This guide has provided a general overview of the benefits of refinancing your mortgage and how you can save money in the long run. However, it is also important to state that the process can prove to be quite complex and that one might get lost in it.
This blog post will give a roadmap to when refinancing from short term mortgage loans makes sense and how to make sense of it all to help you save the most through the various steps.
Whether it is to lower the monthly installments or interest rates, to shorten the length of the loan or to borrow money from the home equity, this guide is helpful.
Timing Considerations
First, consider the current rate of interest minus your current rate. In general, you should refinance whenever rates are at least 1 percent lower than the rate you currently have.
Then there are closing costs which normally cost up to 5% of the loan amount being taken or from 2% depending on the lender. In terms of costs, you will wish to operate at marginal cost in the first year to break even in 12 – 18 months.
Finally, consider your timeline. If you may move soon, you likely won’t hit the breakeven point for those who may have to move soon, there are high chances that they will never achieve the breakeven point.
Savings Calculations
Estimating savings is not always easy and requires analysis and, at times, computation. Begin with utilizing the given online tools to analyze the new loan terms and payments.
Next, get an idea of the closing costs by speaking with 1-2 lenders who can provide you with some guidance regarding this issue. Using the calculations and given its projected costs, new rate, and new payment, compare cumulative costs of both loans.
Last of all calculate your breakeven point based on how many years you wish to spend in your home. By knowing these variables, you can determine the possible costs of a refi to get an idea of the amount of money that can be saved after closing costs.
Loan Options
There are two popular types of mortgage refinance programs of reverse mortgage companies, which are the fixed rate mortgage loans and adjustable-rate mortgage or ARM. Fixed-rate products have the permissive characteristic of generating constant payments as well as stability for the entire duration of the loan.
Apart from knowing mortgage loan questions, ARMs have initial lower rates, yet the payments can be significantly variable. Technicians agree that borrowers with plans to live in a home for more than five to seven years should consider fixed-rate loans while shorter term borrowers could get bigger initial discounts from ARMs.
VA and FHA loans which are government-sponsored also offer refinancing facilities and more ways of qualification. Understand your plans, credit and financial status you will be able to identify the type of loan that suits you most.
What Steps Are Involved?
This being the case, the process of locking in savings can be done more quickly which in turn helps to cement the savings. First, get the supporting documents such as bank statements, tax returns and the income proof.
This speeds approval. Then, carefully compare loan estimates from different lenders and ensure that all the fees and closing costs specified in the estimate match those you agreed upon.
When you decide on a lender, fill the application and provide the necessary documents to lock the rate as fast as you can. Furthermore, closing disclosure of the final terms will be provided to you three days following the underwriting process.
Conclusion
Refinancing can make a huge amount of difference to homeowners and that too in case of an ideal circumstances. But it involves a careful analysis of your circumstances and timing and understanding the cost implications accrued in the switch.
That said, this roadmap is actually a series of steps in disguise, albeit one that may initially appear more complicated than necessary. In conclusion, refinancing does make sense when it is done at the right time.
The potential savings are correctly calculated and compared, the right loan is taken, the paperwork is as simple as possible, and pitfalls are avoided then you will be sure that all aspects of the loan’s lifetime.
