Residential Real Estate:
When to Refinance Your Mortgage:
If you have an adjustable rate mortgage, you should refinance your mortgage during periods of rising interest rates. If you refinance to a fixed rate mortgage, specifically to a rate similar to your present low adjustable rate, you'll avoid the higher costs when the adjustable rates start going up.
Another time when it is wise to refinance your mortgage is when you will save money by getting a lower interest rate. In this case, you'll want to make sure that your monthly savings will pay back your refinancing costs while you're still living on the property. If you sell your home before your refinancing has paid for itself, you won't be saving anything.
Your refinancing cost is the total of any points, closing costs, and private mortgage insurance (PMI) premiums that you pay when you take out the new loan. In addition, any lost tax savings must also be regarded as part of the cost of refinancing.
Points are prepaid fees. One point equals 1% of the amount you're borrowing, and any points you are charged are usually deducted from the mortgage proceeds you receive. Mortgage lenders typically charge 1 point as a loan origination fee. Beyond that, lenders may charge additional points on loans with interest rates below the current market rate. If you are going to stay in your house for a long time and can afford to do so, paying more points in the beginning may get you a better interest rate and save you more money in the long run.
Your closing costs include a variety of fees, such as an appraisal fee, a title search fee, recording fees, and other fees associated with processing and finalizing your mortgage. If your loan-to-value ratio is greater than 80% of the appraised value of your property, you may also be required to carry PMI. The premiums for this insurance usually become a portion of your new monthly mortgage payment and therefore reduce your savings from refinancing. In addition, you may discover hidden costs.
Once you have determined what your refinancing costs will be, you can then determine how long it will take for your refinancing to pay for itself. To do this, divide the total of the points and closing costs that you paid by the net monthly savings that the new loan provides you. Your net monthly savings will be your interest savings less any PMI premiums and tax advantage losses expressed as monthly figures.
No Cash-Out and Cash-Out Refinancing:
No cash-out refinancing occurs when the amount of your new loan does NOT exceed your current mortgage debt (plus points and closing costs). With this type of refinancing, you can typically borrow up to 95% of your home's appraised value.
A cash-out refinancing occurs when you borrow more than you owe on your existing mortgage. In this case, you are often limited to borrowing no more than 75 to 80% of the appraised value of your property. Any excess proceeds remaining after you've paid off an existing mortgage can be used in any way you see fit, but the best use might be to pay off other outstanding high-interest debt.