Refinancing your home mortgage loan can be an excellent way to lower your monthly payment, build equity faster, use your home equity, build your credit, and pay off your mortgage sooner. Refinancing is a restructuring of your loan and is primarily done to save money over the long-term by reducing your interest rate. And while there can be some great benefits to refinancing, in many cases the up-front fees and out-of-pocket expenses make it difficult to for some to take advantage. With a no-cost refinance, you usually will not be required to pay anything up-front. The closing costs usually associated with refinancing are settled by the lender.
The largest benefit to a no-cost refinance is that you do not need to pay anything up front. Closing costs typically range from 1.5 to 2 percent of the loan balance, which can amount to a big expense if you are considering refinancing. For example, if your mortgage balance is $200,000, you can reasonably expect that you will need to have $3000 to $4000 up front to pay for the refinancing. These costs are needed to pay for services including appraisals, title fees, underwriters, and other various expenses involved in refinancing a mortgage.
It is important to remember that a no-cost refinance does not mean that those closing costs are simply free. Depending on the lender, closing costs may be added to the mortgage balance or you may be charged a higher interest rate. However, if you have a high interest rate, you may still be better off refinancing. Mortgage rates are so low that even with increasing the rate through refinancing, it can still save you far more than the cost of staying with your current rate. It is important to do the math to make sure a no-cost refinance works best for your situation.
While a no-cost refinance may not be the solution for everyone, in many cases it can be an excellent way to go. If you have a home that needs renovation, a no-cost refinance may be just the answer you are looking for. Depending on the scope of your renovation project, having the available cash to complete the repairs can often exceed what you may have available. Depending on current rates, you may end up saving money by using a no-cost refinance instead of taking out a home equity line of credit.
It’s also a great option if you do not plan on staying in the home for more than five years. Using a conventional mortgage, it may take more than five years to recoup your closing costs; however the mortgage rate you secure with a no-cost refinance may be less expensive than the amount you would have paid up-front in fees.
Each individual needs to make the decision whether or not a no-cost refinance is the right option for their situation. Depending on your financial situation, your current mortgage, and your future plans, it can be troublesome to navigate your options. However by doing some research and a little math, you can make the decision easier. The goal is to determine the break-even point for how long it would take to recover the closing costs, and compare that to a no-cost refinance. The lender can provide details showing the closing costs and also the difference in interest rate and payments for the no-cost refinance compared with those up-front fees.
You can determine your break-even point by first figuring out the monthly savings from your current house payment to the refinanced payment. Then, determine the after-tax rate by subtracting your effective tax rate from 1. For example, if you are in a 25% tax bracket, you would take 1 minus 0.25, which is 0.75. Next, take your monthly savings and multiply it by your after-tax rate. In our example, you would take your monthly savings and multiply it by 0.75. Finally, divide the estimated closing costs for a standard refinance by your after-tax savings. The resulting number represents the number of months you would need to stay in your home to make up the amount spent in closing costs. That will be your break-even point.
Navigating mortgage and loan rates is complicated! Why not let our team do the hard work for you? Equity Source Mortgage is a trusted mortgage broker in Minnesota. We believe that people deserve a home to call their own. At Equity Source Mortgage, our number one goal is to match you with the best loan for you. Contact us or call us at 763-657-2000 to begin exploring your home ownership journey – YOUR Dream Is Calling!