Refinancing – All You Need To Know About
If you want to lower your payment and/or your interest rate, refinancing makes sense. Nevertheless, there are other things to keep in mind: How much equity you have in your home, how long you expect to stay in your home, how much will be your closing costs, if you will have to pay points, and finally,… see if the amount resulting from the addition of points (if any), fees, and closing costs is lower than the money you will save on your mortgage.
About paying points: Points paid on a refinance can be deducted from your taxes only in small increments. 1/30th a year for a 30-year mortgage. This means it could be several years before your lower rate makes up for the points you pay. But, if you’re buying a home, points paid are a tax-deductible expense for that year.
Please consult with your tax advisor.
There are few loans that truly have no closing costs. Sometimes lenders will not charge application fees and agree to pay the appraisal and title fees, but they may increase the interest rate. Lenders can also roll the costs into the amount of your loan. So, because you’re not paying costs up front, it’s called a “no closing cost” loan. While slightly increasing your mortgage might be acceptable to you, keep in mind that it’s not really a cost-free loan.
Adjustable-rate versus fixed-rate mortgage. Get the lowest fixed-rate possible. Although, refinancing may not make sense to you if you’re in the first year of a five-year adjustable rate mortgage (ARM) and you plan on moving in three years. However, if the rate on your ARM will adjust and you think the rate will go up, then it will make sense to get a fixed-rate mortgage.
The interest rate you pay on a cash-out refinance loan will generally be the same that you pay on a non-cash-out loan. It is possible, you will get an incremental fee associated with a cash-out refinance loan. Depending on the specific loan program you choose and the loan-to-value ratio. Using the equity in your home to pay off other bills can be a smart thing. Consider taking some money out to pay off credit cards bills, auto loans and any debt that has interest that is not tax-deductible. You may be able to deduct the interest on the money you take out to pay off that debt. Please consult your tax advisor.
If you’re thinking about buying a home or refinancing your mortgage, get the good rate now. You can refinance later if rates drop again. Usually, rates go up much faster than they come down. Any near-future drop in interest rates may not be drastic enough to impact your monthly mortgage payment. Of course, every situation is different, so it’s important to consider all your options.
Money for the closing:
A general guideline is that you’ll need two percent of the purchase price of the home for pre-paid interest to cover the time between the date you close and your first mortgage payment. Some states may also require pre-payment of property taxes. When refinancing however, your old mortgage will most likely have money in escrow that can cover their costs. Some borrowers will get short-term loans while this escrow transfers back to them. You pay the money at the closing knowing they’ll get it back when their escrow is returned.
If you’re refinancing, you may be able to eliminate some costs by talking to your lender. For instance, your lender might reuse your last home appraisal or your credit report if they’re recent enough. Another option may be to have your mortgage lender re-certify some documents. This may cost less than the cost of getting new ones.
Now, you might be wondering how long does it take to refinance. Well, anything between two and six weeks. Usually, the home appraisal is what takes the longest to obtain. It depends if there is a refinancing boom, a recent home appraisal, many comparable recent sales in your neighborhood.