Should You Refinance Your Mortgage Now?
Posted by: John
Many homeowners are considering taking advantage of today’s historically low interest rates by refinancing their mortgage. In many cases, they are able to save hundreds of dollars per month by refinancing. Whether mortgage refinancing makes sense for you can be easily determined by doing some simple math.
The first consideration is how much lower your new interest rate should be than your current rate. There is a common belief that if current rates are more than 1.5 to 2 percentage points lower than your current rate, then you should refinance. That’s a good starting point, but there is more to the story than just the raw interest rate.
Your real concern should be the total cost of the mortgage refinance both in the short term and the long term. The total cost includes not only the monthly mortgage payment (principal plus interest), but the closing costs, as well. Closing costs typically include such things as:
Appraisal fee
Credit Report fee
Processing fee
Commitment fee
Tax Service fee
Flood Certification fee
Discount points (if any)
Title Insurance (based on mortgage amount)
Recording/Notary fee
Per diem Interest
Real Estate Taxes
Home Insurance (percentage of mortgage amount)
Adding all these up can easily run into several thousand dollars, even without discount points. This is money that must be paid at the loan closing. In the case of a mortgage refinancing, lenders often advertise “no closing costs”, which is a bit misleading. The truth is that there ARE closing costs, but they are paid out of the proceeds of the loan rather than the pocket of the homeowner. This is possible when the homeowner borrows against the equity in their home as part of the refinancing.
As an example, let’s say that your home is worth $175,000. Your original mortgage was for $125,000 over 30 years at 7% interest. You still owe $100,000 on the original mortgage. The closing costs for your refinance are $3,000. If you simply refinance the $100,000 amount at a lower interest rate you will reduce your monthly payments, but you will have to pay the $3,000 closing costs out of your own pocket. If you choose the “no closing costs” option, your $3,000 closing costs will be paid by simply borrowing the additional money against the equity in your home (i.e. the value of your home less the amount owed). Your mortgage will now be for $103,000 instead of $100,000.
So, what about that widely held 2 percentage points belief we mentioned earlier? The monthly payment for a 30-year $125,000 mortgage at 7% interest is $831.63. For your new 30-year $100,000 loan at 5% interest, the monthly payment is $536.82, a savings of almost $300 per month. If the new mortgage is $103,000, the monthly payment is $552.93, still saving you over $275 per month. In this scenario, considering only the monthly savings, you would recoup your closing costs in as little as 10 months.
Sounds great, right? Well, there’s another factor you need to consider. If your original mortgage was $125,000, you’ve been paying on it for 152 months to get the principal balance down to $100,000. Therefore, you have 208 months left before the mortgage is paid off under the original terms. If you continue without refinancing, you’ll pay an additional $172,978 (208 months at $831.63 per month).
If you refinance your mortgage for the $100,000 you currently owe, you’ll pay on it for 360 months at $536.82 plus the $3,000 closing costs for a total of $196,255.
$172,978 <– payout without refinancing
-196,255 <– payout after refinancing
———
-$23,277 <– difference
In this case, by refinancing you will end up paying an additional $23,277 for the new loan over the original mortgage. This works out to about $775 per year, which may be acceptable to you in order to have the lower monthly payment now. You are the only one who can make that decision based on your personal financial situation. The important thing when refinancing your mortgage is to consider all the ramifications.
How Much Is Your Home Worth? Wanna Bet?
Posted by: John
Would you be willing to bet $300 of your own money that your home is worth what you think it is? Unless you’re ultra-competitive and will bet on pretty much anything, my guess is your answer would be a resounding “No!”
When you go to buy a home, or refinance your existing home, that’s exactly what you’ll be doing in most cases. This is one of the lesser known and most common mortgage ripoffs that occur because people outside the industry don’t know better. Knowing this and other mortgage financing secrets can save you hundreds or even thousands of dollars.
Purchasing a home, unless you’re independently wealthy, involves borrowing the majority of the purchase price from a lender, typically a bank. Before the lender will give you the money, they’re going to want some assurance that the property you’re going to buy is worth at least that much money, and in most cases more. It’s unusual these days to find any lender that will give you 100% of the value of a property. It’s typically 15-20% now. A far cry from the wild and woolly days before the mortgage market crash!
So, let’s say you want to buy a house. You go out and find the perfect house. You and the seller haggle back and forth and settle on a price of $100,000, just to keep the math simple.
Now you go find a lender and ask them to give you a mortgage. They tell you “Okay, we’ll give you $80,000.” You’re okay with that, so you proceed with the mortgage application.
As part of the mortgage application process, the lender will require an appraisal of the property. The appraisal must be done by a certified professional appraiser. The lender isn’t going to take the owner’s word for it!
Typically, the lender schedules the appraiser’s visit. The appraiser calls the property owner and arranges to visit the property. You, the applicant, are required to pay for the appraisal before it can take place. In my area, this fee is generally around $300.
So, you’ve now paid $300 to have the property appraised. If the appraiser agrees that the property is worth at least $100,000, no problem. The application process moves forward.
What if the appraiser says the property is worth less than $100,000?
Ready…?
You don’t get the loan, and, worse, you don’t get your $300 back! You just bet $300 and lost!
Lenders have been doing this for years and it’s become accepted as a way of doing business. People simply suck it up, pay the $300 and hope for the best. In recent years when property values were rising rapidly, this was rarely a problem, unless the seller had ridiculous expectations and the buyer no clue about the real value of the property. Nowadays, however, property values are declining and it’s much less certain that the seller, however well intentioned, really knows the value of their property.
Some reputable mortgage brokers have adopted a policy of paying for the appraisal out of their own pockets. This puts the onus on them to do their homework and have a good knowledge of the current property values in their area. From their perspective, it eliminates the possibility that they would have to call a potential customer and tell them they just blew $300.
The buyer will pay the appraisal fee as part of the normal closing costs, so it’s not like they don’t have the obligation to pay it. With the broker paying the fee first, this eliminates the risk on the part of the buyer and is simply good customer service. Shop around for mortgage lenders and brokers and always ask them who pays the appraisal fee!
Welcome To Today’s Money Secrets
Posted by: John
There’s a lot of news about the economy these days, most of it bad. One thing we all have to keep in mind when reading, watching or listening to the news media is that their job is not primarily to report the news. Contrary to popular belief, the news media is not a public service! On the contrary, media companies are in business and as such operate on business principles, the primary one of which is to make enough money to survive, at least, and ideally, add to the prosperity of the owners and employees thereof.
So, the media’s job is to make money. Nothing wrong with that, as that’s really the purpose of most of the activities of our daily lives. The media makes money by selling advertising. Bad news sells, hence the media will emphasize the bad news over the good news whenever there’s a choice.
The purpose of this site is to provide you with information and resources that will help you save and/or make more money. Rule number one around here is to ignore those telling us how bad things supposedly are and focus on the potential and opportunities that always exist no matter what “the economy” is doing. There are people who thrive in the worst of times and those who fail in the best of times, so the state of the economy is pretty much irrelevant to anyone’s success or lack thereof.
That said, again, welcome and I hope you’ll join us in our journey to prosperity!
