Mortgage Refinancing in California
Interest Rates
Anyone who has obtained a mortgage loan knows that there are many different types. The same can be said about interest rates. There isn’t one universal interest rate when refinancing mortgage loans. Interest rates are influenced by a variety of factors: type of loan program, your credit history, income, and refinancing goals.
Know Your Refinancing Goals
What do you want to accomplish by refinancing?
� Your goal may be to simply obtain a lower interest rate thus lowering your monthly payment.
âÂ?¢ Your objective may be to tap into your home’s equity so the money can be used for remodeling, debt repayment, or a vacation.
� It may be possible to take out some cash plus lower your monthly payment, keep it the same, or increase it slightly.
� You may want to reduce the term of your 30-year mortgage to 15 years without increasing your monthly payment, or increasing it very little.
� You have an adjustable rate mortgage or balloon payment due and want to refinance to a fixed rate.
� You want to pay off a 2nd mortgage by using some of your equity.
Know Your Housing Goals
How long are you going to live in your home? The answer to that question will help you determine whether a refinance is worth the costs. When refinancing, timing is key.
If the refinance will accomplish lowering your monthly house payment, the difference between your current payment and your new payment will result in a monthly savings. Take that monthly savings and multiply x 12 to figure your annual savings. For example, if you are currently paying a monthly payment of $1300 and refinancing will lower it to $1100 per month that is an annual savings of $2400.
The same costs and fees you paid when obtaining a mortgage loan the first time will also be charged on a refinance. At your first appointment with a lender, you will receive a disclosure of all costs, which can include application fee, document prep fee, points, escrow, title, recording fees, or other charges. The good news is that those fees can be rolled into your refinance loan, so you don’t have to bring in cash like required when purchasing. The final loan amount of your refinance will be the current mortgage balance plus the added fees, and plus any requested cash back from your equity. Equity is determined by subtracting your loan amount from the appraised value of the property.
Do the math. Determine how long it will take to recoup refinancing costs: for example, if your loan costs were $5000 (not including any cash back), and your annual savings yield after the refinance is $2,400, it would take you just over two years to recoup the amount spent on the refinance.
So what if you were planning to move in one year and would sell your home? You could not recoup the cost of the refinance as illustrated in the example in one year. Under those circumstances, refinancing might make less sense because you would actually receive $2600 less equity upon selling than you would have without refinancing. Knowing your housing goals will help you establish your refinance goals.
Paying Off Debts With Your Equity
One of the benefits of having equity in your home is pulling some of it out to pay off high interest debt. Generally, credit card interest rates are much higher than mortgage interest rates. In California’s hot real estate market, equity is growing at record speeds, so why not use some of yours to get rid of credit card balances? The balances can be added to your refinanced loan amount, lowering your total monthly payments, and giving you more cash per month.
Compare interest rates on your mortgage and credit cards, then figure how much interest you will save by paying off the debt with your equity. Ask your mortgage lender to calculate how much your mortgage payment will increase with the balances added onto your loan. If you are decreasing your interest rate with refinancing, your mortgage payment may not increase if there is a dramatic difference in rates. In fact, you may be able to pay off your debts and lower your monthly mortgage payment; if not, it is likely that the increase will be less than all of the credit card payments you are currently paying every month.
Questions to Ask Your Mortgage Lender About Refinancing
� Which available loan program would best accomplish my refinancing goals?
� Are there any upfront fees or can all refinancing costs be rolled into the loan?
� Can the quoted interest rate and points be locked-in while the loan is being processed?
âÂ?¢ Are there any “seasoning” requirements on the loan before it can be refinanced again? This is important to know when interest rates are steadily going down and equity is increasing rapidly. Some loans have limitations on how often refinancing can take place. For example, a seasoning requirement might limit refinancing to after 12 payments have been made on the loan.
� Is there any prepayment penalty on the loan?
� Can the loan be assumed if the house is sold?
� If no equity is withdrawn, is a simple rate reduction/streamline loan available at minimal costs?
Compare lender fees when shopping for a refinance loan. A good tip is to first contact the lending company where you pay your mortgage; often, lenders will reduce costs for current customers looking to refinance.
