Thinking of refinancing your mortgage or housing loan? Since Rates are at 30 year lows!
It's a good idea to get pre-approved for a loan if you're seriously
thinking about refinancing your home. Once you're pre-approved, you'll
have a commitment from a lender. While it is important to analyze the
savings versus the costs, it is equally important to take into account the
history and future of your home loan.
If you plan to keep your home for 1 to 3 years, you may want to consider a
No Cost loan.
If you plan to keep the home for 7 - 20 years, you may want to pay extra
points to get a lower interest rate. If your property will be a rental,
cash flow and the lowest possible payment may
be your concern which
you may want to pay extra points. if you have already been paying on
your 30 year loan for 10 yearsI, a new
15 or 20 year loan might be the best option.
Break Even Point
To compare the savings to the cost, divide the total cost of the refinance
by your monthly savings to determine how many months it will take to
"break-even". If you plan to keep the loan longer than the break-even
point, it probably makes sense to refinance. Example: Mike is saving
$200/month by refinancing. The new loan cost him $4,800. It will take 24
($4,800/$200) monthly payments for Mike to "Break Even" on the cost of the
loan. If Mike plans to stay in his home for more than 2 years, it makes
sense for him to refinance.
It may make sense to finance the costs into the new loan. Sometimes
referred to as a No Cost Loan (No Out of Pocket expenses), including the
cost in the new loan uses the equity in your home, not you bank account,
to pay the loan costs. You may choose a loan with lender/broker paid
costs. With a "No Cost" Loan the break-even point is immediate since you
are reducing your monthly payment without paying any closing costs or
increasing your current loan balance.
Reasons To Refinance Include:
Lower your Monthly Mortgage Payment
One of the most common reasons to refinance is to lower your monthly
payment. In addition to a lower interest rate, lowering the loan amount or
eliminating Mortgage Insurance can decrease your mortgage payment. You may
be able to lower your payment without changing your interest rate, if your
property value has gone up or your loan balance has gone down
If you have peen paying on your 30 year loan for 10 or more years, a
refinance will most likely result in a lower payment, but it may not be to
your benefit. Starting over means financing a lower loan amount for more
years and paying more interest. If your loan is less than 10 years old,
your not planning to keep your loan longer than a few more years, or you
really want a lower payment see the section above on Break Even Point.
Take Cash Out for Debt Consolidation or Home Improvements
Combine high interest rate credit card balances, buy a new car, add a room
to the house or send your kids to college ?The equity in your home is
likely to be the cheapest money you can borrow. The interest paid and some
loan costs may even be tax deductible. (Ask your Tax Advisor) You may be
able to borrow up to 80% of the appraised value of your home for a "cash
out" refinance. If you have less than 20% equity in your home, Loan
Shoppers has 2nd Trust Deed loans available for up to 100% of the value of
your home. Use our Home Loan Calculator.
Switch from a Conventional Housing Loan (CHL) Package to a Fixed Rate Loan
or well known as Islamic Housing Loan Package.
Unless you have been paying on your CHL loan for several years, the
current fixed interest rates may be slightly higher than the current
interest rate on your CHL. Ask yourself if the security of a fixed rate is
worth a slightly higher payment. If you think interest rates are going
up soon in future , you may want to wait until your next adjustment. If the
fixed interest rates are lower than your current CHL interest rate, ask
yourself where you might be in 2 years? 5 Years? Evaluate your Break Even
Point. If your Break Even Point is a long period, ask yourself if the
security of a fixed rate is worth the cost?
No Closing/Settlement Cost Loan
With a true No Cost Loan, all of your Non-Recurring closing costs are paid
by the lender/banker. They are NOT added to your loan as with a No "Out of
Pocket" Cost loan. No Cost Loans are great if you have a high interest
rate and are planning to sell or refinance again within the next 2 or 3
years. You may want to refinance for even a small drop in your interest
rate. Since the loan has no costs, any drop in your payment is money in
your pocket. If you plan to keep your loan for more than about 4 years,
you should consider paying your own closing costs. By paying your own
closing costs, you will be able to get a lower interest rate and payment.
Shorten the Term of Your Home Loan (ie.30 years to 15 years)
If you plan to keep your house for awhile and/or you don? like the
prospect of paying all that interest for 30 years, a shorter loan term may
be for you. 15 year loans often carry slightly lower interest rates than
30 year loans. The lower interest rate combined with the shorter payoff
time means you will save tens of thousands of dollars in interest over the
life of the loan. The payment on a 15 year loan is approximately 33%
higher than on a 30 year loan. Loan Shoppers recommends refinancing to a
shorter term only if you are comfortable with your current payment and
don't feel a slightly higher payment would cause you any financial
hardship. Keep in mind, you can shorten the term of any loan just by
making extra principal payments as much and as often as you can. Add an
extra $100 a month to your payment and you may payoff your 30 year loan as
much as 7-10 years early.
Payoff a High Interest Rate 2nd Loan
If you have a 2nd mortgage and some equity in your home, it may benefit
you to refinance and combine both loans into one loan. In addition to the
convenience of writing one check each month, the payment on the new loan
is likely to be less than the combined payments of the first and the
second. For example, Ah Chong had a First Loan at 7% paying $900/month and a
Second Loan at 14% paying $250/month. His combined monthly payment was
$1,150. After he refinanced both loans into a new First Loan at 7.25% his
new payment was $1,050 saving him $100/month
Eliminate Mortgage Insurance (MI)
If you purchased your home with less than a 20% down payment, you are
probably paying Mortgage Insurance. If the value of your home has
increased and/or your loan balance has decreased over the last few years,
you may be able to avoid paying Mortgage Insurance. Even if you do not get
a lower interest rate, it may benefit you to remove the Mortgage Insurance
by refinancing. After evaluating your Break Even Point, the savings of no
longer paying Mortgage Insurance may justify the cost of refinancing.