Mortgage Refinance - Is it Beneficial to You

It is human nature to want the best possible mortgage loan interest rate that is available and everyone knows that you have to do this while the getting is good….(while the rates are down). But, I suggest you be careful and consider all the pros and cons of Refinancing your current mortgage loan. It should be to your advantage, not your loss. If you can lower your interest and your term then you are benefiting from this in the long haul even though your payment may be some larger. Most people in the economy today cannot live with a higher payment and that is their main purpose of refinancing, but I am sure there are some who may be able to afford to do so and that is why I mention lowering your term, especially if you intend to stay in your home for awhile. If you do not then the longer term may be what you need.

It is not always wise to refinance if you are not benefiting from it. The mortgage rates are at an all time low and the lenders, brokers and mortgage companies want you to refinance your loan so that they can make money and you get the lowest possible rate. This is well and good but there is some consideration you should review.

1. Can you lower your current mortgage interest rate by at least two (2) percent?
2. Are you going to add the closing cost back into the principal balance of your loan so that you have no out of pocket expense?
3. Can you pay the closing cost out of pocket so that you do not have to increase your principal balance?
4. Have you considered a no-cost refinance?
5. Will you decrease your payment significantly?
6. Why are you considering a refinance anyway?
7. Are you going to lower your term of the mortgage so that your loan will payoff faster?
8. Do you have an Adjustable Rate Mortgage?

Number one: The general rule for a refinance to lower your rate is; can you decrease it by as much as two (2) percent? I am not referring to an ARM (adjustable rate loan). You might have an ARM that is not two (2) percent over the current rate. That is the difference. If you have an ARM loan and you have read your note and mortgage and you can now refinance your loan, it is probably a great idea to do so. Your note and mortgage may have a certain stipulation regarding refinancing your loan. Check that out to see if you can. If you have a fixed rate loan that is not two percent above the going rate of interest now; think about number two and number three.

If you add back the closing cost of your loan into the principal balance, which will amount to something like three to five percent of the loan amount and re-amortize your loan for 30 years and you are not decreasing your interest rate by two percent; you may not be doing the right thing. Here is an example:

This example is lowering your interest rate by 1%.

Original Loan Amount of $350,000

Interest Rate of 6.5%

Payment of $2,212.24

Term 360 months

First payment 02/01/2008

Current balance after March payment is $341,191.48

You have paid 26 months of payments

You decide to get a mortgage refinance and you are going to add back the closing cost of three (3) percent which will amount to $10,235.74. It might be possible that your CC is lower, we will talk about other options below.

$341,192.00 + 10,235.74 = $351,427.22

$351,428.00 amortized for 360 months @ 5.5 = $1995.37 * your payment is lower.

It will take you 25 months to pay your loan down to what it was when you refinanced. As you can see with closing cost of 3%, you are increasing your balance over the initial balance when you purchased your home.

If your interest rate to 4.375% with APR = 4.719 for 30 years your payment would be $1,754.63. In this scenario it would take you 21 months to get back to where you were with the 3% closing cost added back to your loan.

There are other good things to consider. If you shop for rates and also closing cost, it can save you some money in amortization and in the closing cost. Some lenders will not charge an origination fee which is usually one (1) percent. If they charge a discount fee, it should mean that you have either locked a rate lower than the going rate for that day. Discount points are always about the rate of interest, there should be no other fees in the discount points.  The fees for originating the loan should be in the origination fee.  This means if there is a Broker fee who gets the loan on behalf of the lender. I will go into this in another hub. When they tell you 0/0, it means no origination and no discount and that is what you should be looking for. There are certain circumstances when you will not be able to get 0/0 but you should try. 

However, you may also pay the closing cost out of pocket. When means you would be better off in the long run as you do not have interest to pay on the closing cost funds. That means if you get a loan for the remaining balance of your mortgage $341,192 (rounded) your payment will be $1,703.52 and you will be decreasing your principal balance from the get go.

A no closing cost loan: What does that mean?

A no closing cost loan means that the lender will offer you a higher rate and not charge you any closing cost on the non-reoccurring expenses. If the current interest rate is high enough to swallow this and still reduce your interest and payment, it is not all that bad.

Lowering your current term:

If you can lower the term for your loan and lower the interest rate also, then you are definitely doing yourself a favor. This means that your payment may be higher but you will pay your loan off sooner. For instance let’s use the same principal balance above and a 5.00% interest rate for 25 years instead of 30 years. With the balance of $341,192 your payment = $1,994.57 and you are reducing your term by five (5) years.

I personally do not like ARM loans and do not recommend them to anyone but we all have our preferences. If you have an adjustable rate loan, now is the time to get a fixed rate if at all possible. No one knows for sure how long the interest rate will stay at an all time low.

Other things to consider:

You must qualify for a refinance just like you did your original loan, unless you are eligible for a streamline refinance which has certain guidelines and parameters. Ask your lender and then the documentation may be reduced in some circumstances and this is only for those who have been current on their mortgage loan. If you have to qualify, then you will have present your current financial information, credit, income and assets and it will depend upon your credit score and all applicable criteria.

FHA also has a streamline refinance with reduced guidelines and parameters but again, this is for borrower’s who have paid their mortgage consistently without default.

VA (Veterans Administration Loan) also has an interest rate reduction loan without an appraisal.

Ask your lender about your choices and make sure you are getting what is best for you.