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Yahoo
2 days ago
- Business
- Yahoo
Do you really need to wait for rates to drop a full percentage point to refinance?
For decades, the conventional wisdom about mortgage refinancing has been clear: You should swap loans only when mortgage rates have dropped a full percentage point from the rate on your original loan. However, that's not always the case. The 1 percent advice is certainly useful as a rule of thumb, but will it guide you toward the best deal? Not necessarily. Money tip: 'Don't generalize. Do the math,' says Don Roberts of Johnson Financial Group. Depending on the location of your home, the size of the mortgage and the amount of your closing costs, refinancing might still be the right call if rates drop just half a point, at least in some cases — for example, if your lender is running a promotion to reduce fees for repeat customers. Other homeowners might need savings of well more than a point to make a refinance worth their while, especially in a state with higher closing costs. The bottom line, says Don Roberts, vice president, mortgage field manager at Johnson Financial Group in Kenosha, Wisconsin: 'Don't generalize. Do the math.' Before you refinance, you should know how much it will cost you to refi, and how long it will take to recoup those costs through your new, lower monthly payments. This is known as the break-even point. Think about how long you expect to stay in the home: Bankrate's refinance break-even calculator can help you figure out when you'll start realizing savings. Just as you paid closing costs when you took out your purchase mortgage, you'll have to pay them again on the refinance. These costs typically include things like: Your loan's origination fee An appraisal fee The cost of title insurance Any taxes collected by your state Closing costs on a mortgage refinance can run between 2 and 5 percent of the amount you refinance. However, that can vary widely, and can also be influenced by whether the lender agrees to waive any fees on the new loan. Another key point: Closing costs vary by state, depending on such factors as how tightly title insurance is regulated and whether the state imposes taxes on refinances. New York and Florida are two states that do: In Florida, the state collects a documentary stamp tax of 0.35 percent on mortgages, including refinances. So if you borrow $400,000, you'll owe the state $1,400 on top of other closing costs, a charge that pushes out your break-even point. At the opposite end of the spectrum, Roberts points out that Wisconsin's closing costs are fixed, so a borrower there can expect to pay comparatively less for the same size loan. That's partly because the state regulates title insurance fees, he says. Be aware of your state's procedures so you can budget accordingly. The higher the loan balance, the more sense a refinancing makes, because closing costs tend to be proportionately lower on higher-value loans. Keep in mind: Your break-even timeframe can be shorter for larger loans, because the amount saved each month is greater. For instance, say you've got a $200,000 loan at 7.5 percent with a monthly principal-and-interest payment of $1,398. If rates fall to 6.5 percent, that payment drops to $1,264, a monthly savings of $134. Assuming closing costs of $5,000, you'd need 37 months to break even. Now let's run the same numbers with a $600,000 loan. At 7.5 percent, the monthly payment is $4,195, but at 6.5 percent, it drops to $3,792, a much bigger monthly savings of $403. With closing costs of $5,000, in this scenario you'd need just 12 months to break even. What if rates dropped just half a point? In that case, the $200,000 loan at 7 percent would cost $1,331 a month, a savings of $67. Breaking even on $5,000 in closing costs here would take 75 months, too long to be worth the effort. But a $600,000 loan at 7 percent would cost $3,992, a savings of $203. Break-even there is 25 months, so perhaps it would be worthwhile. Loan amount Interest rate drop Monthly savings Break-even point $200,000 1% (7.5% to 6.5%) $134 37 months $200,000 0.5% (7.5% to 7%) $67 75 months $600,000 1% (7.5% to 6.5%) $403 12 months $600,000 0.5% (7.5% to 7%) $203 25 months Some mortgage lenders are marketing loans that encourage refinancing by sharply reducing closing costs for existing customers. For instance, Better Mortgage's Better Forever loyalty program waives most fees for current Better borrowers who refinance with the lender. That includes the usual $995 origination fee, and it also encompasses title insurance costs. (Both Better and United Wholesale Mortgage participate in Fannie Mae's title insurance waiver program, which allows certain borrowers to swap loans without paying for title insurance again.) What's more, many refinancing buyers are granted appraisal waivers, cutting an additional $500 or so from the tab for closing costs. All in all, it equates to a savings of about $1,500, says Better CEO Vishal Garg. Before you choose a lender to refinance with, be sure to shop around to determine who can offer the best rates and terms. And take Roberts' advice: Do the math. You don't want any last minute surprises.
Yahoo
3 days ago
- Business
- Yahoo
How to get a low-cost mortgage refinance
Refinancing your mortgage includes expenses like closing costs, just as your original mortgage did. Opting for a no-closing-cost refinance can save you money upfront, but you'll likely pay a higher interest rate in return. Comparing offers from multiple mortgage lenders can help you secure a low-cost refinance. By refinancing, you can lower your mortgage interest rate and monthly payments, resulting in long-term savings. However, refinancing means getting a new mortgage to replace your current loan. And just as there were expenses — such as closing costs — when you got your first mortgage, there are costs that come with refinancing. Here are some ways to lower the cost of your refinance. Refinancing your mortgage isn't free; it involves closing costs. These can include: Origination fee Appraisal fee Survey fee Title fees Attorney fees Credit check fee Discount points In general, refinance closing costs equal around 2 percent to 5 percent of the new loan amount. Although the balance for your mortgage refinance will be lower than the balance for your original loan, this can still add up. For example, for a $250,000 loan, you're talking between $5,000 and $12,500. You may find a lender advertising a low-fee refinance — but this typically means you'll pay a higher rate than you would with a competitor. Keep in mind that some lenders will let you negotiate or waive certain fees. Your lender has to provide you with a complete rundown of the fees in your loan estimate. Learn more: How much does it cost to refinance a mortgage? Take these steps to lower the cost of your refinance. Qualifying for the lowest possible mortgage refinance rate is one of the best ways to save money long term: Review your credit report. If you find any errors, request to have them fixed. This can help boost your score. Improve your credit score. The best way to improve your credit score is to pay down debts on time. The lower your debts compared to your credit limit, the better. Build your savings. With more savings, you might be seen as less of a risk and score better rates as a result. Choose your loan term wisely. A shorter loan term usually means a lower rate but a higher monthly payment. If you can afford the higher payment on a 15-year refinance, you might be able to get a better interest rate than what you'd receive with a 30-year term. Compare rates online. Shop mortgage refinance rates online to get an idea of what to expect. Look for the annual percentage rate, or APR, which includes fees and is a more comprehensive estimate of the costs of the mortgage than just the interest rate. Lock in your rate. When getting approved for a refinance, see if you can lock in your mortgage rate. As long as the loan closes before the rate-lock period expires, this will protect you against rate increases. If rates decline during the lock period, lenders might allow you to take the new, lower rate. The more you'll save each month — and overall — on your mortgage, the more quickly you'll recoup the costs of your refinance. Learn more: How to get the best possible refinance rate One way to get a low-cost refinance is to avoid closing costs altogether. With a no-closing-cost refinance, you don't incur any upfront fees. That can save you money — at least in the short term. But you'll want to ensure that you're still saving money longer term, too. There are two main ways that no-closing-cost refinances help you avoid paying a lump sum upfront: Higher interest rate: The lender might charge you a higher interest rate to make up for the no-closing-cost refinance. The lender still gets what you would have paid in closing costs because you're paying more in interest. Roll fees into the principal: The lender can add the closing costs to your overall loan balance. It is convenient — no need to dig up cash on closing day — but it increases the total sum you're borrowing and the amount that interest is going to be calculated on. A no-closing-cost refinance can work well if you won't stay in the home for very long, say five years or less. If you can save on overall costs before you plan to move out, it might be worth the cost and even be a net benefit. But if you plan to stay in the home another 15 or 30 years, the cost of a relatively higher interest rate begins to add up. You aren't required to refinance with your current lender. You might get a better mortgage rate simply by shopping around with multiple lenders. Plus, if you get an attractive quote from one lender, you could have leverage with the next — or your primary lender. Wondering where to start? Bankrate has compiled a list of top mortgage refinance lenders to consider when shopping around for a low-cost refinance. You can also read mortgage lender reviews to learn about other borrowers' experiences. Try negotiating your closing costs with your lender. In some cases, it might offer waivers or discounts. Sometimes, if you're already a borrower with the lender or if you can show some other compelling reason — like you'll choose another lender with a better offer — you might be able to get a break. Generally speaking, when deciding whether to refinance, you'll want to weigh: The cost to refinance The amount you'll save by refinancing The length of time you plan to stay in the home Once you know these three pieces of information, you can calculate your break-even point, or the amount of time you must retain the refinanced mortgage to recoup your costs. Your break-even point is the total cost of the refinance divided by your monthly savings. Let's say you paid $5,200 in closing costs to refinance your mortgage, and you'll save $145 per month by receiving a lower rate. In this case, you'll break even at about 36 months, or three years after your refinance. If you plan to remain in your home for at least that long, a refinance is probably worth it. Bankrate's mortgage refinance calculator can help you run the numbers to see what works best for you. Are low-cost mortgage refinances available for all types of mortgages ( FHA, VA)? Not all types of mortgages may be eligible for certain refinancing. For example, rate-and-term refinancing remains the most flexible type and is available for conventional, FHA, VA and USDA mortgages. However, a USDA mortgage is not eligible for a cash-out refinance, and conventional loans are not eligible for streamline refinancing. Can I use a low-cost mortgage refinance to consolidate debts, such as credit cards or student loans? Yes, a cash-out refinance can be a great way to consolidate debts. By tapping a portion of your home's equity, you'll receive a lump sum payment you can use to pay off student loan debt or high-interest credit cards. The key is ensuring the rate you'll pay on your cash-out refinance is lower than the rate you'd pay for each of the debts you're paying off. Are low-cost mortgage refinances subject to the same underwriting processes as regular refinances? The mortgage refinance underwriting process is typically the same for low-cost refinances, but it may skip some paperwork if you can negotiate away some fees. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
