With all the talk of interest rate cuts refinancing has become a hot topic for many homeowners. Here are the answers to several common questions regarding the current rate cuts and deciding if taking out a new mortgage is right for your situation.
When Does It Make Sense to Refinance a Mortgage?
Question: Is it true that you should not refinance unless your new mortgage rate is two percent lower than your existing rate?
Question: When should I apply to refinance my mortgage? Do the fees and hassles of refinancing outweigh the financial benefits?
Question: I am thinking about selling my house but could really use the lower rate now. If I refinance now and then decide to sell my home will I be hurting my chances of qualifying for another loan?
Forget those rules that say you should never refinance unless your new mortgage rate is “this” much lower than your old rate; it’s best to decide if mortgage refinancing makes sense for you by evaluating the loan on a cost vs. savings basis. You can do this by calculating your break even point by dividing all of your fees and closing costs by the monthly savings from your new loan. Suppose for example that your new home loan has a payment $200 less than your old mortgage. If it cost you $3,500 to take out the new loan divide $3,500 by $200 and you’ll see that your break even point comes after 18 months. This is when you being to realize a savings from the new, lower mortgage payment.
If you plan on keeping your home long enough to reach this break even point and realize a savings, refinancing probably makes sense in your situation and will save you money. If you plan on selling before your break even point you could be losing money by refinancing. How can you evaluate your potential savings from refinancing? You’ll need to shop for rate quotes; however, the rate quotes you receive online or from a mortgage broker include commission based markup. If you want the absolute lowest mortgage rate possible you’ll need to get a wholesale rate. (more on wholesale rates later)
Which Term Length?
If you refinance with a 30 year mortgage you’ll be starting your loan amortization from scratch. What is amortization? It simply describes the process of repaying a mortgage loan over time. Mortgages are front loaded with interest so in the early years the majority of your payment is applied to interest and you build equity in your home at a very slow rate. This could be considered a disadvantage to refinancing, especially if you tap into your equity in the process. Another option is to choose a shorter term like 15 years. Your payments will be higher but you’ll build equity in your home at a faster rate and pay less to the lender in finance charges.
Refinancing now won’t hurt your chances of qualifying for another mortgage several months or a year from now if you sell your home. You just won’t be able to recoup all of the expenses you pay when taking out the new mortgage. Also, make sure your existing loan does not include a prepayment penalty, or if it does that you include this fee in your cost vs. savings analysis.
Is it too early to refinance my mortgage?
If you just purchased your home within the last year and have an interest rate 6 percent or higher, is refinancing worth it? There are no rules saying that you have to wait a certain amount of time before refinancing; you only need to calculate your break even point and make sure that you factor in the prepayment penalty if you have one.
What About Wholesale Mortgage Rates?
The mortgage industry has a dirty little secret that you need to be aware of. All rate quotes you receive online or from your broker include commission based markup. The problem with this markup is that you’re already paying the broker an origination fee for their services; in addition to this fee the broker marks up your mortgage rate for a commission without fully disclosing what they’re doing. The commission your broker receives for marking up your mortgage rate is called Yield Spread Premium and according to the Secretary of Housing and Urban development is the reason American homeowners will overpay nearly sixteen billion dollars for their home loans this year.
The good news for you today is that you can avoid Yield Spread Premium and refinance your home with a wholesale mortgage rate. Register for our free video tutorial and you’ll learn how to recognize Yield Spread Premium, negotiate to avoid paying it, and avoid lender junk fees when refinancing. Sign up today and get in while these videos are still a free offer.