Why Refinance Your Loan?
Mortgage refinancing is good for many financial situations.
Here are some of them:
Mortgage Rates Are Still Low
The main purpose of refinancing is to lower your interest rate. This is the reason why most people refinance. You don't have to just refinance your home loan. You have the option to refinance auto loans, student loans, or even credit cards. According to the Whitehouse, the average homeowner can increase save around $3000 per year through refinancing.
As you figure out whether or not that refinancing lowers your interest rate, understand the following facts:
- Even though mortgage rates are down, predicting future interest rates is impossible. Most financial analysts predict that rates will go up in the near future. In my opinion, I thought this was going to happen. I also thought that the Cleveland Indians would win the 2018 World Series. Overall, choose whether or not to refinance according to the current market: don't try to predict the future.
- The savings you acquire on a new loan is not contingent on the interest alone. Mortgage brokers predict usually offer the lower monthly payment option. On the other hand, remember that your monthly payment is contingent on the new loan terms. For example, if you have 20 years on a mortgage and refinance it back to a 30-year mortgage plan, you'll have a lower monthly payment with the same interest rate.
- Furthermore, it's also important to note the tax implication of a refinance. The flip side of lowering your interest rate is that it reduces tax deductions. As a result, this increases your taxable income. Since you have to take tax reliability into account, the savings you accrue is inadequate.
Reduce Your Loan Term
If your loan term is 30 years, over time, it's important to refinance your loan as soon as possible. With the current, low-interest rates, the interest on a 15-year mortgage is no different than the interest a 30-year mortgage plan.
Moreover, if you want to determine your new payment, use a mortgage calculator.
Switch from an Adjustable to a Fixed Mortgage Rate
Furthermore, there's no guarantee that low interest will last. As a result, act fast and lock into a fixed rate mortgage will a lower interest rate while you still can. By the way, it's way easier to budget on a fixed rate mortgage.
Refinancing Process – Overview
The real question is this: “How low does the interest have to be to constitute refinancing?”.
- There are numerous conventions on this matter ranging from 0.5% to 2%. In addition to, another approach is to do the math yourself. It's only a few steps.
- Figure out the amount you want to save on interest. Once you pay your mortgage off, the savings amount will decrease. If you want a brief estimate, the first-month savings is enough.
- Reduce your interest savings by utilizing the marginal tax rate to reflect bigger deductions. Only implement this if you itemize your deductions.
- Furthermore, determine what is the refinancing cost of your mortgage. The lender typically has this account information on your profile.
- The last thing to do is divide the total refinancing cost of your mortgage by your monthly after-tax savings.
Overall, the result determines how many months it will take to reach the breakeven point. Refinancing is a fine choice if you choose to stay in the house beyond the breakeven point. From the steps above, you can understand why it's better to focus on the total refinancing cost that just on the interest rate.
Refinancing Tips For Borrowers
You have more than one choice in any situation. Usually, homeowners who choose to refinance are not prepared. Don't make this mistake. On the other hand, let's assume you have a solid case for why you need to refinance your home loan.
Now, let's go over 9 easy tips to prepare for your refinancing your loan.
Tip 1: Check Your Credit Score
Before making any financial commitment, make sure to have a good credit score.
If you don't have a good credit score, chances are the creditor will not lower your interest rate (and work on improving your score). It's highly recommended to see counsel from a loan officer to see if it's going to benefit you or not.
Tip 2: Understand Your Home’s Value
If the bank gives you a loan, the bank needs to give you an estimate of the value of your home. In a nutshell, this is what a mortgage is; it’s the monetary value of your home. Usual, people tend to overestimate the value of their homes.
What to do in this case?
Figure out a place where you can compare your home with similar ones that are on the current market. Doing so gives you a clearer picture of the value of your home.
Tip 3: Choose Your Refinance Loan Term
This is another thing to consider when refinancing your current loan. You can either have a shorter or longer term refinance loan. For instance, if your interest rate is low, more than likely your 30-year fixed mortgage can be reduced to a 20 or 15-year term while having the same interest with little to no change on your monthly installments.
On the flip side, a term extension isn't bad if you’re having financial difficulties with monthly payments. As a result, the extended period decreases your monthly payment amount, and the interest on your home loan increases the total value of the debt tremendously.
Tip 4: Calculate Your Mortgage Details
Moreover, you have the knowledge you need, your credit score is good, and the value of your house is as accurate. After this point, there are only simple maths. The mortgage-refinance calculator is a handy dandy tool.
Make sure to have clarity on the accuracy of your data such as your currently, monthly installments, the yeas you have to pay, your current rate, and so on. Furthermore, not only will you know to refinance for the future. You'll have the ability to compare different options and decide which one to choose.
Tip 5: Ongoing Learning
Knowledge is power. Regarding finances, the more information you know, the higher your chance of succeeding is too. Make sure you go to your bank and request all of the information on your mortgage, as well as the future one.
For example, information such as your monthly payment, application fees, interest rates, etc.
Tip 6: Consider Locking Your Rate
Some people prefer to have a steady rate during the loan term. Moreover, when the lender has to agree on a fixed rate in advance in spite of the rates movements through the years, it's considered a rate lock.
It's up to the borrower to decide whether or not to choose this option.
Tip 7: Don't Review – Read!
After the lender approves your loan application, they will send you a letter of approval before you have to sign the contract to receive your new loan. The deal consists of terms and conditions as well. I advise you to not glance at them but read every fine detail.
Make sure that you having clarity on all of the information you see. Once you sign the agreement, you can't reverse it.
Tip 8: Apply Smartly
After completing the previous steps and everything good to go, you are now ready for the application process. Make sure you have all of the required documents and that you fill out the application form correctly.
Make sure to not make any mistakes. Any inaccurate information can lead to a definite “No.” It's very important for you to have all of the papers the bank requires of you if you need to provide any additional information. Furthermore, pristine, accuracy information is very important when filling out your information.
Tip 9: Closing
The closing procedure if the final step. Once completed, you can access the funds. Before signing anything, keep in mind the following: the lender will send you a letter of commitment where you can find all of the terms and conditions laid out as well as the fees of the new debt.