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The thought of refinancing is the first thought in many people’s minds as they notice fixed rates dropping, but one often forgets to factor in the loan origination fees and closing costs. If you were to spend $18,000 on closing costs and amortize that expense over only 36 months for example, you would be paying an extra $500 per month.
This example assumes that after three years you would be either selling your property or refinancing if again either to pull out equity or for an even more favorable rate of interest.
On a $1 million-dollar loan for 30 years for example, a .75% difference from for example, 5% to 4.25% would reduce your payment by approximately $449, which in this example gives you nothing. Of course, the analysis changes dramatically when you keep that loan for 5 or 6 years, amortizing the costs over a much longer period. The longer you keep the loan, the more benefit there is to you on a monthly-basis. Of course, common sense reminds us the less interest you pay, the less tax write-off, just as a reminder.
There are many reasons people refinance other than to lower their payment or to save on interest. Perhaps you started with an adjustable rate because you were anticipating that rates would come down and indeed they have.
Now you just need to know when to lock in your fixed rate, hoping that rates won’t go down even more after you lock in. Better for rates to go down more, than have waited too long and missed a good opportunity with rates now going up.
Another reason people refinance is to pull equity from their home for any number of reasons ranging for divorce settlement, paying out the selling partner, to drawing cash for remodeling and home improvement, for funding college education, for everyday living costs, for travel and entertainment, and as a source to finance business ventures, of all and any type.
Refinancing provides a great opportunity to tap into your equity, in some cases up to 80% and in good times a multiple opportunity to do that, and at the same time reducing your interest rate. Consult with a financial advisor to do multiple calculations and shop with a highly respected mortgage broker for answers to your questions and for trusted guidance. You don’t want to wait too long, go too soon, or pull too much of your equity unless you have a well planned strategy.
Refinancing requires good credit and income qualification in most cases. Be leery of hard money loans with balloon payments and higher rates of interest offered to borrowers with no qualifying income and poor credit scores.
Always do your homework and consult with either referred or well qualified refinance advisors.