Should you repay your mortgage? Here’s how to solve

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Mortgage loan rates changed course, and refinancing activity is growing. This means that homeowners who participated in the big refinancing boom in 2020 are faced with a new decision: Should you refit again?

At the mortgage company Lower, this is a frequent question from borrowers, says Chelsea Wagner, regional vice president. In about half of the cases, the answer is yes, the second ref can be a tricky move.

“It all comes down to this: does it make sense?” – says Wagner. “When rates fell in 2020, everyone rushed to refinance. It really depends on when you closed. “

As the coronavirus pandemic progressed, rates fell to an all-time low after an all-time low. So, if you refinanced in May 2020, your rate could be 3.5 percent. If you wait until late 2020 or early 2021, your rate may be less than 3 percent.

The average rate on 30-year fixed-rate refinancing is 3.04 percent as of July 28, according to data Bankrate National Survey of Lenders… If your mortgage refinance has coincided with an absolute market bottom, refinancing probably doesn’t make sense. On the other hand, if you refinance at the start of a pandemic, another step might make sense.

“Before refinancing twice a year, it’s important to look closely at the numbers and make sure the consumer is making a smart financial decision,” says Glenn Brunker, President Union house… “A good rule of thumb is that the interest rate must rise 50 basis points to make it profitable for the borrower.”

In other words, if your current mortgage is 3.5 percent, you will want a refinancing rate of 3 percent or lower. Greg McBride, chief financial analyst at Bankrate, offers similar advice.

“Mortgage rates are at their lowest since February and close to record lows, so it is likely that homeowners who purchased or refinanced properties in the first half of 2020 could be candidates to do it again,” he says. … “If you can cut your rate by half or three-quarters of a percentage point and expect to be at home for more than three years, you should look into that.”

Calculate your break-even point

One important thing to keep in mind is that you will incur a closing cost each time you refinance, and this can range from 2 to 4 percent of the loan amount. Therefore, it is important to calculate the break-even point, the month when the lower payments will equal the sum of the closing costs for the new loan.

Let’s say you borrowed $ 300,000 last spring at 3.5 percent, which equates to a monthly payment of $ 1,347. If you can refinance your mortgage at 3 percent, your monthly payment drops to $ 1,265, which means you save $ 82 per month.

So, even if your final cost is a modest $ 6,000, it will take over six years to pay off.

This harsh math is why Gordon Miller, head of the Miller Lending Group in Cary, North Carolina, supports mortgages at no additional cost.

“With the free option, you can refinance every six months if the market requires it, without losing capital,” he says. “For everyone else, it becomes a math game: how much I can save and how long it will take to break even, and then they will inevitably have to refinance for other reasons that may be unpredictable at the time.”

Rising Home Values ​​Create Refinancing Opportunities

The rate of decline is just one variable in the refi calculus. Another is the value of your home. Real estate prices are skyrocketing. If you bought last year with a low down payment, chances are your home is worth more.

“Many homeowners have acquired equity capital from rising house prices,” says Brunker.

Let’s say, for example, you put 5 percent on a $ 300,000 home, which means you borrowed $ 285,000. If the value of your home has jumped to $ 360,000, the loan-to-value ratio is now close to the 80 percent threshold that frees you from private mortgage insurance.

A lower loan-to-value ratio could give you a slightly better mortgage rate, Wagner said.

Borrowers who have taken out FHA loans can be particularly good candidates for refinancing. This is because FHA loans include high mortgage insurance premiums that do not disappear over the life of the loan.

The mortgage insurance premium on the FHA loan is 0.85 percent per annum. So on a $ 300,000 loan, that’s $ 2,550, or $ 212.50 a month. Eliminating this monthly fee could make refinancing into a regular loan without mortgage insurance a good move.

How to refinance your mortgage

Step 1. Set a clear goal

You have a good reason to refinance. This could be a reduction in the monthly payment, a reduction in the term of a loan, or a withdrawal of capital to renovate a home or to pay off debt at a higher interest rate. You may also want roll your HELOC into refi

Things to consider: If you lower your interest rate but reset the clock on a 30-year mortgage, you can pay less each month, but more over the life of the loan. This is because amortization provides for the accrual of interest initially in the early years of the mortgage.

Step 2. Check your credit score

You will need to be eligible for refinancing in the same way that you needed to get approval for your original home loan. The higher your credit rating, the better refinancing rates lenders will offer you – and the higher your chances of underwriters approving your loan.

Things to consider: Lenders have become stricter in providing loans during the pandemic, so the typical the credit rating of the mortgage borrower is higher now than ever. Although there are ways refinance a mortgage with a bad credit history, it makes sense to spend a few months improving your credit rating before starting the process.

Step 3. Determine how much equity you have

Your home equity is the value of your home in excess of what you owe your mortgage lender. To find out this figure, check your mortgage statement to see your current balance. Then search for homes online or ask a real estate agent to do an analysis to find the current estimated cost of your home… Your net worth is the difference between the two. For example, if you still owe $ 250,000 for your home and it is worth $ 325,000, your net worth is $ 75,000.

Things to consider: You can refinance a regular loan with just 5 percent equity, but you get higher rates and fewer commissions (and you don’t have to pay for private mortgage insurance, or PMI) if your equity exceeds 20 percent. The more home equity you have, the less risky the loan is for the lender.

Step 4. Buy from multiple mortgage lenders

Receiving quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when is the best time to lock in your rate so you don’t have to worry about raising rates until the loan is closed.

Things to consider: Aside from comparing interest rates, look at the cost of the fees and whether they will be paid upfront or included in your new mortgage. Lenders sometimes offer refinancing without closing costs but charge a higher interest rate or add to the loan for compensation.

Step 5. Get your documents in order

Gather recent payrolls, federal tax returns, bank statements, and whatever else your mortgage lender asks for. Your lender will also keep track of your credit and net worth, so disclose your assets and liabilities ahead of time.

Things to consider: Preparing documentation before starting the refinancing process can make it smoother.

Step 6: Prepare for certification

Mortgage lenders usually require mortgage refinancing assessment to determine the current market value of your home.

Things to consider: You will pay several hundred dollars for the appraisal. Telling the lender about any improvements or repairs you’ve made since you bought your home may result in a higher score.

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