Basics for refinancing your house

It’s a good time for refinancing your house because the interest rates are really low. There are a few things to know when you refinance a home. You should check to see if you qualify for
low income housing loans.

As an old rule of thumb for
loan plans
it is said that you probably shouldn’t refinance your home unless you can refinance at 2 percentage points less than your current mortgage.

That rule no longer applies because of all the different types of loans available. One of the biggest considerations is the closing costs or points of a refinance.

Be sure to check out my loan calculator here:

loan shark

Lately, we have all seen some very extreme types of loans that were obviously poor choices on the part of the homeowner.

It was also due to greedy and careless lending practices. Sub-prime loans have caused a lot of problems.

Percentage Rate

Let’s talk about how to decide if a refinance is our best choice. Suppose we had a $200,000 mortgage locked in at 30 years with an 8% interest rate, our monthly payment would be $1,468. If we was able to get refinanced at 6%, our new monthly payment would be $1,199.

Making a savings of $269 a month. Now, let’s suppose the closing costs were $2,000, we would break even in about eight months. ($269 x 8 = $2,152). If we was planning on living in our home for at least eight more months, then a refinance would be a good idea.

home mortgage

Mortgage Terms

This is the amount of time it takes to pay the loan off. Short term loans usually have better interest rates, but the monthly payment can sometimes be hard to pay. The loan will get paid off faster and we are charged less interest. Some short term home mortgages are 10-year and 15-year options.

Long term loans have smaller monthly payments, but the overall interest paid for the loan will be much higher. Most long term loans are 30-year loans.

refinancing your house

Variability of the Interest Rate

This means the loan is either fixed rate or variable rate. There are loans that are both for refinancing your house, but for the most part, it’s best to choose one or the other.

Variable loans are usually attractive with lower interest than fixed-rate loans, but they can get expensive if lending rates raise. We saw examples of this back in the late 70’s and the early 80’s. Many people lost their homes because the monthly payments had raised so much.

Fixed-rate loans have a level interest rate for the entire time of the loan. This is usually an easier loan to manage because we always know what our monthly payment will be.

Points or Closing Costs

These are called origination fees or discount fees. One point is equal to 1% of the loan amount.

There are some loans that have zero origination fees but they usually make up the difference with higher interest rates.

Here is a typical breakdown of how the closing costs are calculated. These amounts are taken from an actual transaction in 2003.

Average Lender/Broker Fees
Administration fee: $336
Application fee: $205
Commitment fee: $498
Document preparation: $194
Funding fee: $228
Mortgage broker fee: $839
Processing: $320
Tax service: $73
Underwriting: $269
Wire transfer: $31
Third Party Fees
Appraisal: $327
Attorney or settlement fees: $445
Credit report: $29
Flood certification: $17
Pest & other inspection: $68
Postage/courier: $45
Survey: $174
Title insurance: $605
Title work: $200
Government Fees
Recording fee: $76
Various taxes: $1,339

All the closing costs can really add up, so refinancing your house is something that needs to be carefully planned. Ask a lot of questions about contracts and make sure every detail is clear.

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