Should I pay points when refinancing?

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Craig Berry

As a branch manager for Acopia Home Loan, Craig Berry has helped thousands achieve their homeownership goals.

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Last week, mortgage rates once again flirted with all-time lows, as 30-year fixed rates dropped to 2.8%.

Many lenders discontinued rolling a refinance fee of 0.5% into their borrowing costs. With the fee now becoming old news, refinances are an even better deal than they were before.

The drop in interest rates and the removal of the refinance fee sparked another flurry of refinance applications. In fact, refinance loans accounted for more than 67% of all mortgage activity last week.

With rates already at or near record lows, does it really make sense to pay points to buy down the rate even further? The answer is a resounding “it depends”.

The way discount points work

Mortgage points, commonly referred to as discount points, are fees paid to your lender to lower your interest rate. This is sometimes known as “buying down the rate.”

Buying down the rate means paying loan discount points to get a lower interest rate. The end result is that you could pay less over the life of your loan.  

Typically, each discount point costs 1 percent of the mortgage loan amount. So, one point on a $250,000 home loan would cost $2,500.

How much each point lowers the rate varies from lender to lender. The rate-reducing impact of mortgage discount points also depends on the type of mortgage loan, as well as the overall interest rate environment.

Each point typically lowers the rate by approximately .25 percent. If today’s “par rate” were 3.25%, for example, one point would lower your interest rate to 3%.

Homeowners can buy more than one point. They can also buy fractions of a point.

How paying points could save you money

If you have the means to comfortably pay for discount points, doing so could save you a lot of money.

Here’s how paying one discount point could impact a 30-year, fixed rate mortgage on a loan amount of $300,000.

Loan Amount$300,000$300,000
Mortgage Rate3.25%3%
Discount Points$0$3,000
P&I Payment$1,302$1,262
Total Interest$170,023$155,333
Savings $14,690

Monthly savings, as well as long-term interest savings, aren’t the only way you may be able to save money when it comes to paying points.

Purchasing points is essentially prepaying interest. That means points may be tax-deductible. If you meet the IRS’ requirements, you may be able to take the full deduction in the first year. If not, the deduction will be spread out over the lifetime of the loan.

When NOT to buy down your rate when refinancing

Buying discount points can make great financial sense. If you have a long-term investment property or a home you plan to hold onto for many years, paying points could result in a ton of savings.

However, there are times where you wouldn’t benefit from spending money on loan discount points. Every mortgage loan will have a breakeven point that should be factored in when considering points.

In the $300,000 refinance example above, the mortgage borrower would save $40 per month. In order to calculate the breakeven point, you would divide the cost of the points by the amount of the savings each month.

$3000 / $40 = 75 months

The breakeven for this example means this homeowner would need to stay in the home for six and a quarter years to recover the cost of the discount points. Otherwise, paying points just wouldn’t offer the same benefit.

On the other hand, the longer you stay in the home beyond the breakeven point, the more you’ll save as the interest rate reduction continues generating monthly savings.

How to buy mortgage discount points

When it comes to paying for points on a refinance, you’ll have two possible options: 1) pay for points in cash at closing, or 2) finance the cost of the points into the loan.

If you are interested in buying down your rate, you should speak with your lender before your loan closes. The fee for the points will be paid directly to the lender as part of your closing costs.

When you receive the Loan Estimate document for your mortgage, you’ll see the mortgage points separated as a line-item cost on the top left of page two. Should you see points being charged but you weren’t expecting to pay them, ask your lender for options without points. They can most likely offer you a mortgage without points, but expect a higher interest rate in exchange.

What about negative discount points?

There is another way in which lenders may use discount points – in reverse.

Instead of paying points to get access to lower mortgage rates, you may also be able to receive points from your lender. You could then use the cash to pay for closing costs and fees associated with your home loan.

The industry term for reverse points is a “rebate.”

Mortgage applicants can typically receive several points in rebate. However, the catch is that the higher your rebate, the higher your interest rate.

Rebates are commonly used for refinancing when homeowners want to do a zero-closing cost refinance. This could make sense if you won’t stay, you can stay as liquid as possible with all of your cash in the bank.

Rebates can be great for refinancing, too.

Using rebates, a homeowner may be able do a zero-closing cost refinance. This allows the homeowner to refi without increasing their mortgage balance.

When mortgage rates are falling, zero-closing cost mortgages are an excellent way to lower your rate and payment without paying fees over and over again. You could potentially refinance three times in a year or more and never pay fees to your lender.

How to get the best mortgage rate

If you own a home and haven’t refinanced yet, there is a good chance you’re paying more than you should.

According to Black Knight, many homeowners could still benefit from refinancing. Roughly 13 million could potentially save an average of $283 per month by refinancing. Approximately 2 million homeowners could even save $400 a month.

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But, even though mortgage rates have ticked down, lenders won’t necessarily feel obliged to offer you the lowest interest rate available. Scoring a great rate on a refi usually requires a little effort on your part.

To score the best mortgage rate, take these steps:

·        Understand the breakeven point. The lowest rate isn’t always the best deal, especially if you’re paying too much in closing costs. Refinance calculators can be perfect for this. Be sure to compare all aspects of refinancing, including closing costs, loan discount points and interest rate.

·        Use online comparison sites to shop multiple rates at the same time. This is a great way to get several quotes fast.

·        Apply for with several lenders. Different mortgage lenders offer different rates. The same holds true for paying points. The more you shop, the more you might be able to save. Don’t forget to consider applying with different types of lenders, too. Banks, credit unions and online lenders may offer low rates.

·        Shop within a specific window of time. The credit bureaus encourage you to shop around. They do this by giving you 14 to 45 days, depending on the scoring model, to apply for as many mortgages as you want with the same effect on your credit scores as applying for one loan.

Are loan discount points right for you?

Mortgage points are a great way to pay upfront in order to lower the overall cost of your home loan. But, doing so will lead to higher closing costs.

How long you’ll be in your home is the biggest determining factor when deciding if you should pay points when refinancing. Points typically only make sense if you plan to be in the home for a long period of time.

You should consider all the aspects that could influence how long you’ll stay in your home. Factors such as the size and location of your home, your job situation, your financial position can all influence how long you’ll be in your home, and ultimately whether or not paying points make sense.

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When Should You Consider a Cash Out Refinance?

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At Refily, we take pride in the work we do and strive to ensure that every person has access to quality content. Our goal is to provide our readers with original, well-researched articles from recent sources you can trust, delivering original content that has been carefully fact-checked for accuracy.

Atalokhai Ojeh

Atalokhai is a seasoned real estate and finance writer with over 4 years of experience under his belt...

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Ownership of your own home can be a potential goldmine waiting to be tapped when needed. Costs of home improvement or other major expenses can be conveniently taken care of by leveraging on your home’s equity. 

One way to do this is by refinancing. Refinancing in the real estate sphere simply refers to a process of replacing or exchanging an existing mortgage for a new one. The key characteristic of the new mortgage is that it has more favorable terms. 

Refinancing potentially allows you to negotiate a lower interest rate, reduce monthly mortgage payments, alter the total number of years for payback, or even access some cash, amongst other benefits. 

There are two options when it comes to refinancing your mortgage: 

  • Refinancing an existing loan to alter the terms or negotiate for a reduced interest rate, known as a rate-and-term refinance.
  • The second focuses on tapping into equity to get cash for personal expenses, referred to as a cash-out loan or cash-out refinance

For the purpose of this article, our focal point would be the cash-out refinance. 

What is a Cash-Out Refinance? 

A cash-out refinance in plain terms is a mortgage refinancing option that exchanges an old mortgage for a new one, usually a larger amount than the existing loan. The main difference between this and the rate-and-term refinance option is that you get to keep some cash. 

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Equity on a home increases as the mortgage matures and more of the loan is paid off. Therefore, equity refers to the portion of the mortgage that is paid off. However, there are two main ways by which equity increases: 

  • The first is by monthly mortgage payments that reduce the mortgage principal. 
  • The second is an increase in home base value. 

A cash-out refinance simply considers the amount of equity that you have been able to build over time, and then you can leverage this to take out a larger mortgage. Basically, you’re able to borrow in excess of what you currently owe, so that you pay off your present debt and keep the remaining cash.  

In this scenario, there is no need to make a second monthly payment as against when you take out a second mortgage. Instead, you just replace your old mortgage with the new one and continue with the monthly payments detailed in the terms. 

A Detailed Example 

Assume that you purchased a home for $250,000 and you’ve paid off $150,000. This implies that you have a $100,000 deficit leftover on your home. Say you need $30,000 to cover expenses like home renovations and some other personal business. 

A cash-out refinance allows you to tap into a portion of your mortgage, and then add it to your new mortgage principal. In this scenario, your new mortgage principal would be the sum of the $100,000 owed on your previous mortgage plus your $30,000 cashout to make a total sum of $130,000. 

After closing, your lender would give you the $30,000 in cash, and then you can use it as you please. Generally, cash-out refinances come with lower interest rates relative to credit cards.  

When Should You Consider One?

Cash-out refinancing provides a wide range of benefits as may even be preferable to taking out a second mortgage or a personal loan. 

Before taking out a cash-out refinance the first factor to consider (as you should with any mortgage refinance,) is whether it saves you any money. 

Relative to its counterpart, the interest rate for a cash-out refi is slightly higher mainly because of the risk attached. It is considered a riskier loan because of the cash-out clause. 

An impressive credit score and reasonable home equity that qualifies you for a cash-out refinance may be available, but it might not be the best move to make. You need to be certain that given your general financial situation, a cash-out refi is the next best move to get you where you want to go. 

Even in the wake of an increase in your monthly mortgage payments, choosing cash-out refinancing can still make overall sense provided you’re reaping the benefits elsewhere. 

Here are some reasons why you should consider cash-out refinancing: 

  • For Home Improvements and Renovations 

This is one of the main reasons why people opt for a cash-out refinance.

First-party data points for consumers that are looking for a cash-out refinance vs. standard rate/term and then the % that are looking for cash out for a Home Improvement vs. other reasons:

MonthPeople Requesting Cash Out
Jun 201946.13%
Jun 202159.46%
MonthCash Out for Home Improvement
Jun 201947.57%
Jun 202151.00%

It allows you to spend the equity you’ve earned over time on making your house even better. A new bathroom or kitchen here, fixing a broken HVAC system there, and you’re inadvertently raising the value of your home. 

  • To Consolidate Debt 

With a cash-out refinance, you can clear your debts, and move what you owe to a lower-interest payment that is a lot more convenient. 

Refinance rates are low at the moment, making it the perfect opportunity to consolidate accumulated high-interest consumer debt, provided your home has sufficient equity. 

Auto loans and credit card balances typically have higher APRs relative to your mortgage. Therefore, paying them off with cash from your refinancing implies that you are consolidating these payments directly into your new mortgage payment. 

  • To Get a Lower Interest Rate 

A high price purchase on a variable credit card would result in a significant amount of interest. In addition to paying this rate bound to the rate of federal funds set by the Federal Reserve, there are some percentage points thrown in the mix too. 

Credit card interest rates are typically higher than refinance rates and using your equity to cover this saves you thousands in interest in the long run. 

In addition to enjoying a lower rate on interest, you could save some money come tax season using a cash-out refinance. And unlike other loans, there’s a possibility of deducting some interest that you pay on your mortgage, effectively reducing the portion of your income that is taxed. 

The amount that you would be able to save depends on your situation, but it’s nothing that a tax professional cannot handle. 

  • Funds for Investment 

Instead of keeping your equity tied up in your home, freeing up some money to invest and earn compound interest may be a good call. 

In the long run, you get to make enough profit to cover whatever interest you would have to pay on the loan. This is one great way of setting up a college fund for your kids or even building your retirement savings. 

How Much Can You Get Out of a Cash-Out Refinance?

To accurately determine how much you can get from a cash-out refinance, you must know these three things: 

  • The value of your home 
  • Your mortgage balance (how much is left unpaid)
  • Amount of retained equity that your lender requires you to have post refinancing 

To determine the value of your home, lenders typically carry out a physical appraisal or make use of an automated valuation model — this model determines your home value based on the value of similar properties. 

The lender then allows up to 80% or 90% of that amount, based on the rules set by the lender. The percentage leftover (10% or 20%) is retained equity, and you can’t borrow this portion. 

Now that you know precisely, the amount available to borrow, subtract what you have on your present mortgage from it, and this difference is what you get in cash. 

Since it’s a loan and not income, it isn’t taxable from the point of view of the IRS. Also, you can decide to take just what you need if what the lender is offering is more. This way, you don’t have to pay interest on extra funds that you didn’t need. 

Upsides of a Cash-Out Refinance 

  • Allows you to borrow a significant amount of money at a relatively low-interest rate. 
  • Mortgage interest may be tax-deductible. 
  • Ranks amongst the cheapest ways to borrow money. 
  • An avenue for getting rid of high-interest debt, developing your property, and covering other expenses.  
  • The interest rate on the new mortgage may be significantly lower than your existing mortgage. 
  • Spending on home improvement can greatly increase the worth of your home. 
  • There are no restrictions on how you spend the money. 

Downsides of a Cash-Out Refinance 

  • You might see an increase in the monthly mortgage payment sum. 
  • The timespan for paying off the mortgage might increase. 
  • Cashing out too much equity might require you to pay private mortgage insurance (PMI). 
  • A new mortgage might potentially come with a higher interest rate. 
  • In the long run, you might pay more mortgage interest. 
  • Closing costs can run into thousands of dollars. 

The Bottomline 

A cash-out refinance might be a great call particularly if you have the purpose of use all planned out. Despite the extra interest or payments that might accumulate, if the long-term benefits exceed these costs, then it just might make for a great call.

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Refinancing and Breaking Even: When Do I Start Saving?

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At Refily, we take pride in the work we do and strive to ensure that every person has access to quality content. Our goal is to provide our readers with original, well-researched articles from recent sources you can trust, delivering original content that has been carefully fact-checked for accuracy.

Haitham al Mhana

Haitham al Mhana is an entrepreneur, business owner, and active financial markets trader.

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Refinancing your mortgage loan can help lower your monthly bill. After all, that’s the whole point of refinancing!

As a homeowner, it is important for you to understand how and when you will start realizing these savings.

Once you learn how the new closing costs, loan terms, and interest rates influence your break-even point, you can make an informed decision that maximizes your savings and gets you a step closer to reaching your financial goals.

Defining your mortgage refinance break-even point

In short, you will break even when your overall savings are equal to your total refinancing costs. As a current homeowner, you probably hit a previous break-even point, particularly if you moved from a rental property to a house. After all, many consumers who purchase a home will save money because monthly mortgage payments tend to be lower than the rent on an apartment or a house. However, they will only start to realize their savings (i.e. break even) after recouping all of their initial expenses.

To illustrate, here is an example: A family lives in an apartment and they pay $2,000 per month in rent. The same household purchased a home with a monthly mortgage of $1,000. Their closing costs and downpayment were $10,000. In turn, here is the new homeowners’ break-even timeline:

  • Nine months after moving: The total expenses are $19,000 (the closing costs and downpayment plus nine months’ worth of mortgage installments). If they stayed in the apartment, they would’ve paid a lesser amount in rent ($12,000) for that duration. Therefore, the family is yet to break even.
  • Ten months: At this point, the household’s mortgage and downpayment will add up to $20,000, which is equal to their total rental expenses (at $2,000 per month) for the same amount of time. In other words, the family will break even ten months after moving into their new house.
  • Eleven months: The new homeowners finally start to realize their savings. To clarify, their closing and mortgage expenses would be $21,000. In comparison, staying in a rental apartment would have cost them $22,000 by the eleventh month.

Although the process of refinancing a mortgage is different than the initial purchase, the same break-even calculation applies.

Factors that impact your mortgage refinance break-even point

Homeowners refinance their loans to save money. However, some factors that influence your refinancing break-even timeline are entirely different than the ones that impact the original home acquisition.

Interest rates

One of the most common reasons for refinancing a mortgage is to lock in a more favorable interest rate. More specifically, there are a couple of ways to do so:

  • Lower rate: When the current interest rates are lower than what you’re already paying, refinancing your loan will save you money. This is particularly the case if you secure a cheaper interest payment.
  • Fixed interest: Some homeowners have an adjustable rate, which fluctuates based on the prevalent market conditions. Attaining a fixed and relatively lower interest can reduce your monthly payment, especially when the overall market rates are expected to start trending upwards in the distant future.

Simply put, the difference between your original and refinanced interest payments will determine how much you save.

Nonetheless, to accurately identify your mortgage refinance break-even timeline, other loan features are equally as important as the new interest rate.

The loan term

The length of your loan defines both your long and short-term savings. Homeowners typically follow one of two strategies:

  • Shorter term and higher payments: Under this approach, you could pay down your mortgage sooner by reducing its term to ten or fifteen years. In turn, you would pay less in interest over the lifetime of the loan, but your monthly payments will likely increase with a shorter mortgage.
  • Longer term and lower payments: A 15 or 20-year loan term, on the other hand, would reduce your monthly costs. However, you should keep in mind that your total interest will be higher over the lifetime of the mortgage.

Borrowers who lock in lower refinance rates can save money with both of these approaches. A shorter term allows you to break even relatively quicker, but the higher payments may not be suitable for everyone. A 15 or 20-year mortgage, on the other hand, benefits homeowners who want to reduce their monthly housing bill, even if that means waiting longer to break even.

Closing costs

Lastly, but certainly not least, your mortgage refinance break-even point largely depends on your related closing costs. Just as with your original loan, you may have to pay certain up front expenses when refinancing your home:

  • Application and loan fees: When you initially apply to remortgage your property, lenders will ask you to pay these fees in order to process the application and issue the new loan.
  • Appraisal and inspection expenses: Before refinancing your home, you may have to work with an inspector to verify that your house is still inn good shape and did not incur significant damages. Similarly, you might need to hire an inspector to ensure that there aren’t any problems related to the structure, water pipes, or bug infestations.
  • Insurance: If you paid down less than 20% of your mortgage balance, you will need to retain your title insurance policy. Add that to your break-even calculation.
  • Early payment penalties: Check your original loan papers and find out if your lender will charge you for paying down the mortgage early (which applies to refinancing). At times, you may break even sooner if you wait until the early payment period ends, especially if the penalty is relatively expensive.

Calculating your mortgage refinance break-even point

After taking the updated interest rate, new loan term, and closing costs into account, you can start determining your mortgage refinance break-even level.

To do so, follow these steps:

1. Compare the old and new payments

How much are you paying per month before and after refinancing? First and foremost, find the different between the two bills based on the loan amount, the interest rate, and term.

To clarify, here is an example that you can follow while calculating your mortgage refinance break-even point:

A homeowner has a mortgage balance of $300,000. Under a 20-year term and a 3% annual interest rate, their payments are as follows:

  • Per year: $15,450 ($15,000 in principal and $450 in interest)
  • Per month: $1,290 ($1,250 in principal and $40 in interest)

The homeowner decided to refinance. They locked in a lower interest rate of 2% and increased their term to 30 years on the same $300,000 loan amount. Therefore, their new mortgage bill is as follows:

  • Per year: $10,200 ($10,000 in principal and $200 in interest)
  • Per month: $850 ($833 in principal and $17 in interest)

In turn, the homeowner would save over $5,000 annually and more than $400 monthly. However, the closing costs should also be added to the equation.

2. Add the fees, appraisal/inspection expenses, and other costs

Let’s assume that the homeowner in our above example incurred $10,000 in closing costs and decided to pay them up front. There are two ways for them to come up with the new mortgage refinance break-even timeline:

  1. Through dividing the closing costs by the yearly or monthly payment. For instance, if they divide the $10,000 in expenses over the $5,000 in annual savings, it would take the homeowner about two years to break even. Similarly, dividing the closing costs by the monthly savings gives us the number of months it takes for the homeowner to break even after they refinance.
  2. Another way to identify your break-even timeline is through the same calculation we used in the example of the family that moved from an apartment into a home. In short, add the closing costs to your new monthly mortgage bill and compare your total savings (in relation to the previous payment) on a month-by-month basis. Once the refinanced mortgage’s costs surpass the overall monthly payments on the older loan, you will break even.

Special situations and your mortgage refinance break-even point

There are several certain circumstances that may alter your break-even calculation.

The following are the most common ones:

Adding the closing costs to the mortgage amount

Instead of paying the closing costs up front, some homeowners prefer to add them to the loan amount. This is particularly the case when a borrower cannot afford to cover the closing expenses in one large payment.

If you decide to add these costs to your loan, compare the total principle and interest payments to those on your original mortgage. Since the closing expenses incur interest when you don’t take care of them up front, you could end up paying more in the long-term after refinancing.

When your refinanced monthly payments are lower than the previous ones, and you choose to keep the same loan length, you will break even and start saving money immediately. This is because your new bill is lower, and there aren’t any other up front expenses that influence it.

If you shorten or lengthen your refinanced mortgage term, simply add up the old and new payments on a month-by-month basis. Once the accumulated amount on the refinanced loan is lower than that on the original mortgage, you break even. This is nearly identical to the calculation we used in the example of the family that moved from an apartment to a home, but without adding a downpayment or any up front closing costs.

Cash-out refinancing

Some homeowners take out a larger loan than their mortgage balance, especially when their house’s value goes up.

One of the most common reasons for cash-out refinancing is to use the money for renovations and home improvement. This could make your long-term expenses larger than what they were with the original mortgage. However, improving your house can boost its price and save you money if you refinance again in the future.

Click here for our guide on how to increase your home’s value.

Another reason for cash-out refinancing is debt consolidation. More specifically, borrowers may combine other high-interest debt (such as credit cards and auto loans) with their mortgage in order to attain an overall lower rate.

If you cash out and consolidate other debts, here is how you can calculate your new mortgage refinance break-even point:

  1. Add up the monthly or annual payments on the original mortgage loan and the consolidated debt.
  2. Compare your new bill, which has a lower interest rate, to your old mortgage and debt payments. The difference between them is how much you save.

Lastly, but certainly not least, don’t forget to account for closing costs. If you pay for these expenses up front (instead of adding them to your consolidated loan), just follow our examples above to determine your mortgage refinance break-even point.

Why refinance?

As this article shows, refinancing your mortgage can be a great way to save money, reduce your monthly expenses, and even obtain extra cash.

If you are thinking about refinancing, check out Refily’s lender matching tool to learn more about your home refinance options.

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Step-By-Step: How to Calculate Your Refinanced Mortgage Payments

Fact-checked

At Refily, we take pride in the work we do and strive to ensure that every person has access to quality content. Our goal is to provide our readers with original, well-researched articles from recent sources you can trust, delivering original content that has been carefully fact-checked for accuracy.

Haitham al Mhana

Haitham al Mhana is an entrepreneur, business owner, and active financial markets trader.

Full Bio

Are you thinking about refinancing? Although there are many pre-built calculators out there, they don’t give you a full picture of what your new loan terms will be.

How much of a difference would a 1% interest rate reduction make? Which loan term should you choose? Also, does your home’s price impact your mortgage refinance calculation?

To fully understand how a refinance will impact your monthly bill, follow these steps to find your new payment and loan terms.

1. Study your current loan terms

Before you start your mortgage refinance calculation, identify your remaining mortgage balance and principal payments. Just as importantly, you should deduct the interest from the actual loan amount. This is because the interest rate will change after you refinance, whereas the actual principal remains the same.

To find your mortgage balance, look at your latest statement. It should highlight how much you owe and the interest on that amount.

2. Add up your closing costs and fees

Next, study how much your mortgage lender will charge you for refinancing. At times, it can be advantageous to shop around and compare offerings. In fact, some lenders offer free refinancing.

Here are a few common closing costs that you should include in your refinance calculation:

  • Early Repayment Fees: If your loan is less than three or five years old, your lender will probably require you to pay a fee when you refinance.
  • Application Fees: Lenders will spend a lot of time on reviewing your application and processing your credit check. Because of this, they may charge you additional fees.
  • Title Insurance: Even though you bought a title insurance policy when you originally bought your house, you will likely need to obtain a new one when you refinance.
  • Appraisal and Inspection Costs: Most lenders require refinancing applicants to conduct a home appraisal and inspection. This increases your refinancing expenses, but you can also lock in a lower interest rate when your property’s value appreciates (more on this to follow).

After you add up the fees, you can pay them up front and minimize your long-term interest expenses. Adding your closing costs to the overall mortgage loan amount is another option. However, doing so entails paying interest on these expenses.

To determine the approach that suits you best, add the closing costs to your refinance calculation and decide on whether the long-term interest expenses are worthwhile.

3. Account for cash-out refinancing and debt consolidation

If the value of your home increased since you initially bought it, you may be able to borrow more money than the remaining amount on your mortgage.

Homeowners typically do so for two reasons:

Cover certain expenses

Whether you need the funds to renovate the house or pay for another expense, cash-out refinancing allows you to take out a larger loan. In turn, you can deduct the borrowed amount from your mortgage balance and use the extra cash for your desired purpose.

If you plan on cashing out, add this amount to your refinance calculation. It will help you come up with your new interest rate and monthly payment.

Debt consolidation

Another option is to use the additional funds to pay off high-interest debts, such as credit cards. In other words, you can combine your debt payments and home loan under one mortgage with a relatively low rate.

To clarify, here is an example of how you can account for debt consolidation and interest savings in your refinance calculation:

A homeowner has a mortgage balance of $200,000. The interest is 3% (or $6,000). The said homeowner also has $15,000 in credit card debt, with an interest rate of 10% (or $1,500). In total, their interest expenses are $7,500.

With cash-out refinancing, the property owner can merge their home loan and credit card debt under a $210,000 mortgage with 3% in interest. As a result, the borrower reduced their interest expenses to less than $6,500.

4. Include interest rates

Once you figure out your remaining mortgage balance, estimate the closing costs, and decide on whether (or how much) you want to cash-out, you can add the interest to your refinance calculation.

This step can be complicated because several factors influence your rate. Nonetheless, here is a breakdown of what to look for that will make this process simpler and easier to understand: 

The current mortgage refinance rates

If the current mortgage refinance rates are lower than what you’re paying, you will likely cut your costs by refinancing.

To get a clear idea of how much money you may save, compare between the existing rate on your remaining mortgage balance and the interest on the refinanced loan (including the cash-out value and any closing costs that you don’t pay up front).

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Your credit score

With a good FICO score, you are more likely to attain a favorable interest rate. As a matter of fact, homeowners that have a credit score of 670 or more may secure a lower rate than the market average.

Even if your credit is below 670, you can still refinance your loan, but with less bargaining power over the interest.

When you put together your mortgage refinance calculation, estimate your expenses based on the prevalent market rates.

If your FICO score is relatively low, consider how much you would pay at an interest rate that’s 1%-1.5% higher than the current mortgage refinance rates. Homeowners with good credit, on the other hand, may lock in a rate that’s lower than the average by 1% or more.

When your mortgage refinance calculation includes a range (as opposed to a specific interest rate), your estimates will give you a clearer idea of how much you could be paying before and after refinancing.

What if I have poor credit?

At times, lenders may reject a refinance application when the borrower has bad credit. Similarly, some homeowners could get a higher than preferred interest rate because of their credit.

A bad credit score, however, shouldn’t prevent you from refinancing. Here are a few ways that can help you get approved and/or secure a desirable interest:

  • Pay down your credit card balances.
  • Find a co-signer with a strong FICO score to apply alongside you.
  • Demonstrate that you have liquid assets, such as cash or stocks. This shows the lender that you have enough money to pay your refinanced mortgage, even if your job or income change.
  • Leverage your home’s value. If the price of your house went up since you bought it, this built-up equity will help you secure favorable loan terms.

The property value

Just as with your credit score, the value of your home could help lower your interest payments. Certain modifications and improvements can increase your house’s value, such as the following examples:

  • Enhancing the landscaping and planting flowers in your yard.
  • Repainting the front door and the garage.
  • Upgrading to a more efficient heating and cooling system.
  • Replacing doors and windows when your existing ones are worn out.
  • Expanding your pool or building a new one.

Your location and zip code

Your zip code and location are equally as important as renovations. If more people and/or businesses are moving into your neighborhood, the houses in the area will probably become more expensive. This includes your home, regardless of whether or not you improved or renovated it.

After you research price trends in your zip code and estimate your house’s value, create a range of the low and high interest rates that you expect to pay. Also, consider how your current mortgage balance and credit score will come into play.

Above all, make sure to use your zip code or city/town’s interest rates as a reference. They may be different than the national or statewide average.

5. Choose your term

At this point, you should have the following information on-hand:

  • Your remaining principal balance.
  • The estimated refinancing closing costs, and if you plan to pay them up front or add them to your principal balance.
  • Whether or not you want to take cash out or consolidate debts with your mortgage.
  • An approximate range of the interest rates that you might end up paying. This is based on your credit, location, home value, and the current mortgage refinance rates on the market.

After adding up your new balance and interest rate, the next step in your refinance calculation entails choosing your loan term.

Most lenders offer 10, 15, 20, and 30-year mortgages. With a shorter term, your monthly payment will be higher, but you end up paying less interest over the lifetime of the loan. Longer mortgages come with smaller monthly payments, but you incur more interest expenses over time.

Since each approach has its own pros and cons, you should choose a loan term that suits your preferences. Some borrowers are comfortable with making bigger payments if it reduces their interest. Others might find the lower monthly bill more suitable, even if it increases their long-term rate.

Calculating the monthly payment

Once you add up your remaining balance, closing costs, and any cash you want to take out, divide that number by your new loan’s year terms. This will give you your new estimated annual payment. Divide this number by 12 to find your updated monthly bill.

Do not include the interest, we will add that in the next step.

To illustrate, here is an example of a homeowner’s refinance calculation:

  • Remaining balance: $250,000
  • Closing costs: $10,000 ($5,000 was paid up front and the other $5,000 was added to the loan amount)
  • Cash-out: $45,000

In total, the refinanced mortgage amount is $300,000. With a 30-year term, the homeowner would pay $30,000 per year ($300,000 divided by 30) or $2,500 per month (the annual payment divided by 12) before interest.

You can use the same refinance calculation to determine your principal payments on a 10, 15, or 20-year mortgage. To get a better idea of how much you may save, compare your calculations to what your current payments are.

Above all, keep in mind that most of the factors that impact your interest rate will also affect your loan term.

In other words, if your credit is lower than average, lenders may only offer you a 20 or 30-year term. This is because they view borrowers with low credit as relatively high-risk. Therefore, a lower monthly bill (which comes with a longer-term) minimizes the odds that the borrower will default or miss a payment.

Calculating your refinanced mortgage

The steps above can help you figure out whether a refinance would benefit you or not.

Now that you know how each of the closing costs, any cash out that you get, and the interest rates affect your new loan, you can play around with our refinance calculator and alter the factors that matter most to you.

If refinancing your mortgage sounds like a good way to move forward, check out Refily’s lender matching tool to learn more about your home refinance options.

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Mortgage Rates are Still Low – How Long Will It Last?

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Adam Luehrs

Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.

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If you’re considering refinancing your current house, there are several factors to keep in mind. While the value of the property is certainly one part of the equation, it’s important that you consider some of the other numbers that come into play. 

One such factor that is often overlooked is found in the mortgage rate. Refinancing your home when interest rates are low can save you thousands of dollars over the course of your mortgage. Understanding how mortgage rates are determined, what factors are used to set them, and how you can forecast the direction that they’re moving can help put you in a position to save big on your home.

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How Are Interest Rates Determined?

Contrary to what you may have heard in the past, mortgage rates are not solely based on the 10-year Treasury note. Instead, there are multiple factors that come into play when determining mortgage rates. It’s not uncommon for people who are shopping for a mortgage to get online to find out what the 10-year Treasury note is doing, but that information is only part of the equation.

In the United States, interest rates are determined by the Federal Open Market Committee (or FOMC). This board, comprised of seven governors from the Federal Reserve Board and five Federal Reserve Bank presidents, works together to examine the current bond market and establish interest rates accordingly. 

In order to make sure that interest rates are as conducive as possible to home purchases, the FOMC meets eight times a year to examine the current market and establish interest rates.

The money supply also has an impact on interest rates. For instance, if monetary policymakers are looking for a way to decrease the supply of money in the market, they will increase interest rates. This is done to encourage people to deposit funds instead of borrowing money from the central bank. 

Conversely, if government officials deem it necessary to increase the amount of money circulating in the market, they will lower the interest rates to encourage people to take out loans and make major purchases.

The History of Interest Rate Trends

Interest rates fluctuating isn’t a new trend. Major economic, societal and political events have always had an impact on interest rates. Throughout the years, there have been both positive impacts and negative impacts.

In fact, if you study some historical interest rates, you will find spikes and decreases in interest rates throughout every decade dating back to the 1970s. In the early 70s, interest rates hovered around 7.5%. However, in September of 1973, interest rates spiked to 8.85%. The increase didn’t stop there, as the interest rates of the 1970s reached their high (up to that point) of 10.03% in September of 1974. 

This sudden surge in interest rates was due to an economic recession that struck the United States in 1973. Things were exacerbated by the Watergate Scandal that resulted in President Nixon resigning and Vice President Ford replacing him in August of 1974. This example shows how major shifts in the political arena can have an impact on the economy. 

Watergate resulted in a stop-and-go battle against inflation that marred the market for the rest of the 1970s. The impact on rates? Interest rates stayed in the upper 8% range for most of the decade before surging back up to 12.9% in December of 1979.

The 1980s proved to be just as difficult for potential homebuyers, as interest rates soared to north of 16% by April of 1980. Unfortunately, things would only get worse, as October of 1981 saw rates peak at 18.44%. This major spike in mortgage rates was due to an ongoing recession that saw millions of Americans lose their jobs as the government scrambled in their search for a way to stabilize the economy. At one point in 1981, more than 10% of Americans had lost their jobs, throwing the country’s economic future into full-blown uncertainty. 

Interest rates wouldn’t get back to a mark below 10% until March of 1987, when they fell to 9.03%. The famous stock market crash on Black Monday in October of 1987 briefly put the interest rates back into a state of flux, but things leveled out relatively quickly. At the end of the decade, interest rates were at 9.78%, leading the United States into what was forecasted to be a decade of economic recovery in the 1990s.

However, an eight-month recession started in July of 1990. The Fed proactively set into motion a plan to lower interest rates, thrusting more money into the economy. Over the course of the next four years, interest rates would decrease every month, hitting a low of 6.86% in October of 1993. 

By 1994, many economists began to worry that we were heading towards another period of massive inflation and raised the interest rates accordingly. While there were seven increases in interest rates over the course of the next year, rates still stayed below 10%, hitting a high of 9.25% in November of 1994. 

Shortly thereafter, interest rates went back to a downward trend, staying between 6.6% and 8.2% for the rest of the decade. By all accounts, interest rates were finally starting to get back to normal after more than two decades of uncertainty!

The beginning of the 2000s provided even more low interest rates, even in the face of the 9/11 tragedy and the war that followed. For years, interest rates were lower than they had been in decades. In June of 2004, rates plummeted to 5.24%, making them lower than they had been, even in the 1970s. 

By August of 2007, the nation was setting up for a major recession. Interest rates climbed in response, staying in the 6% range for all of 2007. It became clear in September of 2007 that the housing market bubble was bursting. Rates held flat for much of the rest of the 2000s until April of 2009, when they hit a low of 4.78%. What would follow was a decade of the lowest interest rates in history.

In November of 2012, interest rates bottomed out, reaching their lowest point of 3.32%. That decline would set the stage for the interest rates that we see today, as policymakers continue to enact rates that drive the housing market. Since the rate drop in November of 2012, interest rates have remained well below 5%. In fact, the highest that rates have been since that point was 4.82% (in October of 2018).

Where Are We Now?

At the time of writing (June 2021), interest rates are at 3.02%. 2016 still holds the title for the lowest interest rates over the course of an entire year, but there is a real possibility that 2021 may beat 2016 when all is said and done. 

The first five months of this year actually saw interest rates that stayed below 3%, making these the lowest interest rates we’ve ever seen in the United States. With rates so low, the market currently benefits homeowners who are considering refinancing their homes in order to get a lower monthly payment.

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Why Have Interest Rates Been So Low?

The short answer? The COVID-19 pandemic.

The worldwide COVID-19 pandemic started nearly two years ago. In March of 2020, President Trump declared a state of emergency in the United States. By April of 2020, the unemployment rate in the US was the highest that it had been since the 1930s. 

As of last month, the unemployment rate was still at 5.8%, even with stay-at-home orders lifted and other restrictions removed. In addition to unemployment among citizens, the pandemic also resulted in a decrease in the number of jobs available. 

Due to the economic impacts associated with the pandemic, more than 100,000 businesses closed their doors for good. Companies that have stayed open have had to reduce spending, including cutting labor costs. 

With so many economic factors trending downward, the only way to keep the economy afloat was to lower interest rates to make it easier for people with less cash on hand to make purchases. 

Due to this extended period of widespread unemployment, policymakers are looking for a way to keep the economy as functional as possible. One such way to do that is through keeping interest rates low, encouraging people to borrow money and then spend it.

How Long Will This Last?

As is the case in any type of economic forecasting, it’s important to look at where mortgage rates are today and where they are projected to go in the near future as well as the long-term future. 

Even though it appears that we are coming out of the other side of the COVID-19 pandemic, it’s not a guarantee that interest rates are going to sharply increase in the near future. 

In fact, one of the people who play a key role in setting these rates says that we shouldn’t expect a major interest rate increase anytime soon. Federal Reserve Chairman Jerome Powell has been quoted as saying, “We believe that the economy’s going to need low-interest rates, which supports economic activity for an extended period of time–it will be measured in years. However long it takes, we’re going to be there-we’re not going to prematurely withdraw the support that we think the economy needs.”

The Federal Reserve and the FOMC do not arbitrarily make decisions that decide interest rates. They are provided with detailed information and advice from expert economists at the top of their field. While there is no way for these economists and policymakers to forecast something as devastating as a worldwide pandemic, we can look at the things that they do know. 

For one, the Federal Reserve has pledged to support the economic recovery that is currently underway by keeping interest rates near zero at least through 2023.

With this information in mind, it appears that interest rates are going to remain low for at least the next 18 months. If you have been debating about whether or not to refinance your home, now is certainly the time to do so. 

Depending on where you are at in your mortgage repayment schedule, refinancing your home now could put you in a position to save thousands of dollars! Take advantage of these near historically low interest rates today and contact a lender about refinancing your property.

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