2021 is just around the corner and refinance mortgage rates are on the way up. According to Freddie Mac, the average rate on mortgage refinance loans today is 4.6%. If you been considering a refinance as a new home owner, you may want to get it done sooner than later. Some experts believe that with strong economic growth and low unemployment, we could have 5% mortgage rates soon. Below is a complete guide to refinancing your mortgage so you can make the best decision for you and your family.
Why Refinance Your Mortgage Now?
Did you know that if you drop your mortgage rate by 1%, you are getting 10% roughly of your mortgage payment back in your pocket each month? Each $1,000 you pay your lender, you can reduce your mortgage payment by $100. That is $12,000 that you can save over the next 10 years just be doing a refinance.
Should You Refinance This Year?
When rates drop, more people wonder if they should refinance their first mortgage. Low rates are tempting, but many homeowners look at the lower rate and wonder if it is still worth it. They might worry about not qualifying, the stress they have to deal with, and closing costs. But it is easier to deal with a refinance now than it was five years ago. It is easier to get approved and the process does not take more than a few weeks for most people.
There also is the argument about whether it makes financial sense to refinance. It is wise to look at this closely, but do not rely on conventional wisdom to guide you.
A common conventional wisdom canard is that it does not make sense to refinance unless you are dropping your rate by at least 1%. The other conventional wisdom is that it does not make sense to do a refinance mortgage unless you are going to move before the loan hits the break-even point.
First, saving one percent on your interest rate is a rule that dates way back to more than fifty years ago. That was when closing costs were huge, loans were small, and homeowners stayed in homes for forty years. In those days, loans were usually $60,000 or less, and the home owner needed to save 1% on the interest rate to save $1,000 per year.
With today’s loan sizes, you can save up to six times that amount when you refinance. Even a small reduction in your mortgage refinance rate can save you a lot each month. As long as the closing costs are reasonable, even saving .25% on your home loan interest rate can be worth it.
Regarding recouping your costs, this is based upon the break-even method which is often flawed. The big issues with using the break-even method to look at a refi are the following:
- You will not ever want to do a refinance again
- You will never need to do a refinance again
- You will never sell
It is possible these assumptions can apply to you, but this is not as common as decades ago. Many people will want to do another refinance again when interest rates drop, or they need cash. You also may want to refinance into a 15-year mortgage when you get closer to retirement. Mortgage refinance rates on these loans are less and you will have your home paid off faster.
Also remember that rates CAN go lower than you think; it is impossible to predict what interest rates will be in five or 10 years. You do not know how long you will need to hold the mortgage, so the break-even method to evaluate a refi does not always make sense.
A Great Safe Refinance Choice
A good idea if you are considering a refinance is to think about saving money each month with a lower rate with minimal closing costs. You can do this with a zero-closing cost mortgage refinance.
There are no closing costs for these loans; you will generally pay .25% higher interest to do a zero-cost refinance loan. This can be a great deal if you are able to move into a lower interest rate and still save at least .25% on your refinance mortgage rate.
Some Homeowners Hold Loans for Too Long
Rates have gone up in the last year, but they are still historically low at 4.6% or so. You might think that many homeowners would be rushing to do a refinance, but there has been a drop off in refinances in the past several months as rates have gone up. Many people who are eligible to refinance and save money are still holding onto their current mortgage.
The US government has been surprised that more people are not refinancing. The Home Affordable Refinance Program or HARP is in its final year and the volume for this program has dropped a great deal. A HARP refinance can be used by people with a Fannie or Freddie backed loan who are underwater on their loan and need to refinance to lower their payment. But it is not just homeowners who are eligible for HARP that are not refinancing. There are homeowners with many types of home loans that are not refinancing too. As refinance mortgage rates are continuing to inch higher, with promises of 5% down the road, it is probably worth looking to see if you should refinance.
The bottom line on home refinancing is to look closely at what you can save each month and each year, and what your closing costs are. If you do a no-cost refinance loan, you probably can do very well as long as you are still saving on the rate. If you have closing costs, just make sure that you will hold onto the home long enough so that your closing cost expenses are not more than the interest you saved.
Shopping Mortgage Lenders for the Best Refinance Terms is a Wise and Prudent Choice that Can Save You a Lot of Money.
Secrets to Refinance a Mortgage with No Closing Costs our Lending Fees
Perhaps you have seen advertisements for no closing cost refinance mortgages. This is a mortgage loan that promises you will have no out of cost expenses when you do a refinance of your existing mortgage.
Below is more information about what a no closing cost and no lending fees refinance is all about.
No Closing Cost and Lending Fees Refinance
A no closing cost refinance is a loan where the broker or lender pays the costs for settlement. This includes common lender fees such as processing, underwriting, appraisal, and points, as well as third party costs such as title and escrow.
You are probably wondering how the bank or lender can afford to pay for these fees for you. After all, closing costs and lender fees can add up to thousands of dollars on top of the transaction.
Most lenders will increase your interest rate slightly in exchange for paying your closing costs and lending fees. So, remember that a trade-off for a mortgage refinance with no fees or closing costs is a higher rate. If you are going to hold this mortgage for a long time, odds are that the lender is going to come out on top in the transaction.
Depending upon the rate and closing costs, it will take a few years for the additional interest you are paying to equal what the lender paid for you. After that point, the lender wins in financial terms. So, remember that a no closing cost refinance can end up costing you more than it saves you over time if you hold the mortgage for many years.
A no closing cost or lender fee refinance is just a simple trade where you pay nothing now but pay more over the loan life with a higher rate. For some people, getting a no closing cost loan is needed because they simply do not have the funds to pay all the closing fees. But for others, whether to make this kind of transaction or not depends upon their circumstances.
A mortgage broker can set up a no closing cost refinance as well if they adjust their commission to the point where they can make enough money to offset any fees associated with the loan.
One of the important points to remember is that terms of a no fee refinance loan varies by lender. Some refinance programs will cover every closing cost and others may still charge you for some third-party fees including title, escrow and appraisal, while paying for the rest. It is important to take a close look at the contract and see which fees are covered by the lender and which are being charged to you.
For example, if a lender says that it has a no lender fees loan, this means that you would need to pay for third party fees, such as taxes, interest and insurance.
Example of a No Cost Refinance Loan
Let’s say you qualified for a $500,000 loan at 6%, paying 1 point to the lender and $2,500 in closing costs for a total of $7,500. This is a lot of cash for many people, but in exchange for paying nothing up front, you may pay a rate of 6.5% or even higher for the same loan. You could pay another $150 or $200 per month or about $2,400 more each year if you get the no closing cost refinance mortgage option. Clearly, you would break even at about three years with this example. So, if you are going to sell the house in that time, this could make sense. Otherwise, the lender is going to make out in the long run in exchange for paying the $7,500 now.
Can You Find No-Fee Refinance for People with Poor Credit?
By now you have likely read an article about the new opportunities for homeowners to refinance even if they have low credit scores. One common question we get is, “Can you get a no closing cost refinance with bad credit?” The answer is “sometimes” and almost always you will have to agree to a higher interest rate. It’s important to do the math to determine which option best meets your needs.
Should You Do a No Cost Mortgage Refinance?
The key to making this decision is knowing what you are going to do with the property. If you want to move or upgrade to another home in three or four years, or you refinance a lot, paying upfront costs to get a lower rate will probably be a financial loser. A no closing cost refinance might be a good option. Why pay a lower rate and be out thousands in closing costs if you are just going to sell or refinance in three years?
But if you are the type to stay put in the home for more than five years, just know that you are going to end up losing money on the transaction by having the lender pay your losing costs, most likely.
Also, look out for the lender who wants to put your closing costs on top of the loan amount, making you pay interest on the closing costs. This is not a no closing cost refinance.
A no closing cost or lender fee refinance is not good or bad, but you need to understand the numbers and what you want to do with the home over the long term to decide if it is a good fit for you.