Should I Refinance or Not?

When does it make sense to refinance your mortgage? - It all depends on your personal financial needs and goals. If you're trying to save on your monthly payments, it's just a simple math question.

You figure out how much it will cost to get a new lower interest mortgage, divide that total cost by the amount of money you will save each month and the net result is your "break-even point" in number of months.

For example, if it cost $2,000 in closing costs to reduce your mortgage payments by $100 per month, you'd divide $2,000 by $100 and your break-even point would be 20 months. That means if you are planning to stay in your home at least 20 more months, it would make sense to refinance.

Today, almost all of the refinance loans that we do for our clients are done with no point and no origination fee, or NO closing costs at all, so the "break-even point" comes much sooner.

Or, better yet ... call me at (703) 655-6161 or (301) 660-3399 and let me do it for you! I will help you figure out the best mortgage options for your personal financial situation.

The "No Closing Costs" Refinance

If you decide to refinance with a "no closing costs" loan, you save monthly payment immediately, no matter how little you reduce your interest rate.

But  the trade-off for getting a "no closing costs" loan is that your interest rate is higher than the rate you would get if you pay closing costs.

If you plan to keep your loan for several years, you are typically better off paying the closing costs and locking in a lower interest rate. But if you plan to keep the loan less than 3-4 years, the "no closing costs" option may be the best for you.

The key question to ask yourself is, "How long will I stay in the house?" Or more accurately, "How long do I think I will keep this mortgage?"

Technically, you could refinance with a "no closing costs" loan every time rates drop as little as 0.125% below your current mortgage rate, but do you really want to go through the hassle of getting a new loan to save a few dollars per month?

To tell the truth, "No Closing Costs" loans are NOT all created equal!

If you want an HONEST "No Closing Costs" loan at the lowest interest rate possible, call me at (703) 655-6161 or (301) 660-3399.

Other Reasons to Refinance

By Refinancing your existing loan, total finance charges may be higher over the life of your loan. Reducing your monthly loan payment is just one reason to refinance your mortgage. There are many others ...

For example, you might want a "cash-out" refinance that doesn't just pay off your current mortgage balance, but actually puts money in your pocket at the close of refinance.

If you have good credit, you can borrow up to 75% of your home's appraised value on a cash-out first mortgage. For example, if you currently owed $300,000 on a $500,000 house, you could borrow up to $375,000 (75% of $500,000). That would give you $50,000 in cash, minus any closing costs.

After a "cash-out" refinance, you could do anything you want with that money, such as pay for home repairs and improvements, pay off your credit cards, buy a new car, etc. In most cases, the interest expense is all tax- deductible, and at today's interest rates, it's probably the cheapest cost of money you can get.

I do NOT recommend spending this money frivolously, such as taking an expensive vacation to Vegas, but if you can pay off your non tax deductible debts and/or add value to your home, a cash-out refinance is a very handy financial tool.

Another reason to refinance is to convert an Adjustable Rate Mortgage (ARM) into a fixed-rate loan. Or in the opposite direction. Let me tell you which selection is better for you.

Dump that 2nd Mortgage or HELOC

Another reason to refinance is to get rid of the second loan on your home.

If you used a first and second mortgage combination to buy your home a couple of years ago, such as an 80/20 "no down payment" loan, your home's value may have appreciated enough so that you can refinance and eliminate the second mortgage.

For example, let's say you bought your home for $300,000 using a zero down payment 80/20 loan program. Your 80% ($240,000) first mortgage has an interest rate of 5.5% and your 20% ($60,000) second mortgage has an interest rate of 9%.

Let's further assume that thanks to our hot housing market over the past few years, your home is now worth $400,000.

That means you could get a new first mortgage that would pay off both of the existing first and second mortgages because the balance of the new loan would be less than 80% of your home's current value.

Even if your new first mortgage was the same rate as your old loan, your monthly payments would be significantly lower because you would be financing the second mortgage balance over 30 years, and at a much lower rate.

The same thing goes for a Home Equity Line of Credit (HELOC), which is a type of second mortgage where the loan balance changes as you use the line of credit, and the interest rate varies with the financial markets.

HELOC interest rates are typically tied to the prime rate. It changes every single month and of course affect your monthly payment.

If your home's value has appreciated enough to pay off some or all of your HELOC with a new first mortgage that totals less than 80% of the home value, you will lower your monthly loan payments and not have to worry about the prime rate continuing to increase.

Get Rid of that PMI

Yet another reason to refinance your mortgage would be to get rid of your Private Mortgage Insurance (PMI).

PMI is far less common than it used to be, thanks to the popularity of first and second mortgage combination loans.

But if you made a down payment of less than 20% when you bought your home, and you didn't use a 2nd mortgage, you probably had to pay for PMI to protect the lender's interest in the property.

If you've made your payments on time for at least two years and your current mortgage balance is now less than 80% of your home's current market value (because of price appreciation or pre- paying principal), you can ask your lender to drop the PMI requirement on your loan. Typically, that means you will have to pay for an appraisal to prove that you have sufficient equity in your home.

An appraisal typically costs $300-$500. Since you have to pay for an appraisal anyway, it may make sense to go ahead and refinance your mortgage at the same time you are dropping your PMI insurance. Even a small drop in your monthly payment, combined with eliminating the PMI payment could add up to substantial monthly savings.

Decisions, Decisions ...

As you can see, there are many reasons that you may want to refinance your mortgage, including several others that I have not included in this brief article.

To determine which option is best for you, you should consult a mortgage professional.

I will give you HONEST answers and expert advice.

In some cases, your best option may be to simply keep your current loan instead of refinancing. If that's the case, I'll tell you. Very few other mortgage companies would ever tell a potential customer NOT to do a loan!

So if you're trying to decide whether it makes sense to refinance your mortgage, call me now at (703) 655-6161 or (301) 660-3399.

You'll get honest, straight-forward answers and NO pressure!