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To Refi or Not to Refi? That is the Question.

posted on Thursday, July 23, 2020 in Realtor News

To Refi or Not to Refi? [image of woman looking up]

There are many reasons you might choose to refinance your home mortgage. Mortgage interest rates have plummeted, and there may be some people who feel like they “missed the boat” on getting a low rate on their home loan. That’s where refinancing could come into play.

There are Two Common Types of Mortgage Refinances

  • Cash-out Refi 
  • Rate and Term Refi 

The following scenarios are for example purposes only. Contact a Mortgage Banker for a personalized discussion around your refinancing options.

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Cash-Out Refi 

  • Tap into your home's equity to get access to cash.
  • As of Q4 2019, American homeowners had nearly $19 billion in home equity.
    • One in four mortgaged homes is considered “equity rich” — 50% or more of the mortgage has been paid off.1
  • Individual households gained an average of $7,300 in equity in 2019.2

What could you do with the extra cash? 

  • Medical expenses
  • Home improvements
  • Investing
  • Grow your savings or retirement accounts
  • School tuition
  • Pay off high-interest loans (credit card, auto loan, etc.) 
  • Consolidate debt

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Rate and Term Refi 

  • Refinance to save money by changing your loan’s terms.
  • Shorter term — Go from a 30-year loan into 15-year loan:
    • Pay less interest over time, save thousands.
  • Longer term — Go from a 15-year loan to a 30-year loan:
    • Monthly mortgage payment can drop by hundreds.
  • Eliminate private mortgage insurance (PMI) if you have 20% equity.
  • Roll a piggyback loan into your first loan (they often have higher rates).
  • Switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan or vice-versa:
    • ARMs are suitable for people who plan to only stay in their homes a few years, need liquid cash each month, or who expect a boost to their income in the near future.

BONUS: Borrowers with FHA, VA and USDA loans may be eligible for a streamlined refinance such as less paperwork, no income verification, appraisal may be waived and no debt-to-income verification.3  

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Is a Refi Right for Me? 

Refinancing your mortgage requires you to pay lenders' fees and closing costs, just like a regular home loan.  Is it worth the money? 

A Refi may be worth it if: 

  • If current interest rates are lower than your current mortgage. 
  • Your ARM is about to reset.
  • Your credit score is in the 700s or above.   
  • You have at least 20% equity in the home.
  • You have a low DTI ratio.  
  • You’ll still be in the home when you reach your break-even point.

 
Calculating Your Break-Even Point4

  1. Add up all the loan fees.
  2. Determine your monthly savings with the new lower payment.
  3. Divide costs by savings to get the number of months until you break even (you start saving more than you spent).

Example

  • Loan Fees = $4,000
  • Monthly Savings = $100 
  • $4,000/$100 = 40 months or just over 3 years to recoup the fees you paid for the refinance

Note that it may be possible to roll your fees into the new mortgage, but don't let that dissuade you from doing your due diligence and checking your numbers. 

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Contact a Mortgage Banker today to review your current mortgage, housing plans and your finances so you can decide if refinancing is the right decision for you! 

Sources:
[1] Attom Data Solutions, “U.S. Homeowners Remain Four Times as Likely to Be Equity-Rich Than Seriously Underwater,” May 7, 2020.
[2] CoreLogic, Homeowner Equity Insights report, data through Q4 2019.
[3] The Mortgage Reports, “The Streamline Refinance: Get Today's Low Rates With Almost No Paperwork,” February 28, 2020.
[4] U.S. News & World Report, “Mortgage Refinance Lenders,” April 6, 2020.

 

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