Refinancing Your Home Mortgage Loan
So, you’re thinking of refinancing your home? That’s a great idea because it’s possible that you could save a substantial amount of money on your mortgage – every month and over the life of your loan.
Of course, there are many factors to consider to determine whether refinancing your home is the right thing for you to do. And there are several decisions you’ll have to make if you choose to proceed.
This article is intended to provide you with an overview about some aspects of the home refinancing process to help you make a more informed decision.
Why refinance your home?
The usual answer to this question is – to save money. And who doesn’t want to save money? But in order to determine if you will actually save money in the long run, some careful calculations and considerations have to be made.
Let’s assume you currently have a mortgage loan at X% interest rate. If current rates are significantly lower, you might think, “Hmmm…if I refinance, maybe I’ll save money on my monthly payments”, and that’s a definite possibility.
But you will also have to consider the costs of originating a new loan. Mortgage companies typically charge all kinds of fees that have to be paid at the time of your new loan closing.
The fees vary from lender to lender but they could include:
- Application fee
- Loan Origination fee
- Appraisal fee
- Inspection fee
- Attorney fee
- Title Search and Title Insurance
And there could be even more fees depending on the kind of loan you obtain. Generally speaking, you can count on paying somewhere between 3% - 6% of your total loan amount in refinancing fees.
In addition, your current loan might have prepayment penalties or other costs that you will have to pay for paying off your mortgage early.
So, you see the point – all the costs of generating a new mortgage must be weighed against the savings you will receive from a lower mortgage interest rate. Only then will you know if refinancing your home makes sense for you.
For example, compare the monthly payments (for principal and interest) on a 30-year fixed-rate loan of $200,000 at 5.5% and 6.0%.
|Monthly payment @ 6.0%||$1,199|
|Monthly payment @ 5.5%||$1,136|
|The difference each month is||$63|
|But over a year's time, the difference adds up to||$756|
|Over 10 years, you will have saved||$7,560|
Choosing a loan term right for you
Let’s assume your current loan term is 30 years and you’ve already lived in your house for 5 years. If you refinance your house and choose 30 years again as your loan term, it’s going to take you 5 years longer to pay off your mortgage.
Plus, with a longer loan term, you are going to pay more in interest over the life of the loan. Loans are front-loaded with interest, meaning that in the beginning, more of your monthly payment goes toward paying off interest rather than the principal.
The longer you’ve been making monthly payments, the more each payment is being applied toward your principal balance. Do you really want to start over with a loan term where most of your payments are going toward paying off interest?
There is a temptation to choose a longer term because your monthly payment will be lower. But if your goal is to one day pay off your mortgage, then a shorter loan term may be more appropriate for you.
The best loan term for your new mortgage is a balancing act between an affordable monthly payment and reducing your borrowing costs.
For example, compare the total interest costs for a fixed-rate loan of $200,000 at 6% for 30 years with a fixed-rate loan at 5.5% for 15 years (see table directly below).
30-year loan @ 6.0%
15-year loan @ 5.5%
Types of Mortgage Loans
There are many different types of mortgage loans available and you’ll have to decide which one best suits your personal circumstances.
Not every mortgage lender offers the same loan products, so you will have to shop around to make sure the lender you select offers the kind of loan you are seeking.
Fixed Rate Mortgages
- Payments and interest rates don’t change for the life of the loan
- Available terms from 10 to 30 years
Adjustable Rate Mortgages
- Interest rates are fixed for 5 or 7 years, after which the rate fluctuates
- There is typically a lower interest rate for the initial period but then it changes according to market conditions
- FHA loans are insured by the federal government
- Because the loans are insured, they usually offer better terms – smaller down payments, lower interest rates, lower fees and less documentation
- Designed to help active duty military and veterans
- For those who qualify, lower monthly mortgage payments without the need to submit bank statements, W2s, paychecks and other documents
Home Affordable Refinance Program (HARP)
- Designed for homeowners who have little or no equity, or owe more than their home is worth
- If eligible, borrowers can expect lower interest rates, no appraisal, and a streamlined loan process
Cash Out Refinance Mortgage
- Designed to access your home’s equity and turn it into cash
- Cash can be used for home improvements, high-interest debt consolidation, or other financial goals
Depending on your personal circumstances and the lender you choose, there may be additional loan products available that are better suited to achieve your refinancing goals.
Mortgage Refinance Calculator
Once you’ve determined that you have good reasons to refinance, and you have some idea about which loan type and loan term makes sense for you, then it’s time to examine the numbers. A mortgage refinance calculator is an easy and efficient way to do that.
Mortgage calculators are designed to measure the effects of refinancing your mortgage. They require information about your current mortgage (such as your outstanding balance, interest rate, and the years remaining on your mortgage); details about the new loan you are considering (such as principal, interest rate, and term); and the closing costs you will pay for the loan.
Once you enter the data, the calculator will determine:
- How much you’ll save each month
- Your new payment amount
- Number of months until you break even
- Amount of your lifetime savings
Using a mortgage calculator should provide you with a fairly accurate picture about the savings you will attain by refinancing. Also, once you have actual estimates from a few lenders, you can use the calculator to determine which company is providing the best deal.
To access a mortgage loan calculator, click here
Shopping for your mortgage refinance loan
Shopping, comparing and negotiating for a new home loan will help you to obtain the best possible deal – and might save you thousands of dollars in the process.
If you are just beginning your search for a company to provide you with a new mortgage loan, your initial information is likely to come from some form of advertising – direct mail, television, radio, newspaper, telephone, internet, and even door-to-door solicitations from builders, real estate brokers, mortgage brokers and lenders.
Although this information can be useful, keep in mind that these are advertising materials; they are designed to make the mortgage seem as attractive as possible. They might feature low initial interest rates and monthly payments, without disclosing that those rates and payments could substantially increase later on.
Make sure you get all the facts and make sure that any offers you receive meet or exceed your financial expectations.
Talk first to your current lender
If you are planning to refinance, it makes sense to talk first with your current lender. Your lender may not want to lose your business and therefore, might be willing to reduce or eliminate some of the usual refinancing fees.
Your lender might waive or reduce fees for the title search, appraisal, surveys and inspection. Or perhaps your lender might not charge an application or origination fee.
When dealing with lenders and brokers, don’t be shy about making them compete for your business. Let them know upfront that you will be shopping for multiple loan offers, and that you are looking for the best deal you can get.
Good Faith Estimate (GFE)
Lenders are required by law to provide borrowers with a "good faith estimate" within three days of receiving a loan application.
The GFE includes the estimated costs for your mortgage loan, including all your costs at the time of closing. By providing this basic information, it will help you to:
- Compare offers
- Understand the real cost of the loan
- Make an informed decision about choosing a loan
Remember, shop around and compare all the terms that different lenders offer – both their interest rates and costs. This effort could literally save you thousands of dollars.
Protect your most valuable asset
For most people, their home is by far the most valuable asset they will ever own, so it is imperative to protect this precious investment.
When requesting loan offers from various companies, make sure you get all the information in writing. It is critical that you understand all that you’ve been presented and if something is not clear to you, make sure to ask the lender or broker about it, and continue to ask questions until you get complete and accurate answers.
Choosing a mortgage may be the most important financial decision you will ever make. In this article, we have attempted to provide a constructive overview of the process to refinance your home.
However, in addition, you may also want to talk with financial advisers, housing counselors, your attorney or other trusted advisers to make sure you have all the information you need so you can make the best possible decision for yourself and your family.