shorten the term of your fixed rate mortgage, paying off your mortgage faster and saving on interest costs.

Typically, when you refinance a mortgage, you have built some equity into your home. That is, the price you could get to sell the home exceeds the mortgage balance. That excess value is your equity. If your mortgage is “underwater,” your home is worth less than your existing mortgage balance – you have negative equity – making refinancing unlikely or impossible.  Your home can go underwater due to several reasons, including:

  • Your neighborhood has gone downhill since you bought the home
  • The economy has gone into recession
  • New construction has depressed the value of existing homes
  • You have not maintained your home, and a buyer would be faced with considerable expenses, such as a new roof or new septic system
  • You have a negative amortization mortgage, in which you pay only part of the interest due each The unpaid interest is added to the mortgage principal, which eventually can cause your loan balance to exceed the home’s sale value.

If you do have positive equity in your home, you can do a cash-out refi, in which your new mortgage pays off the old one and also puts some cash in your pocket. A cash-out converts some of your home equity into cash, which can be a good or bad thing as we shall see.

The housing market has pretty much recovered from the sucker punch served up by Wall Street in 2008. Fewer homes are underwater, and long-term interest rates have fallen substantially, which means we are in a golden age of refinancing.

Here’s proof: Wells Fargo and JPMorgan Chase forecasted that 2016 mortgage volume will jump between 20 and 50 percent over last year’s, largely refueled by refi’s. The Mortgage Bankers Association in May raised its annual mortgage volume forecast from $1.380 trillion to $1.608 trillion, once again spurred on by refinancings.

The refi boom is good for the economy because it reduces consumer debt and increases consumer spending. That’s right, refinancing your home is downright patriotic.

Mortgage Refinance Example

Let’s work through an example to see how a refi can save you money. Suppose you bought a $750,000 house in 2004. You received a 30-year fixed-rate mortgage for $630,000 with an APR of 3.875 percent. That means you have 17 years, nine months (212 payments) left on the original loan. Your monthly payment, including property taxes and homeowner’s insurance, is $3,462.49. Your total remaining payments are $631,012.80, of which interest is $175,268.35

Fast forward to today. For the sake of convenience, let’s say your home is still worth $750,000, and you can get a 2.875 percent APR on a refi mortgage. You decide to proceed and refinance the current mortgage balance of $461,743.45 over 20 years (240 payments). You have to pay an upfront refinancing fee of $5,999 percent, which is figured into the APR. Under refinancing, your monthly payment drops down to $3,032.02, including taxes and homeowner’s insurance.

The result is that, under the terms of the refi, your monthly payment drops by $430 a month, and you save $23,299 in interest payments over the life of the loan.

Pros

If you don’t like your current mortgage, refinancing can benefit you in several ways:

  1. Lower interest rates: Interest is an expense. It represents money you can spend elsewhere. Even a half-point reduction in your interest rate can save many thousands of dollars over the life of a mortgage loan. If you are a cash-strapped consumer, the monthly savings leaves more money in your pocket to pay other expenses, including reducing other debt.
  2. Adjustable to fixed: A refi can convert your ARM to a fixed-rate mortgage. ARMs entice homebuyers by offering low teaser rates for the first few years. They also make sense if you know you are going to live in your home for only a few years. The ARM’s initial interest rate remains the same for a set number of years, usually between one and seven At the end of the fixed period, an interest rate reset occurs. The interest rate adjusts to match a benchmark index interest rate such as LIBOR. The new rate is locked in for a year before resetting again. Normally, the reset results in a higher interest rate and a bump up in your monthly payments. Some ARMs have caps that limit the maximum amount that your interest rate can climb at each reset. In general, converting from an ARM to a fixed-rate mortgage benefits homeowners by saving money and cutting risk.
  3. Balloon payments: A balloon mortgage is structured like a regular 30-year loan, except that it terminates after a fixed period (usually five to seven years), and the remaining balance is due as a lump-sum payment. Homebuyers might choose a balloon mortgage because they usually have bargain interest rates and may be easier to obtain than is a regular mortgage. Once again, these can make sense if you plan to sell your home before or at the termination date. If you want to stay in your home beyond that date, you can refinance the balloon mortgage into a fixed-rate mortgage or an ARM. The risk is that, at the reset time, interest rates have significantly risen, the value of your home has declined, or your credit rating has eroded to the point that you can’t qualify for a refi. Bear in mind that Loanatik specializes in loans to homeowners with fair to poor credit.
  4. Cash-out option: As explained above, if you have equity in your home, you can refinance for an amount greater than the balance due on the original mortgage. You can use the extra cash any way you want, but one really good use is to pay down expensive credit card debt. Even the best credit card APRs are considerably higher than those of mortgages, and some credit cards charge 30 percent or more. Paying off credit card debt with cash from your refi has several benefits:
    1. The interest you pay on the refi is substantially less than that of credit cards.
    2. Paying off credit cards can help boost your credit score.
    3. Mortgage interest is tax-deductible, but credit card interest is not. This saves you, even more,

You can also use the extra cash to pay for a big ticket purchase without using debt, or to consolidate a first and second mortgage or home equity line of credit.

Cons

There can be a few difficulties with refinancing a mortgage:

  1. Credit conditions: If you got your mortgage before 2008, you know that banks were pretty loose back then when it can to underwriting loans. That’s one of the reasons why the real estate market blew up in 2008 and led to the Great Recession. You might find a less enthusiastic reception from your bank when you apply for refinancing. But don’t panic – Loanatik has you covered. We approve refi’s for homeowners even if they have a sub-prime credit rating.
  2. Lack of discipline: Just as it’s a great idea to pay off your credit cards with the savings from a refi or cash-out refi, its generally a terrible idea to then resume your spendthrift ways and run up your credit card balances again. If you take a cash-out and then build up high credit card balances, you find yourself with more debt on your mortgage and more debt on your credit cards. Your credit score could drop, and you’re flirting with foreclosure and bankruptcy. We at Loanatik provide educational materials that can help you understand how to handle credit responsibly.
  3. Fees: There is a fee charged for refinancing a mortgage. You may have to stay in your home for several years after refinancing to break even on these fees. However, the fees are included in the loan’s APR, which will usually be lower than that on your original loan, so you are still saving money. Also, Loanatik allows you to pay your fee as part of a cash-out refi, and the fee is tax-deductible (?).
  4. Prepayment penalty: Your original loan may include a prepayment penalty that can cost you thousands of dollars when you refinance. It’s best when first getting a mortgage to make sure it has no prepayment penalties, like the ones offered by Loanatik.
  5. Paperwork: Some banks require all sorts of paperwork to process a refi. Come to Loanatik for a hassle-free refi.

Considerations

We think it’s pretty obvious that the benefits of refinancing greatly outweigh any downsides. If you are interested in refinancing your mortgage, here is how to proceed:

  1. Have your home appraised and confirm your mortgage is not underwater. You can have your home professionally appraised for a few hundred dollars.
  2. Contact Loanatik and find out what refi rate you qualify for. We offer no-obligation, fast quotes, usually in 2 minutes or less. Compare that rate to that on your current mortgage, and use the convenient Loanatik refi calculator (?) to see how much you’ll save by refinancing, fees inclusive.
  3. Decide if you’d like a cash-out refi, and if so, how much equity you’d like to convert to cash.
  4. Apply for a Loanatik refi loan. The application is free and simple.
  5. If you use a cash-out refi, we urge you to pay down your other debt and try to maintain low credit card balances.

Loanatik is a trusted lender with safe and secure data management. You’ve got nothing to lose, so contact us today.

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