Is refinancing on your radar? Mortgage refinancing applications have seen a dramatic increase in 2020, with interest rates at unusual lows.
Prior to jumping into refinancing, each borrower should attentively consider whether this choice puts him/her in a better financial position. While it might be an answer to your prayers, it certainly isn’t an answer to everyone’s needs.
Individuals must go through a long research process to gain knowledge about every important aspect, not rush through this phase. Imagine the best and worst scenarios in your case and take action afterward.
These helpful tips will make sure no mistake is made on your end.
Also Read: Research Mortgage Types
Doing research should be the primary step on your list of tasks. Get knowledgeable about the factors that impact the rate you will eventually receive. The elements that affect these rates include paid points, loan to value ratio, credit, loan size, and mortgage term. The rates advertised by lenders aren’t always reliable, as these are mainly used to lure individuals.
Another obvious aspect of the research should be knowing the expenses linked to refinancing. It makes no sense to re-finance if the associated fees are larger than the amount you expect to save after the refinancing journey. It’s common for borrowers to pay anywhere between three and six percent of their principal in fees. Read here why refinancing is getting more expensive.
Borrowers should figure out whether lenders have a prepayment fee related to their original mortgage. Some moneylenders charge a one-time fee if you pay your mortgage off early, as they stand to lose the extra money earned from interest payments. The usual worth of prepayment fees is between one and six months’ worth of interest payments.
Modify the mortgage’s length
The next tip to follow is modifying your mortgage’s length by either lengthening or shortening the term. Borrowers who want more affordable installments should lengthen the term, meaning you’ll need to make larger interest payments over the entire term. While this might not be the best move, it allows borrowers to hold onto their homes.
The second option is shortening the term to reduce the interest in total. Basically, you will be trading a longer mortgage for a short-term one while saving on interest. The dilemma of whether to lengthen or shorten the term should be made by balancing out your short-term and long-term needs. The seriousness of such a financial undertaking requires investigating the exact reason for choosing either option.
Consider adjustable-rate mortgages (ARMs)
ARM monthly payments shift in accordance with interest rates since they are tied to them. When intending to refinance mortgage, consider the best and worst reasons for doing it. Some months you might get decent payments because rates have moved in a downward direction. During other months, the payments will be bigger than expected due to the upward trend in interest movements.
Borrowers should beware of the teaser rates featured by many ARMs, which promise lower-than-average interest in the initial period. These rates are valid only for several months or a year. Afterward, the payments of interest simply skyrocket. These offers are too good to be true, which is why you need to read the fine print that comes with the loan.
When refinancing from one ARM to another ARM, you should check the initial rate along with any payment caps. You should look for adjustable-rate mortgages with a lower initial rate to start off with fewer interest payments. Payment caps are the total increased amount you pay from month to month. If your adjustable-rate mortgage has a payment cap of six percent, the total increase to pay from one month to the next is six percent, even when the rates increase more.
Know when not to refinance
Borrowers should carefully consider the moments when refinancing is not a suitable option, such as when having invested in their existing mortgage for a longer period. The longer you make mortgage payments, the more equity is built up. The money paid towards your principal is counted as part of your equity, while the money paid towards interest isn’t.
At the beginning of making mortgage payments, most of the money is reserved for interest, not principal. After the twentieth year of a thirty-year fixed loan, you begin paying off more and more principal, meaning the equity starts growing.
Therefore, refinancing after holding onto the same mortgage for a long time restarts the amortization process. You have spent the early years making interest payments instead of building equity. This site, https://www.allbusiness.com/does-your-home-have-equity-3878753-1.html, reveals what home equity is and how you can build it faster.
Refinancing isn’t a smart decision if your intention is to move very soon. Moving sooner than later while in view of refinancing costs makes no economic sense. Nevertheless, if you intend to keep your house as a rental, it might make sense to refinance. Paying a high prepayment fee is an indicator against refinancing. Anyhow, if you use the same bank, ask them to waive this fee.
Start the process
When starting the process, borrowers should factor in the most common eligibility requirements, which lenders rely on to see if they fall within the acceptable range. You have to discuss all essentials with your loan officer, including your willingness to pay points for more fitting interest rates.
No-cost refinancing is a term you should be familiar with. It takes place when the moneylender assumes the responsibility for the upfront fees at the sum of increased interest rates. This option often seems viable to people who wish to refinance but find the upfront costs too expensive. Nevertheless, it should be avoided by those who find these fees affordable, as the continuously high interest will make you pay much more.
Borrowers are suggested to check the quotes of all credible lenders and verify their credibility. You shouldn’t be afraid to negotiate better terms than those you’ve been offered. You’ll probably be entering a 30-year contract, which requires devotion to the most credible provider.
Ask yourself the right questions
Last but not least, asking yourself the right questions is a must before signing any contract. The essential questions to ask are:
- What are your goals?
- Is refinancing a smart move?
- Can you afford the fees?
- What are the pitfalls?
Until you provide an honest answer to all these questions, don’t even think about agreeing to mortgage refinancing. You must be absolutely positive that you are taking the right path.
By following these tips, you’ll pay attention to each and every step of the refinancing journey.
Do not skip any step!