MenuTips when you refinance
Tips when you refinance
When you’re refinancing you need to beware of a few things. I’ve talked to several people after they have refinanced their home 2-3 times in the past 5 years. The lender always tells them it’s a “no cost” loan but happens most of the time, the lender just adds the closing costs to the current mortgage balance every time they refinance.
Let’s say your original mortgage balance was $350,000 and your interest rate is 5.0% for 30 years, after 24 months of payments your loan balance would be $339,408.25. This shows that out of your total payments for the past 2 years, you paid a total of $45,093 which only $10,592 went toward principle! You mainly pay interest for the first 16.2 years on a 30 year mortgage.
Now a new lender calls you to refinance to lower your rate of 4.5% because this will lower your payments currently at $1,878.88 to $1,773.40. That’s a $105.48 savings per month or $1,265.76 per year! You say great I want to save money so the lender refinances you to a new loan amount of $350,000 for 30 years. The lender didn’t make you bring in any money out of pocket to close but what happen is that they just spent your $10,592 that you had in equity and put you back to a 30 year mortgage.
Bottom line is that you lost your $10,592 in equity plus you have to pay another 2 more years of payments which total $42,561.
You may want to consider another option, to have the lender charge you a higher interest rate so the lender pays all of your closing costs. Typically, the lender can increase the interest rate (on loans greater than $250,000) by 0.25% which gives the lender a premium or back end commission.
For most people it won’t make sense to refinance until you lower your interest rate by .375% (3/8). If you have a 5.0% mortgage payment of $1,878.88 and after 2 years you refinanced to a 4.625% loan for 28 years, your new payment is $1,791.48 per month. Even though you’re saving $87.40 per month, your savings start on day one. The reason is that you’re not increasing your loan amount and you’re not increasing the term of your loan.
If you have any questions you can certainly email or call me:
Douglas Hauck 303-400-0472 or email: doug@DouglasHauck.com
When you’re refinancing you need to beware of a few things. I’ve talked to several people after they have refinanced their home 2-3 times in the past 5 years. The lender always tells them it’s a “no cost” loan but happens most of the time, the lender just adds the closing costs to the current mortgage balance every time they refinance.
Let’s say your original mortgage balance was $350,000 and your interest rate is 5.0% for 30 years, after 24 months of payments your loan balance would be $339,408.25. This shows that out of your total payments for the past 2 years, you paid a total of $45,093 which only $10,592 went toward principle! You mainly pay interest for the first 16.2 years on a 30 year mortgage.
Now a new lender calls you to refinance to lower your rate of 4.5% because this will lower your payments currently at $1,878.88 to $1,773.40. That’s a $105.48 savings per month or $1,265.76 per year! You say great I want to save money so the lender refinances you to a new loan amount of $350,000 for 30 years. The lender didn’t make you bring in any money out of pocket to close but what happen is that they just spent your $10,592 that you had in equity and put you back to a 30 year mortgage.
Bottom line is that you lost your $10,592 in equity plus you have to pay another 2 more years of payments which total $42,561.
You may want to consider another option, to have the lender charge you a higher interest rate so the lender pays all of your closing costs. Typically, the lender can increase the interest rate (on loans greater than $250,000) by 0.25% which gives the lender a premium or back end commission.
For most people it won’t make sense to refinance until you lower your interest rate by .375% (3/8). If you have a 5.0% mortgage payment of $1,878.88 and after 2 years you refinanced to a 4.625% loan for 28 years, your new payment is $1,791.48 per month. Even though you’re saving $87.40 per month, your savings start on day one. The reason is that you’re not increasing your loan amount and you’re not increasing the term of your loan.
If you have any questions you can certainly email or call me:
Douglas Hauck 303-400-0472 or email: doug@DouglasHauck.com
