7 Questions to Ask Before Refinancing a Mortgage. 

So how does refinancing a mortgage work?

When you’re considering refinancing your mortgage, it’s important to compare interest rates and closing costs

When it comes to refinancing your mortgage, you want to make sure you get the best interest rate possible. But how do you find the best interest rates? And what is your current interest rate?

To find the best interest rates for refinancing, you can start by checking out the rates at your current bank or credit union. You can also check online for rates from other lenders. Once you have a few rates, compare them to see which one is the lowest.

Your current interest rate is important to know when you are considering refinancing because it will affect how much money you save. If your current interest rate is lower than the rates you are seeing for refinancing, it may not be worth it to refinance. However, if your current interest rate is higher, refinancing could save you a lot of money in the long run.

Closing costs are another important factor to consider when refinancing a mortgage. These are the fees charged by the lender for processing your loan. They can vary from lender to lender, so be sure to ask about them before you agree to refinance. You may be able to negotiate with the lender to have some or all of the closing costs waived.

Here are some questions to ask when refinancing a mortgage:

1. What is my current interest rate?
2. What are the current interest rates for refinancing?
3. How much will I save if I refinance at a lower interest rate?
4. What are the closing costs for refinancing?
5. How long will it take to recoup the closing costs?
6. Are there any prepayment penalties?
7. Is there anything else I need to know before refinancing a mortgage?

What is my current interest rate?

This may seem like a silly question but you’d be surprised at how many people don’t know the answer to this question. Knowing what your rate of interest is the foundation for refinancing your mortgage.

What are the current interest rates for refinancing a mortgage?

The current interest rates today are hovering between 6% and 7%. FICO scores, repayment history, loan-to-value, type of property and whether you’re taking cash-out or not will affect the rate.

How much will I save if I refinance at a lower rate?

Saving money when refinancing at a lower rate is only one motivation for refinancing. you need to know what your first mortgage interest rate is, calculate only the principal and interest payment,  and set that number aside. Now calculate your new interest rate, principal and interest only and subtract your new mortgage payment from your existing mortgage payment. That total number will give you the monthly savings.

Example: If the new payment was $1490.00 and the old payment was $1680.00, the monthly savings would be $190.00 per month.

Take the total amount of closing costs and divide that by your new principal and interest payment. The number you come up with should be the amount of months it’s going to take for you to recoup the money you paid in closing costs. at that point you can determine whether or not it’s worth refinancing a mortgage.

We have an advanced mortgage calculator to assist you with your calculations.

What are the closing costs for refinancing?

The closing costs for refinancing a mortgage are generally the same when purchasing a home. The only main difference is you won’t have to establish an escrow account paying a large sum of property taxes and a year up front for homeowners insurance. the only time these two items become an issue is if they are due and payable during the time period of your refinance. In some cases when refinancing a mortgage, you may get a property inspection waiver (PIW) meaning you will not need a new appraisal saving you that money.

How long will it take to recoup the closing costs costs?

This is a simple calculation. when refinancing a mortgage you want to take the savings amount per month and divide that by the closing costs. using the example below we see the closing costs of $5,350, we take the monthly savings of $190 and divide that into the closing costs. our answer should be roughly 28 months to recoup the closing costs. that is the equivalent of 2 years and 4 months. if you are planning on being in the home for more than 2 years, you will begin saving money on your new mortgage payment after the 28 months are complete.

Example: If the new payment was $1490.00 and the old payment was $1680.00, the monthly savings would be $190.00 per month. Now take the closing costs, using an example of $5350.00. Divide the $190.00 monthly savings into the closings costs of $5350.00. It will take roughly 28 months to recoup the money. This is only an example. Insert your own numbers into these calculations.

Are there any prepayment penalties?

Most mortgages today governed by Fannie Mae and Freddie Mac have no prepayment penalty. mortgages not governed by the federal government can come with a prepayment penalty. These mortgages are known as alt-a loans, hard money loans, subprime loans and sometimes short-term financing. Do your diligence and ask these questions prior to making an application. Understand how the prepayment penalty may affect you. For additional information on this you can always reach out to us using our contact us page.

What else do I need to know about refinancing a mortgage?

To refinance a mortgage, you’ll need to explore different lenders and their terms, calculate your loan-to-value ratio, compare closing costs, compare interest rates, and search for the best loan options. It’s also important to consider your credit score, amortization period, and other factors that may impact your ability to get a good rate.

Q&A:

What are the pros and cons of refinancing a mortgage?

When refinancing a mortgage, think about what you are trying to achieve. Are you looking to pull out cash to pay off bills or other expenses? Are you looking to lower your interest rate? when you are able to answer this question you’ll be able to determine whether or not refinancing a mortgage will benefit you. 

The pros of refinancing a mortgage are getting a better interest rate and possibly a shorter term with a minimal amount of cost. Another benefit may be taking cash out to pay off other bills with higher interest rates thereby lowering your overall monthly outlay.

The disadvantages of refinancing a mortgage are possibly getting a higher interest rate and closing costs if you are in a financially difficult situation.

Does refinancing hurt your credit?

Like any other inquiry on your credit report, refinancing a mortgage does not necessarily harm your credit. If you apply with multiple lenders you may run the risk of having your credit score drop a few points.

Is it really worth it to refinance?

This is a difficult question to answer without knowing a borrower’s specific circumstance. It all depends on how much money you’re going to save per month, how long you’re planning to be in the home and what the closing costs are. Using the example above you may be able to figure this out on your own. for more information you may submit a question on our contact us page.

What will happen if I refinance my mortgage?

What does it mean to refinance a mortgage? Refinancing a mortgage simply means you are starting the clock all over again. If you took the original mortgage out 5 years ago, and you have a 30-year mortgage you will have 25 years left on the original mortgage term. Refinancing a mortgage will mean if you take out a mortgage with the same term of 30 years, you are starting the mortgage all over again. You can request a shorter term through most lenders. Using this example you may want to seek out a 25 year mortgage.

Conclusion:

When you begin refinancing a mortgage, doing the math matters. If you do decide to refinance and you are 5 to 10 years into your mortgage, you can always request a shorter term like 10, 15, 20, or 25 years.