Refinance mortgage application
Finding the right time to go ahead with a refinance is a very perplexing issue, and needs a lot of research and evaluation to proceed with. And most homeowners face this issue at some point during the term of their existing mortgage. The only homeowners who wouldnt face this are those who took their mortgage when the interest rates were at an all time low.
But for the remaining some twists and turns in the rates often leads to a state of dilemma about whether its time to refinance their existing mortgage to harvest the benefits of the deflated rates of interest.
There are homeowners who would jump forward for a refinance when the rates would have decreased only by 0.025 to 0.05 percent. This drop may essentially make no visible difference to their monthly payments. Rather the drop may not even be sufficient to cover up for the fees that come up on the refinance. So just dont leap forward with minor rate fluctuations, in fact hold your horses till you see some viable difference of at least a one percent or more. Refinancing with such drops only can get you real benefits. The money you save in the game will be able to cover up all the closing costs and still leave you in a profitable state.
If the closing costs of the refinance are high then you need to be more calculative with your decision. The lenders would in fact increase your temptation by telling you that the closing costs can be rolled into your mortgage amount. And do you think it makes good sense No it doesnt, because by doing this you are loosing out on the on the hard earned equity in the house that you have built so far. There is no reason why you should let all your efforts of the past years go down the drain, it seriously does not make any economic sense.
Let us analyze all that we have mentioned here with the aid of an example. Let us assume that Ms. Alice took an initial mortgage of $407,250 at the rate of 7.4 percent. Now two years have passed by and she has made regular payments so far with the result that her mortgage balance has come down to $398,900. Now she wants to take a refinance on the house to avail of a lower interest rate of 7.15 percent and decides to have the closing cost amounting to $9000 added into the new loan amount. Do you think it was a wise decision Definitely not, that is because in the last two years she had built equity of $8350 in the house while she is increasing the loan amount by $9000. By including the closing costs in the refinance amount she has lost her bit of equity that she had earned in two long years.
Makes perfectly no sense so far, but it can if we include in the appreciation value of the property in these two years. Let us say the property has appreciated by four percent in these two years and the total worth of the property has gone up to $423,540. That means the property has increased in value by $16290 in the last two years, now if you reduce the closing cost amount that is $9000 from this Ms Alice is still left with equity of $7290. She had to part only with a marginal amount of her equity to shift on to a decreased mortgage rate. But do remember that we assumed an appreciation rate of 4 percent for the two years, and this high appreciation is seen only with ten percent of the properties. And if your property doesnt have a high appreciation, drop the idea right away.
If you can find in the market a refinance deal that has no closing costs at all and you are still able to get lower monthly payments, you must go head over heels to grab such an offer. Because such refinance deals havent been heard of so far. If you are going in for a no closing cost refinance then you are bound to pay higher rates of interest. So, when you are going in for a refinance dont get stuck into this trap of no closing costs.
If you are bent upon taking a no closing cost mortgage then you must have some solid reason like you want to invest this amount into something that will give you much larger returns over the years or you have an emergency in the house and taking a small debt from outside may turn out to be more expensive.
If you are thinking about refinancing here is a check list that can help you out.
Rates are importance but closing costs cannot be ignored.
Paying discount points to get a reduced rate leading to lower monthly payments is a good idea only when you plan to stay in the house for a long term.
Carry out calculations to see if you are really gaining something from refinancing and also to find out the period to break even.
Are you able to avail of added benefits like reduction in the insurance premium
Look for combo loans to manage issues related to PMI. At times being able to get rid of PMI can be really beneficial.
Research the market for the best rates and best terms. Dont rush for low interest rates without knowing what the implications of the refinance will.
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