5 Different Ways to Refinance A Mortgage: Tips by Sammamish Mortgage

5 Different Ways to Refinance A Mortgage: Tips by Sammamish Mortgage
Sammamish Mortgage
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There are many good reasons to refinance. Foremost among these are:

  • Covering your interest rate
  • Improving the terms of your loan
  • Turning some of your loan

When you decide whether refinancing your existing mortgage makes sense, you should keep a few things in mind:

  • How long will it take to recover the cost of doing the new loan?
  • How much money will you save over some time period?
  • Will you reduce your interest rate enough to make it worthwhile?

These are all obvious, but let`s explore some other aspects of refinancing.

Terms

We should first define some important terms. When you refinance your existing mortgage to get a better loan, but don’t take any significant cash out of the transaction, you are doing a “rate and term” refinance. You may choose to roll the costs into your new loan so you don’t have to write a check at close of escrow but this is still considered “rate and term.” You typically add closing costs such as title, escrow, document preparation, underwriting,
recording and notary to your new loan. You might also choose to add prorated interest into the new loan (you can expect to skip at least one mortgage payment when you refinance, but the lenders still charge interest).

If you want to turn some of your equity into cash for remodeling or bill consolidation, you would apply for a loan larger than your old loan’s balance plus closing costs. You’ll receive the excess in the form of a check at closing Let’s say your present loan balance is $300,000 and the total closing costs are $5,000. If you get a new loan of $405,000, you’ll receive $100,000 at close of escrow. This is your money to do with as you please.

You have some choices to make when you do a rate and term refinance

Your Choices

The first is the term of your new loan.

If your old loan had a term of 30 years and you’ve had it for three years, you now have a 27-year loan. When you refinance into a new 30-year loan, you will extend the term of your financing by three years. If your goal is to get your home loan paid off, you can avoid that “mortgage reset” by making a slightly larger payment each month – large enough so that you keep the same payoff schedule that you had before.

Here’s how that works: Let’s say you have a 5% loan today with a balance of $400,000 and a payment of $2,252. You’ve had that loan for three years, so there are 27 years remaining. You refinance into a new loan at 4.37%. You roll the costs into your new loan, so your new balance is $404,000. The new mortgage will call for a monthly payment of $2,047 more than $200 lower than your old payment. If you want to pay your new loan off in 27 years, you just increase your monthly payment to $2,156. You’ll still save nearly $100 a month, and you’ll pay off your home on the same schedule as before.

You could also be more aggressive with your payments. You could keep your payment at the same amount as before but with a lower interest rate.

Doing that would pay your new loan off in less than 25 years – two full years early.

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Options

You could also select a loan with a much shorter term. 15 years is a popular choice. The rate for a 15-year loan is typically .5% lower than for a 30-year  loan, so in this example you might get a rate of 3.75%. Your payment for a $404,000 loan would be $2,800, but your home would be mortgage-free in just 15 years. You might decide that this is worth the extra $611 per month.

You may decide that you’d like to convert some of your home’s equity into cash. You can expect to get a loan as high as 80% o your home’s appraised value. The prospect of getting a large sum of money may be very attractive, but you should think carefully about what you will do with it. This may be a good opportunity to remodel your kitchen and bathrooms, and this would be a good use of your home’s equity.

Those kinds o improvements enhance the quality of your home and increase its value.

To Consider

You may also consider paying off other debt, such as car loans and credit card balances. You should think about this very carefully. If you have, say, $50,000 of consumer debt and monthly payments totaling $1,ooo, wrapping these mounts into a loan from your home would drop your monthly payments by $750 or more. Be very careful if part of the reason your payment drops so much is that you’re paying back the money over 30 years. You will probably not keep your car for that long. The result is that you would pay thousands of dollars more in interest because of the longer term.

To avoid this, you should make a plan to increase the monthly payments on your new cash-out mortgage. By doing this, you’ll shorten the term and avoid paying those extra thousands of dollars.

If there is a cash-out refinance in your future, you should sit down with your loan officer to go over the numbers and your choices very carefully.

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Ready to Refinance?

Do you have questions about home loans or refinancing? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire Colorado state, including Boulder, and its many amazing neighborhoods like Whittier, Mapleton Hill, Foothills, and Longmont. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.