With interest rates dropping to lows we haven’t seen in over 20 months most mortgage lenders are screaming from the rooftop, but here are a few things to look for when you are considering a refinance that most of the other guys won’t tell you about
Refinancing your loan is the replacement of an existing debt obligation with another deb obligation under different terms. There are a few different types of refinances but I will mainly focus on the two major refinancing options I see clients doing.
The first refinancing loan type is a Limited Refi Rate and Term no cash out. That is a mess of words, I know. This type of refinance is one where you are not pulling cash out of your equity, so at closing you will not be receiving back any money. This refinance option is great for those who are wanting to drop their interest rate from the current rate. The pros to this type of refinance is that depending on market conditions, your loan to value, and your credit score you may be able to drop the interest rate and ultimately lower your monthly payment. Before you jump in the comments or slide into my messages about doing a Rate/term refinance for yourself let me tell you some of the things you need to know. There are Fees to refinance. You will see some lenders promoting no fees to refinance, but it is important to understand that when they say no fees, they are talking about no lender fees. You will still need to pay 3 rd party fees. 3 rd party fees are fees like the appraisal, and title costs. Depending on what kind of loan you do your appraisal can range from $435-495, and title fees will be in the ballpark of 1,000-1300. The reason why it is important to understand the fees is because most don’t realize this cost when refinancing their current loan. It is also important to calculate your return on your refinance. When doing a refinance you may either roll in the closing costs into the new loan, or you can pay out of pocket
for the fees.
Lets say the fees end up at $2,000* (Just an example) After doing an application, and running your scenario tailored to you we were able to drop your monthly payment $120/month
To calculate your return on your refinance or to know when you break-even on the cost to refinance I suggest to divide $2,000 / $120. The answer is 16, so that means it would take you 16 months to break-even on the cost of the refinance. In some cases it can take much longer to break-even or shorter. At the end of the day it comes down to what your financial goals are and how long you plan to live in the property. I have some cases where doing a refinance makes a ton of sense and the borrowers can drop their mortgage insurance and lower their interest rate. Other times I can drop their interest rate, but the return takes so long and they only planned on living in the home for another year or so.
The second type of refinance I am going to touch on is A Cash out Refinance. This type of refinance is where you will get cash back at closing. This type of loan has loan to value limits, but can be extremely useful for some borrowers who want to pay off some other debts. You are going to have the same or similar fees that will be incurred when doing the rate/term refinance.
This type of refinance is common for those who need cash fast and some would argue there’s no better place to pull it from than from the equity you have already built in your home.
My hope for you watching this is to realize that there is no one size fits all option when it comes to your mortgage options. It is always best to do research and gather information from a professional you trust.
If you have any questions about your home and you live in Utah I would love to go over your options with you to ensure you are looking at all sides of the coin.