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What You Should Consider Before Refinancing Your Home

Refinancing a home or mortgage has associated costs and fees that can be costly depending on the amount of the loan, the location of the property, and other factors.

What is refinancing and why refinance?

Refinancing a mortgage can have many benefits, such as a lower interest rate and monthly payment, changing from a variable rate mortgage to a fixed rate one, or reducing the term of your mortgage so you can pay it off faster. However, keeping your current mortgage might be a better option if the refinancing costs outweigh the savings.

Since a refinance involves paying off your current mortgage and taking out a new one, the costs you incur may be similar to what you paid for your original mortgage. Refinancing fees can cost up to 5% or more of your loan amount, depending on the location of your property. These costs and fees may include but are not limited to:

  • A mortgage loan underwriting/processing fee;
  • An appraisal fee;
  • The loan issuance fees;
  • Attorney’s fees and / or a title fee;
  • A flood determination fee;
  • Security reserves for property taxes and insurance;
  • Discount points for a lower interest rate, and / or;
  • A fee for the credit report.

Should you refinance?

Before you consider refinancing your mortgage, ask yourself the following questions:

How old is my current mortgage?

If you’ve been paying your current mortgage for a long time, consider how many additional years you would have to pay off a mortgage when refinancing. It wouldn’t make much sense, economically speaking, to start a 15, 20, or 30 year mortgage if you only have 10 years left on your current loan. In the long run, you could end up paying thousands more in interest if you refinance, even if the interest rate and monthly payment are lower.

Also, you pay primarily interest for the first few years of a mortgage. The same applies to a refinanced mortgage. So instead of advancing in the principal as you have done, you will return to making payments almost exclusively of interest.

Does my current mortgage have a prepayment penalty?

If your mortgage has a prepayment penalty, you may be charged a fee if you refinance your loan, because in reality what you would be doing is paying off the loan before it expires. You need to review the terms of your loan in relation to the period of the prepayment penalty and the amount of the penalty. If you are going to incur a prepayment penalty, be sure to add it to the refinance fee list for an accurate assessment of what the refinance will cost you.

How long am I planning to stay here?

If moving in the next three years is something you are planning, you may not want to refinance your current mortgage. Recovering the costs of a refinance takes time; You can easily calculate how long by dividing the amount you will pay in installments by the amount you will save each month. The result is equal to the number of months until you get out without winning or losing with your new loan. If you’re selling your home before breaking even, refinancing may not make sense.

I have none of my home equity left?

Has the value of your home decreased, so you have to finance more than 80% of its value? Or are you trying to get rid of an inventive loan, in which a first mortgage was combined with a home equity loan? Home loans that do not have a loan to value ratio of 80% may require you to pay Private Mortgage Insurance (PMI) each month to your lender.

PMI protects your lender in the event that you default on your loan, but premiums can add a significant amount to your monthly payment and are not tax deductible.

What credit score do I have?

Your credit score directly determines your interest rate for a new mortgage. A 100-point difference in your credit score could result in thousands of extra dollars in interest payments for a 30-year mortgage, depending on the amount of the loan.

If your credit score has suffered since you got your current mortgage, you may want to work on improving your credit score before refinancing. Your credit score is a reflection of your credit history for a single specific time and changes as new information is added to your credit report.

Remember, mortgage lenders generally check your credit score with all three reporting agencies, so you should too.

Your needs could outweigh the costs

Of course, your needs could outweigh your answers to the questions above and justify refinancing your mortgage. After all, you may need a lower monthly payment or get rid of a variable rate mortgage before the rate adjusts; Or you want to consolidate high-interest debt, make home improvements, or pay for medical or educational expenses.

when it comes to getting the best financing, it will be necessary to invest a lot of time and effort in your search. You will find a good number of brokers in your area with a search such as Mortgage Broker Near Me. Then carry out your due diligence to find various refinancing plans that you can compare so that you can find the lender that best suits your needs and requirements.

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Hi, my name is Tony Overton. I'm a businessman and engineer with a corporate management background. I try my best to keep fit and healthy and to develop a good work / life balance where I can experience the best that life has to offer whilst pursuing my business focus to be the most successful that I can be. On this blog, you will find out how I am able to achieve the success and results and at the same time talk about lifestyle topics that I'm sure you'll enjoy.

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