Original Vs New Monthly Payment When Refinancing
Dont just look at the monthly payment, though. How much will each loan cost you in total interest assuming you pay off the mortgage and dont sell your home or refinance again?
To get this information, select the calculators option to view the amortization table. At the bottom, youll see the total interest for the new mortgage. Write that number down.
Then, do a new calculation with the mortgage calculator. Enter your:
- Original principal amount
- Current interest rate
- Current loan term
Then, view the amortization table for that calculation and see what your current total interest over the life of the loan will be. How much will you save in the long run by refinancing?
What Is Needed To Refinance Your Mortgage
You might be asking, what do I need to refinance my home? Most of what youll need to refinance include what you used to secure the mortgage in the first place, plus some additional items. Youll need:
- Your name on the title
- An acceptable credit score
- An acceptable debt-to-income ratio
- equity in your home
Refinancing To Switch From An Adjustable
Some borrowers refinance because they have an adjustable-rate mortgage and they want to lock in a fixed rate. But there are also situations when it makes sense to go from a fixed-rate to an adjustable-rate mortgage or from one ARM to another: Namely, if you plan to sell in a few years and youre comfortable with the risk of taking on a higher rate should you end up staying in your current home longer than planned.
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How To Calculate Your Refinance Savings
Okay, put on your math hat! Lets say you bought a $300,000 house with a 30-year mortgage at a fixed interest rate of 4% and had a 20% down payment .
After around 10 years of paying about $1,150 per month on your mortgage, your loan balance is now at $200,000. You want to save money, so you consider a refinance.
Using our mortgage calculator, you enter your remaining loan balance of $200,000. To test the refi option, you shorten the mortgage term from your remaining 20 years to 15 years and drop your interest rate down a percentagefrom 4% to 3%.
Youll notice that the shorter 15-year term will make your new monthly payment go up from $1,150 to about $1,400 per monthbut dont worry. Youve probably earned some raises over those 10 years to be able to afford that $250 increase each month. Plus, youll pay off your home five years sooner and save $53,000 in interest!
Just make sure your monthly mortgage is never more than 25% of your monthly take-home pay.
What Is A Good Mortgage Rate
When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow. But mortgage rates dont always move in lockstep with short-term rates.
Avoid focusing too much on a low mortgage rate that you read about or see advertised. Mortgage refinance rates change throughout the day, every day. And the rate youre quoted may be higher or lower than a rate published at any given time.
Your mortgage refinance rate is primarily based on your and the equity you have in your home.
Youre more likely to get a competitive rate as long as your credit score is good and you have proof of steady income.
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Understand When Not To Opt For Mortgage Refinancing
It is not worth to refinance home when you do not find any apparent advantage. You should understand that you would not be saving money at all times sometimes, refi can get you into trouble. It is advisable to wait when the closing costs are not affordable, break-even period is too long, the long-term overheads are high up and you don’t have plans to stay in your home for long. A home mortgage refinancing calculator is advised for easy break up of costs involved and thus understand if mortgage refinance is the good decision.
Thus, regardless of the refinance market, your decision to refinance should be mostly influenced by your personal situation.
When And When Not To Refinance Your Home Loan
Discover if refinancing makes sense for you
Knowing when to refinance your home loan is not an exact science. It can depend on a number of variables and circumstances.
Firstly, the home loan market changes all the time. Lenders frequently adjust their interest rates, change their loan terms, amend or add new features, or include extras to improve the level of flexibility they offer their customers.
In addition to market changes, your personal or financial circumstances can also influence whether you should refinance.
So if youve had your current home loan for a few years, or your financial circumstances have changed, it could be time to arrange a home loan health check with your local broker.
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S To Refinancing A Mortgage
What Should You Do Before Refinancing
Before refinancing, you should contact your existing lender to see whether you can negotiate a better rate than youre currently receiving from them or being offered elsewhere.
Karkal says that when you do, it pays to have evidence of the rate youre being offered to use as a bargaining tool. The more information you have about what other lenders are prepared to offer you, the better the deal youre likely to get.
Take our refinancing readiness quiz and talk to your mortgage broker about your refinancing options.
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What Does Refinancing A Mortgage Mean
Refinancing a mortgage means that youre borrowing from a lender sometimes the same lender with which you financed the first time to pay your current mortgage in full. In exchange for their loaned money, you agree to a new mortgage with them.
In most cases, refinancing is beneficial to both parties: the new lender secures a loan from which theyll earn interest, and you get a lower interest rate.
When Youre At The Tail
Peek SingSavers home loan comparison page and youll notice that lock-in periods usually stretch two to three years. Once youre in the clear, youre free to switch to a new home loan without incurring any penalties. For the possibility of maximising savings alone, its definitely worth your while to take a look at the different home loan packages out there and the interest rates they offer.
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Refinance To Lower Your Mortgage Rate
To determine if you can save money with a lower mortgage rate, use our calculator to compare the monthly interest savings against the cost to refinance. As most mortgage brokers and lenders will cover your legal costs, the main cost you need to worry about is your break of mortgage penalty, or prepayment penalty. This penalty is charged by your lender for breaking your mortgage contract early and is based on your original contract date, current mortgage balance, mortgage rate, and other factors.
When You Should Refinance Your Loan
Timing the refinancing well makes a big difference to your loan payments. Here are the situations under which it makes sense to refinance.
WHEN THERES TIME LEFT ON YOUR LOAN: Refinancing early in your loan tenure typically in the first half makes more sense. During this time, your EMIs focus mostly on interest payments. Therefore, a refinanced loan at a lower interest rate will lead to savings.
WHEN YOU GET LOWER INTEREST RATES: Often the biggest part of home ownership cost is the interest on the home loan. A loan cheaper by around 50 basis points or more could lead to a shorter loan tenure, lower EMIs, lower interest payments, and large long-term savings.
WHEN YOUR CREDIT SCORE & INCOME IMPROVE: An improvement in your credit score as well as income stability will allow you to access the best loan offers.
WHEN COSTS OF REFINANCING JUSTIFY IT: Refinancing has a cost. When the projected savings from refinancing exceed the costs, you should consider refinancing.
WHEN YOURE GETTING BETTER SERVICE: Digitised account management, on-tap customer service, proximity to branch, lower costs of account management coupled with the above-mentioned reasons, make for a compelling case for refinancing.
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Will You Stay In Your Home Long Enough To Benefit From A Refi
Using our example , youd pay $23,000 in interest over the next three years with your current 30-year loan at a 4% interest rate.
On the flip side, the 15-year refi at 3% interest would only cost you about $17,000 in interest the first three years. That means, after three years, your refi will have made up for its own closing costs .
After that, youll enjoy thousands of dollars of savings nearly every year until you pay off the mortgage or sell your home! But if you relocate in just 12 years after refinancing, you wouldnt earn back that $6,000 and the refi wouldnt have been worth it.
Whewthats a lot to throw at you! And we know that even when using a mortgage calculator, the math can be pretty complicated. So ask a home loan specialist you can trust for helplike our friends at Churchill Mortgage.
Refinancing To Convert To An Arm Or Fixed
While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.
Conversely, converting from a fixed-rate loan to an ARMwhich often has a lower monthly payment than a fixed-term mortgagecan be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.
These homeowners can reduce their loan’s interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future.
If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop. When mortgage interest rates rise, on the other hand, this would be an unwise strategy.
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When Can You Refinance A Mortgage
When you refinance, you’re replacing your original loan with a new one. Refinancing may allow you to adjust the interest rate and/or length of your loan, which impacts your payments. There are a number of reasons why refinancing may be a good idea, although there are a few things you should consider when deciding if refinancing is right for you.
Blend And Extend Your Existing Mortgage
Your existing mortgage lender may offer you a âblended rateâ essentially, a âblendâ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.
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How Long Does It Take To Refinance A Mortgage
Refinancing a mortgage doesnt happen overnight. The same work involved in your first mortgage verifying your income and reviewing your credit and debt, appraising the property, underwriting and closing applies here, too. The average refinance took 47 days to close, or about a month and a half, as of July 2021, according to ICE Mortgage Technology.
Some lenders complete closings faster thanks to automated online processes. When shopping around for refinance options, ask each lender about their average closing times and the estimated closing costs youd need to pay.
Dont let the process intimidate you, either. A recent Bankrate survey shows that homeowners who havent refinanced in todays low-rate environment cited too much paperwork as one of their reasons for avoiding it. Taking care of that paperwork now can save you more valuable paper down the road.
Expert Insight On Mortgage Refinancing
To help answer all your questions, MoneyGeek spoke with industry leaders on refinancing and home lending. This panel will help you identify what to look for, when you should consider refinancing and how to avoid scams in the process.
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When Should You Refinance Your Home Loan
In todays market, there are many reasons for you to consider refinancing, says Karkal.
It is a competitive environment for lenders, he says.
Banks are constantly introducing new product features to attract borrowers and home loans are evolving.
Banks are constantly introducing new product feautures to attract borrowers.
Karkal points out that, as well as lower interest rates, some home loans offer features such as multiple offset accounts, fee-free extra repayments and the ability to have your salary paid directly into the loan. Each of these has the potential to save you a substantial amount of money and shave years of the term of a home loan.
If youre still on the same terms and your home loan has the same features as you had a couple of years ago, you should consider looking around for a better deal.
What Do I Do To Refinance
The first thing you must do when considering refinancing is to consider exactly how you will repay the loan. If the home equity line of credit is to be used for home renovations in order to increase the value of the house, you may consider this increased revenue upon the sale of the house to be the way in which you will repay the loan. On the other hand, if the credit is going to be used for something else, like a new car, education, or to pay down credit card debt, it is best to sit down and put to paper exactly how you will repay the loan.
Also, you will need to contact your mortgage company and discuss the options available to you, as well as discussing with other mortgage companies the options they would make available. It may be that there is not a current deal which can be met through refinancing that would benefit you at the moment. If that is the case, at least you now know exactly what you must do in order to let a refinancing opportunity best benefit you. When refinancing, it can also benefit you to hire an attorney to decipher the meaning of some of the more complicated paperwork.
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Pro Tip: Refinance Closing Costs
When you take out a new home loan, youll pay upfront fees totaling 3% to 6% of the loan amount. If you refinance, this is a significant expense you should take into account. When you refinance frequently or sell your home soon after refinancing, you may not experience enough savings to justify the upfront fees.
Where To Learn More About Mortgage Refinancing
To truly understand if itâs a good idea to refinance your mortgage, you should speak to a licensed Canadian mortgage broker. Theyâll be able to assess your personal situation at no cost to you, and help you understand what your options are. If youâre ready to refinance then they can also find you the best deals and guide you through the process.
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Refinancing To Tap Equity Or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another justification is that the interest on mortgages is tax-deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision nor is spending a dollar on interest to get a 30-cent tax deduction. Also note that since the Tax Cut and Jobs Act went into effect, the size of the loan on which you can deduct interest has dropped from $1 million to $750,000 if you bought your house after Dec. 15, 2017.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
It takes years to recoup the 3% to 6% of principal that refinancing costs, so don’t do it unless you plan to stay in your current home for more than a few years.
Add A Home Equity Line Of Credit
A home equity line of credit gives you access to the equity in your home, at your own discretion. A HELOC works a lot like a credit card account, but because itâs a secured loan the interest rates are much lower. If you do take money from it, youâll be responsible for monthly interest-only payments on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.
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