Why Refinance Your Mortgage?
To refinance a mortgage, borrowers pay off their current mortgage and replace the loan with a new mortgage agreement. There are a number of reasons why borrowers choose to refinance.
- To get a better interest rate
With interest rates sitting at record low levels, many borrowers are choosing to refinance to get a better rate. A lower interest rate can decrease your monthly mortgage payment amounts, and could potentially save you thousands of dollars in the long run.
- To alter the term length
If your current interest rate is high, refinancing may help you significantly shorten your mortgage term while your monthly payments stay the same or fall.
- To convert to a variable or fixed-rate loan
Rates for variable mortgages are falling, so you could refinance for a lower rate. On the other hand, you could refinance your variable mortgage to secure a lower rate for a fixed-mortgage while they are still at rock-bottom levels.
- To access equity
Homeowners can use their home equity to cover various expenses, like education costs or credit card debt. You can also use equity to pay for home remodelling which, in many cases, in turn increases the value of your home.
- To consolidate debt
Borrowers can refinance a high-interest debt with a low-interest mortgage. If the debt is a result of poor spending habits, borrowers should be wary of using refinancing as a solution.
Mistakes to Avoid When Refinancing
With such low interest rates on the market, many borrowers are keen to learn more about their refinancing options.
However, refinancing has to be done right to make the costs worth it. Here are some key mistakes to avoid:
- Not comparing mortgage products
Many borrowers simply go to their current lender to renew or refinance their mortgage not realizing that comparing different mortgages can result in big savings.
Shopping around is the surest way to get you the lowest rate with ideal terms and conditions. Informing lenders that you are still looking for the right mortgage lender encourages them to give you a better deal in some situations.
- Only focusing on the interest rate
Although a low interest rate can result in great savings, in some circumstances, refinancing comes with certain upfront costs.
Closing costs can range from as low as $1,500 for legal fees and appraisal costs to as high as 6% of the total mortgage amount. Let’s consider the mortgage refinance of a $400,000 loan, closing costs could total as little as $1,500 or as much as $24,000, although this will vary based on the lenders and mortgage brokers that you work with, so be sure that you go with the right mortgage broker who will help you minimize unnecessary costs. Some lenders offer “no-cost” mortgages with no upfront closing costs, but most often closing costs are built into the loan over time. Again, a knowledgeable and trustworthy mortgage broker will help you get the best mortgage for your needs given your individual circumstances.
Application fees, loan origination fees, appraisals, and title fees can add up. Some charges like document preparation fees can be negotiable, and as a borrower you should never pay credit report retrievals. A broker should provide that service free of charge.
Pay attention to prepayment terms in case you might want to sell or prepay a portion or all of your mortgage before your term is up for renewal.
Carefully read the good faith estimate document your lender gives you outlining all of the costs to make sure refinancing is worth the savings.
- Bad timing
Refinancing at the right time is important to make sure you can get a low interest rate.
Some borrowers wait around hoping interest rates will drop even further. This is not a great strategy because rates could suddenly rise again instead. Do not miss out on a low rate -- lock it in while you can.
- Overextending the mortgage term
Adding years to your mortgage term can decrease your monthly costs, but you will be paying a ton of extra interest over time.
A more prudent choice would be to refinance into a new loan for the time remaining on your current mortgage. For example, consider making the decision to secure a new 5 year loan after paying your 30 year mortgage for the last 8 years. Mortgages with shorter terms in some cases can also have lower interest rates, so you could shorten the length of your term while paying less interest per month.
- Not refinancing for the right amount
Refinancing can be costly, so you want to be sure it’s for the right amount.
In the case of a mortgage refinance with an equity take out portion, when you refinance for a larger amount than your current original mortgage balance, be sure that you request enough of an equity take out so that you are not left seeking mid-term financing a year or two into a 5-year term. Also make sure you can afford the monthly payments for the increased mortgage amount.
If refinancing to consolidate debt, make sure you are saving money in the long run and paying down your debts faster. For example, you could refinance your $20,000 credit card debt into your $400,000 mortgage. At 20% interest, the credit card accumulates $333.33 of interest each month, while a mortgage amount of $20,000 accumulates $41.67 of interest each month at 2.5%. So, if you refinance and consolidate your credit card debt into the mortgage, your new loan of $420,000 will stay at the 2.5% interest rate. The interest amount that you will be paying on the additional $20,000 of mortgage compared to your credit card per month will fall to $41.67 compared to the $333.33 in interest that you were paying for the same $20,000 on your credit card.
So Should I Refinance?
There are many factors involved in deciding whether to refinance your mortgage. If you can save on time and interest, or if you can pay down expenses by tapping into your equity, then refinancing could be a great choice for you.
Don’t fall into the common mistakes that many borrowers make. Be sure to know what all of your options are. Read the fine print and get ready for the potential upfront costs, as long as they are justified by long-term savings. Waiting for a lower rate may very well be a waste of time, so lock in the best rate while you still can. Make sure that you consider different term lengths and ensure that your term length is not too short and not too long, but just long enough to ensure that you pay less interest. Most importantly, work with a good mortgage broker who will help you calculate all of the costs involved so that you end up refinancing for the right amount. You never want to fall short with a refinance.
To make the right refinancing decision, always consult an experienced and knowledgeable mortgage broker. The right mortgage broker can help you qualify for the lowest rates, most amount of money, and best terms that are available to you. Contact Clover Mortgage for all of your refinancing needs.