| Today’s interest rates are still at an
all time low around the country. Whether your mortgage is on your primary or second home,
you could possibly benefit by refinancing your existing mortgage. In some cases, you may
only be looking for a better rate and term. In other cases, you may want to consider
taking some equity, in the form of cash, out of your property. In either case, you need to
look at the assortment of types and terms of mortgages offered by lenders.
When you refinance a mortgage, your lender will pay off your existing mortgage and any
second mortgage, such as a home equity loan. You will have a choice to refinance just the
balance(s), include the closing costs, or in some cases, take out some additional cash.
Your decisions will also include type of mortgage, length of mortgage, points or not, and
in some cases, choice of attorney, and/or settlement office. You will have to go through
the normal closing and settlement costs just as you did when you first purchased your
home.
Three reasons to consider refinancing:
- You want a better rate of interest
- You want a shorter period to pay off your property
- You would like to take out some cash
Say your existing mortgage rate is at 8.2 percent.
You know the current rates are much lower than this and would like to take advantage of
some savings. For a $100,000 mortgage, your monthly payment of principle and interest is
$768.91. Assuming you have $98,000 to pay on your existing mortgage, and you would like to
refinance this amount at a current rate of 7.2 percent, your new payment would come to
$685.23Ca monthly savings of $83.68. But you would really like an even better rate. That
can be accomplished by purchasing "points." One point is equal to 1% of the
mortgage amount. In this case, 1 point would equal $980 and would be paid at the
settlement table. In most cases, you can have your lender add the points to the mortgage
amount. Now assume that 1 point would buy the interest rate down to 7 percent. You would
then mortgage $98,980 at 7 percent interest for a payment of $658.51Ca monthly savings of
$110.39. These are just a couple of ways to increase your monthly savings by changing the
mortgage rate. Your mortgage professional can work with you to determine the best-fit
scenario of rates and/or points.
The second reason for a refinance concerns a shorter time
frame of pay off. In most cases, when you mortgage for a shorter period of time, the
interest rate is also a lesser amount. Say you are currently in the 3rd year of a 30-year
mortgage, and you’ve been making extra payments toward your principle since you
received a big raise at work. Your original rate was pretty high. Work with your mortgage
professional to determine the best amount of years to amortize your mortgage at a new,
lower rate. You may already be ahead of the game by pre-paying some of the principle.
Refinancing your existing mortgage for the sole reason of reducing the term or length is
not for everyone.
The third reason is to take cash out of the equity in your home. This assumes
you’re in a market where appraised values have increased, not decreased. Generally,
refinances for a cash out basis will only allow a 75% "Loan to Value" of the new
appraised value. Some lenders offer more than 75%, but with a much higher rate of
interest. Let’s say you would like to pay off an existing car loan, but you are
somewhat short of cash. Your home originally cost $125,000, but you are pretty sure that
it is currently valued at $200,000. Your existing mortgage is only $75,000. This means
that you have a total of $125,000 equity in your home! Under standard guidelines, you will
be able to mortgage up to 75% of the $200,000 or up to $150,000. You stand to walk away
from settlement with approximately $25,000 in your pocket. If you are interested in
refinancing your existing mortgage, it is best to see a mortgage professional for guidance
as to all the possibilities available. Your opportunity to benefit from a refinance is
only a conversation away! In all cases of the process of mortgaging and refinancing,
lenders have to abide by guidelines and rules within their organizations. The above
examples represent approximate numbers and may vary.
Settlement and closing costs vary from geographical area, type of mortgage and lender.
Cheryl Normandeau, a Loan Officer with Norwest Mortgage in Rehoboth Beach, may
be reached at 302-226-1865 or 888- 227-5700. She is available to meet with you during the
week and on the weekends.
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