The Truth About Refinancing Your Mortgage (& What to Know)

The pandemic 2020 has created when mortgage refinancing is not something everyone could have predicted.

In fact, according to a recent Bankrate study, 17%, or nearly 2 out of 10 homeowners, refinanced this year to take advantage of historically low interest rates.

When COVID-19 The virus hit in early 2020, one of the Feds’ initial responses and steps to help combat a possible recession was to lower interest rates. And reduce them that they did.

Historically low interest rates aim to keep home buying activity going. However, it also opens the door to incentivizing homeowners to refinance their mortgages and lock in super low interest rates.

However, this leads to several questions: Is refinancing always advisable? And, what’s the truth behind refinancing your mortgage?

Today, we’ll tackle those questions and help you determine when it’s ideal to refinance and perhaps not so ideal!

The Truth About Refinancing Your Mortgage

While refinancing is a hot topic and seems to be a popular move for many homeowners these days, there are always pros and cons.

Not all financial move makes sense and this includes refinancing. Refinancing could be the right move for you, or it could be the wrong move. First, let’s start by looking at some of the downsides of refinancing your mortgage before expanding on the downside!

Disadvantages of Refinancing:

1. Break-even point

Brian Scott, a senior loan consultant outside of Washington, DC, puts it this way, “The downside to refinancing will be the amount of capital you have to spend to pay closing costs and the potential maturity of the loan. set again.”

Scott further explains that while refinancing is often beneficial, you want to make sure you can recoup your closing costs within as little as five years. In other words, the purpose of refinancing is to save money, not to lose it.

To assess whether refinancing will save you money, you must evaluate your “Breaking Point.” Then use a breakeven calculator, the goal is to see how long it takes to cover your closing costs.

As a general rule, if you can’t cover your closing costs within five years, or you’re planning to move out shortly, refinancing may not be worth it! Saving half a point may not be worth it in the long run!

2. Loan Terms:

Your loan terms matter.

Perhaps one of the biggest downsides to refinancing is the reset of loan terms. However, the truth about refinancing that many people don’t realize is the amortization schedule of a mortgage.

At the start of new mortgage terms, a new allocation schedule begins. The downside of a newly amortized loan is that the payments will go to interest first, principal second.

For example, if you’re taking out a 5-year loan on a 30-year mortgage, refinancing means you have to start all over again on your amortization schedule.

This may or may not be the case; it just depends on how much you are with your current mortgage.

3. If you plan to move house soon.

While refinancing can be beneficial because of better loan rates and the ability to save money every month in relation to your payments, it doesn’t always make sense if you have a plan. move in the next few years.

Back to the original premise of refinancing and whether it’s worth it – your cost recovery is the #1 factor; this usually takes time (several years).

It doesn’t make sense to refinance if you plan to move within the next few years. There isn’t enough time to cover the costs even if you lock in a new mortgage with a one point better interest rate.

Advantages of refinancing your mortgage

Knowing the downsides of refinancing doesn’t mean it’s a bad idea. In fact, depending on your individual circumstances and needs, refinancing can be a great idea… as long as you can benefit from the following:

1. You Save

With all the talk about non-refundable closing costs when it comes to refinancing your mortgage, if you intend to stay in the house for another 4-5 years and you can get the fees back , in which case the refinancing is worth it.

Once you reach your breakeven point after refinancing, any payments after this will save you money. Saving when it comes to refinancing usually means you’re saving:

  • Monthly, due to lower monthly payments.
  • Overall, due to lower % (thus paying less interest)
  • Possibility to cancel PMI (mortgage insurance)

If you can save, it’s well worth it.

2. Shorten your deadline

One positive to refinancing is that you can lock in a low interest rate for a shorter term, like a 15-year hot loan option.

When you extend the term of your mortgage payments for more than thirty years, what you will inevitably do is pay more interest. Use an amortization calculator and do the math, and you’ll quickly find that a $300,000 home doesn’t cost $300,000… in 30 years; it will far exceed $500,000 in total payment (because of interest).

However, refinancing at a lower interest rate and shortening the loan term can consume some of your cash flow, but over the life of the loan you will typically save 50% interest when compared with the loan period. 15 year term with 30 year term.

3. Better Mortgage Rate

The obvious reason for a refinance is the savings a homeowner receives from their newly lowered interest rate. Brian said it this way earlier,

“Refinancing isn’t a bad idea if you can get your interest rates down to a level where it’s profitable and pays off on its own in the long run.”

Usually, this means removing at least a percentage point from your mortgage to make the refinancing process, pay closing costs, and more value!

4. Get rid of Mortgage Insurance

Mortgage insurance is expensive; However, necessary for some home buyers.

When I bought my first home in 2010, to make sure I could finance it and make sure the bank got their money, I had to have mortgage insurance, at $95 a month.

Over a 5-year period, that number grew to $5,700. If I don’t refinance, I will have to pay an additional $5,700 over the next five years. However, the closing cost of the refinance was only $3,000 – so right there, I was able to save $2,700.

Not to mention better rates.

In this case, refinancing can be extremely advantageous to avoid paying high PMI.

Last word Từ

The truth is when it comes to refinancing it depends. Therefore, you must consider factors to determine if refinancing is the right move for you, or possibly the wrong move.

Some believe in refinancing their mortgage at a better rate over 30 years so they can pay more on their mortgage and pay it soon. Others may choose to refinance with a 15-year mortgage to save on interest.

And obviously, for some, it simply doesn’t make sense. But, in my personal case, refinancing in 2016 is a great option. We can save money in all areas, buy mortgage insurance and save 1%.

Other times when refinancing makes sense is when you have variable interest rates. In many cases, if you have variable interest rates, you should give a lot of consideration to a fixed rate refinance.

So no matter what you decide to do, it is best to consider all these factors and meet some industry consultants who will provide you with the most relevant and transparent information. with you!

Frequently asked Questions:

Why is refinancing a bad idea?

Refinancing a bad idea can be either a bad idea or a good idea; It just depends on your situation. For example, if you are unable to cover equity/closing costs on a new loan within a reasonable time, you plan to move out, or you are continuing to amortize, a refinance could be a bad idea for you.

Is refinancing your mortgage a good idea?

It’s better to lower your interest rates to your advantage and the savings will pay off on their own. Additionally, getting rid of mortgage insurance, avoiding variable interest rates, and locking in new shortened loan terms can make refinancing a great option.

Does your mortgage start over when you refinance?

Yes, your term and amortization will start over. That being said, if you have only a few years left in your current 30-year term, you might consider a shorter term like 15 or 20-year options!

How much can you save in 15 years installment?

In short, a 15-year mortgage term will be more expensive monthly than a 30-year mortgage. However, for the entire life of the loan, a 15-year loan will save up to 50% in interest fees. | The Truth About Refinancing Your Mortgage (& What to Know)


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