your financial details.
If you’re gearing up to refinance your mortgage, the lender’s going to want to check out your credit and assets before you’re approved. One of the things they’ll pay attention to is what’s in your bank account. So if you haven’t gotten those statements ready yet, there’s no time to waste. If you don’t want to raise any eyebrows with the lender, there are certain banking moves you probably won’t want to make until after refinancing.
Check out our refinance calculator.
1. Moving Your Money Around Too Much
Any time a bank lends you money, they’re taking on a certain degree of risk. Seeing that you’ve got a nice wad of cash saved up can quell any fears they may have about approving your refinance. The problem is that it can be difficult to see what the bottom line is if you’re constantly transferring money back and forth between accounts.
If you’ve set up regular transfers from your checking to savings, that could work in your favor since you’re growing your balance. There’s an issue, however, when you’re regularly pulling money out of savings and moving it somewhere else. This move could give the impression that you’re not very adept at managing your finances. When a refinance is on the horizon, it can be a good idea to take a hands-off approach so your statements reflect a stable balance history.
Compare mortgage refinance rates.
2. Making Large Deposits or Withdrawals
Pulling a lot of money out of your account is also another potential trouble spot. The bank might ask for an explanation and that could cause them to reevaluate your entire application. If you’re planning to make a big purchase in cash, you might be better off deferring it until after the lender gives your refinance the green light.
The same thing goes for suddenly making a sizable deposit out of the blue. If your balance increases overnight by thousands of dollars, that’s something the lender’s going to notice. Even if there’s a good reason – such as a relative or friend gifting you money for closing costs – the bank may still have concerns over your ability to repay. If you have to make a large deposit for any reason, it’s a good idea to be prepared to explain why and to provide supporting documents if you have them.
Try using the free SmartAsset closing costs calculator.
3. Opening or Closing Accounts
Again, lenders want to see a certain degree of continuity when it comes to your banking habits so in the month or two prior to refinancing, you might want to steer clear of opening new accounts or closing old ones. Sure, there are some great account opening bonuses to cash in on these days, but if you’ve got five or six different accounts at several banks, your lender could wonder why you need so many.
Closing accounts is also probably a bad idea, especially if they’ve been open for a while. While closing an account won’t hurt your credit score the way getting rid of a credit card would, the bank isn’t likely to look on it favorably. If you don’t have statements for your new account showing where the money went, that could work against you when you apply for a refinance.
Final Word
Refinancing can save you a lot of money in the long run if you’re able to lower your interest rate or reduce your payments. How you manage your bank accounts prior to and during the refinance process can determine whether your loan application gets the seal of approval.
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Refinancing Your USDA Loan Just Got Easier
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If you live in a rural area, getting a mortgage through the U.S. Department of Agriculture could be a good way to save money on your home purchase. Qualifying buyers can get a USDA loan without having to put any money down. The Department of Agriculture is making these loans even more affordable for existing borrowers by lowering the cost of refinancing. If you bought your home through the USDA program, here’s what you need to know about its streamline refinance program.
Check out our refinance calculator.
Who Qualifies?
As of June 2, 2016, any homeowner with a direct USDA loan or a USDA loan guarantee could be eligible to take advantage of the USDA’s Streamline Refinance Program. Since 2012, the USDA has been testing out new refinancing rules on borrowers in certain states.
All USDA loans are subject to underwriting guidelines. But homeowners who have made at least 12 consecutive, on-time payments over the past year don’t have to undergo a credit check, secure an appraisal or be subject to a debt-to-income calculation (when refinancing for a 30-year term).
According to the Department of Agriculture’s estimates, the typical homeowner should expect to save approximately $150 a month once they refinance through the streamline program. Over the course of a year, that can add up to $1,800 in savings.
Related Article: What Is a Streamline Refinance?
Should You Refinance Your Mortgage?
Just from looking at the numbers, you can see that homeowners can save money by refinancing. In the pilot program, some homeowners who refinanced were saving as much as $600 a month. That kind of reduction in your monthly mortgage payment could have a huge impact on your monthly budget.
But refinancing doesn’t make sense for everyone. If you’ve already paid down a substantial amount of interest on your home, refinancing may not affect your monthly payment that much. And keep in mind that not everyone can qualify for a refinance. You may run into issues if you’ve missed a payment in the past year, for example.
Try out our mortgage calculator.
Also, it’s important to remember that refinancing an existing loan into a new USDA loan doesn’t eliminate the private mortgage insurance premiums you’ll have to pay. USDA loans come with an upfront fee and a monthly premium, both of which are rolled into the loan. They’re added on to your monthly payment, so it’s a good idea to run the numbers to see how refinancing your loan might affect your payments.
The Bottom Line
The USDA’s new refinance guidelines are designed to benefit lower- and middle-income homebuyers with high interest rates. While these changes might offer some homeowners the chance to save money, it’s best to consider the financial implications of refinancing before pulling the trigger.
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3 Must-Do Moves to Prepare for a Mortgage Refinance
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Mortgage rates are still relatively low. That means that there’s no time like the present to consider refinancing the mortgage loan you have for your home. Shaving at least a point or two off your current rate or converting your 30-year loan to a shorter 15-year term can help you keep more of your money in your pocket and out of the hands of lenders.
Before you go looking for a refinance loan, it’s a good idea to polish up your application package to make yourself as appealing as possible to lenders. SmartAsset has put together a quick checklist of things you need to do that can up your odds of getting your new home loan approved.
1. Track Down All Your Documents
Refinancing your home usually involves just as much paperwork as your original mortgage loan required. So getting your ducks in a row ahead of time can make the process a bit easier. You’ll likely need proof of income from your pay stubs for the past few pay periods and copies of your tax return for the last two years. If you’re receiving any child support or alimony payments, it’s also a good idea to have receipts or canceled checks on hand to show the sources of that income.
Next, you’ll need to gather up recent statements from your bank and investment accounts as proof of your assets. Lenders often check your account history from the past two years, so it’s best if you hold off on making any big withdrawals or deposits in the months leading up to your refinance application. If you do have any unusual banking activity, be prepared to explain it to the lender with documents to support your claims.
2. Take a Look at Your Credit
Lenders want to see that you’ve got enough income to cover your monthly payments after you refinance, but they’ll also be concerned with your credit score. If it’s been a while since you checked it, there’s no reason to put it off any longer.
There are plenty of ways to check your score without paying anything. You can get free copies of your credit report from each of the three reporting bureaus through AnnualCreditReport.com. Also, a number of credit cards now offer complimentary FICO scores to card members. You can also get a look at your credit score from SmartAsset.
3. Find Out What Your Home Is Worth
Unless you’re applying for an FHA Streamline Refinance, you’ll need to have an accurate estimate of what your home’s value is before applying for a new mortgage loan. The bank must have enough information to decide how much of a loan you’re eligible for. If the appraisal value comes in too low, you may not qualify for a refinance at all. That’s something you want to know before you get too far along in the application process.
Bottom Line
Doing a little homework before you enlist the help of a professional can give you an idea of whether it’s worth it to shell out several hundreds of dollars for an appraisal. From there, you can compare your home’s value to the sale prices of similar homes to determine what ballpark you’re working with.
If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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3 Refinancing Mistakes That Can Cost You Money
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Mortgage rates are currently very low, but you can’t expect them to stay that way forever. If you bought a home within the last five to seven years and you’ve built up equity, you might be thinking about refinancing. A refinance can lower your payments and save you money on interest, but it’s not always the right move. In fact, these three mistakes could end up costing you in the long run.
Mistake #1: Skipping out on Closing Costs
When you refinance your mortgage, you’re basically taking out a new loan to replace the original one. That means you’re going to have to pay closing costs to finalize the paperwork. Closing costs typically run between 2% and 5% of the loan’s value. On a $200,000 loan, you’d be looking at anywhere from $4,000 to $10,000.
Homeowners have an out in the form of a no-closing cost mortgage but there is a catch. To make up for the money they’re losing up front, the lender may charge you a slightly higher interest rate. Over the life of the loan, that can end up making a refinance much more expensive.
Here’s an example to show how the cost breaks down. Let’s say you’ve got a choice between a $200,000 loan at a rate of 4% with closing costs of $6,000 or the same loan amount with no closing costs at a rate of 4.5%. That doesn’t seem like a huge difference but over a 30-year term, going with the second option can have you paying thousands of dollars more in interest.
Mistake #2: Lengthening the Loan Term
If one of your refinancing goals is to lower your payments, stretching out the loan term can lighten your financial burden each month. The only problem is that you’re going to end up paying substantially more in interest over the life of the loan.
If you take out a $200,000 loan at a rate of 4.5%, your payments could come to just over $1,000. After five years, you’d have paid more than $43,000 in interest and knocked almost $20,000 off the principal. Altogether, the loan would cost you over $164,000 in interest.
If you refinance the remaining $182,000 for another 30 year term at 4%, your payments would drop about $245 a month, but you’d end up paying more interest. And compared to the original loan terms, you’d save less than $2,000 when it’s all said and done.
Mistake #3: Refinancing With Less Than 20% Equity
Refinancing can increase your mortgage costs if you haven’t built up sufficient equity in your home. Generally, when you have less than 20% equity value the lender will require you to pay private mortgage insurance premiums. This insurance is a protection for the lender against the possibility of default.
For a conventional mortgage, you can expect to pay a PMI premium between 0.3% and 1.5% of the loan amount. The premiums are tacked directly on to your payment. Even if you’re able to lock in a low interest rate, having that extra money added into the payment is going to eat away at any savings you’re seeing.
The Bottom Line
Refinancing isn’t something you want to jump into without running all the numbers. It’s tempting to focus on just the interest rate, but while doing so, you could overlook some of the less obvious costs.
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Should You Refinance Your FHA Loan to a Regular Loan?
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Mortgage refinance rates are steadily creeping upward, so if you’ve been toying with the idea of a refinance, it might be best to do it sooner rather than later. If you’ve got an FHA loan, you can go with a streamline refinance or transition to a conventional mortgage. Going with a conventional loan has some advantages, but it’s a good idea to weigh all the pros and cons before making a move.
FHA Loans vs. Conventional Loans
First-time buyers often prefer FHA loans because the down payment requirements aren’t as stringent. But the Federal Housing Administration usually requires borrowers to pay a one-time upfront mortgage insurance premium (MIP) that’s 1.75% of the loan’s value. You would also be responsible for paying an annual premium that’s built into loan payments.
When you swap out your FHA loan for a conventional loan, you probably won’t have to worry about paying for mortgage insurance at all if the equity value you’ve built up in your home is above 20%. The end result could be a lower monthly payment and big savings. And if you could keep that money in your pocket each year, you could put it toward other debts, build an emergency fund or save for retirement.
What Are the Drawbacks of a Conventional Loan Refinance?
On the other hand, there are some costly disadvantages associated with refinancing an FHA loan to a traditional mortgage. The biggest upfront expense comes in the form of closing costs, which can be anywhere from 2% to 5% of the loan’s value. If you’re refinancing a $200,000 loan with closing costs of 3%, you’d have to bring $6,000 in cold hard cash to the closing table.
If you haven’t built up enough equity in the home, you’ll probably get stuck paying for private mortgage insurance (PMI) when you refinance. The combined costs of closing and PMI can zero out any savings in interest if you’re not getting a huge discount on the rate.
When an FHA Streamline Refinance Makes More Sense
The FHA Streamline Refinance program offers a refinance option for borrowers who want to save a little money on their mortgages. If you’ve kept up with your monthly payments for at least a year, you can apply for one without having your income, employment or credit verified.
If you’re trying to lower the cost of your mortgage payments but your credit isn’t in great shape, an FHA streamline refinance can do that for you without a lot of extra paperwork. You will, however, still have to make annual MIP payments, so it’s somewhat of a trade-off.
Shop Around for the Best Deal
When you’re not sure whether a conventional or FHA refinance is best, taking a look at what lenders are offering might help. By weighing the costs of the mortgages and adding in closing costs, you can figure out which option will save you the most money.
If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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4 Signs Refinancing Is The Wrong Move
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Refinancing your mortgage can bring your interest rate down, lower your monthly payments and generally save you some money. With rates still low, you may be pondering whether now’s the right time to try for a better deal on your home loan. But you don’t want to pull the trigger too soon. If any of the following apply to you, you may want to think twice before jumping on the refinancing bandwagon.
Compare refinance mortgage rates.
1. Your Credit’s Not in Great Shape
Refinancing when you’ve got a few blemishes on your credit report isn’t impossible, but it’s not necessarily going to work in your favor either. Even though lenders have relaxed certain restrictions on borrowing over the last year, qualifying for the best rates on a loan can still be tough if your score is stuck somewhere in the middle range.
If you took out an FHA loan the first time around, you might be able to get around your less-than-spotless credit with a streamline refinance, but approval isn’t guaranteed. Interest rates are expected to rise toward the end of the year, but that still gives you some time to work on improving your score.
Getting rid of debt, limiting the number of new accounts you apply for and paying your bills on time will go a long way toward improving your number so that when you do refinance, you’ll be eligible for the lowest interest rates.
Related Article: The Costs and Benefits of Refinancing
2. You’re Not Sure You’ll Stay in Your Home Long-Term
Refinancing involves replacing your existing mortgage with a new one. The interest rate, payments and loan term may be different but the one thing that remains the same is the fact that you’ll be required to pay closing costs to finalize the deal. Closing costs can run between 2 and 5 percent of the total loan amount, but that varies and is based on the lender you choose. If you’re refinancing a $200,000 mortgage, for example, it’s possible that you’d have to cough up anywhere from $4,000 to $10,000.
Since you’re reducing your payment and interest rate, you’ll hopefully eventually recoup the money you spend on closing costs, but it’s going to take some time. If you end up selling the home and moving before you hit the break-even point, all that money that you put out up front to refinance is basically gone. It could take a few years to break even so if you don’t think you’ll stick around that long, you may be better off keeping your cash and paying your current loan as is.
Learn more about refinance closing costs.
3. A No-Closing Cost Loan Is Your Only Option
If you don’t have a few thousand dollars to spare to cover the closing costs, you can always look into a no-closing cost loan. With this type of refinance, the lender folds the costs into the loan itself so you don’t have to pay anything extra out of pocket. While that’s a plus if you’re short on cash, you may be really putting yourself at a disadvantage in the long run. Increasing your mortgage (even if it’s just by a few thousand dollars) means you’re going to pay more interest over the life of the loan.
For example, let’s say you refinance a $200,000 mortgage at 4 percent for 30 years. Altogether, you’d pay $143,000 in interest if you don’t pay anything extra. Your closing costs come to 3 percent but you roll them into the loan so you’re refinancing about $206,000 instead. That extra $6,000 would cost you another $11,000 in interest so you have to ask yourself whether the monthly savings from refinancing justify the overall added expense.
4. Compare Your Refinance Loan Options
Once you’re ready to refinance, it’s important to take the time to compare what’s available from different lenders carefully. Checking out the rates and fees each lender charges ensures that you won’t spend any more money on a refinance loan than you need to.
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What Is a Serial Entrepreneur?
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A serial entrepreneur starts several businesses one after another rather than beginning one venture and staying focused on it for many years like a more typical entrepreneur. Serial entrepreneurs may sell their businesses after they reach a certain level of maturity. They may retain ownership while delegating day-to-day managerial responsibilities to other people. Or, if the business is underperforming, they may close it down and move on to the next idea. Some highly successful businesspeople are serial entrepreneurs. Startups organized by serial entrepreneurs are generally regarded as attractive opportunities by knowledgeable venture investors.
It’s not uncommon for people to start businesses, experience failure and then try again. Serial entrepreneurs are generally seen as a different sort because of their track record of starting multiple successful enterprises.
There is no standard number of businesses that someone has to start to be considered a serial entrepreneur, but three may be a minimum. Nor do all the businesses have to succeed or produce profits. However, most people regarded as serial entrepreneurs have at least a couple of significant and enduring successes to their credit.
Pros and Cons of Serial Entrepreneurs
While each startup has unique characteristics, the process of beginning a new business does have some steps that are common to most if not all entrepreneurial ventures. Serial entrepreneurs learn from experience, sometimes the hard way by making mistakes, how to get an idea for a business in motion and off the ground. Along with developing skills, they acquire contacts among investors, talented employees and others who can help them with the next enterprise.
Venture capital investors have expressed a preference for backing companies founded by serial entrepreneurs because of the value the experienced startup leaders bring. This preference isn’t only for serial entrepreneurs whose past startups have all been successes. Failure can be a good teacher, according to this viewpoint, and past failure can pave the way to future success.
The practice of serial entrepreneurship can come with some limitations and risks as well as benefits. For one thing, a serial entrepreneur who builds and sells a startup that later achieves great success can miss out on the chance to acquire great wealth by cashing out too soon.
Another risk is that soon after starting a business a serial entrepreneur will be distracted by an idea for a new startup. That may lead the entrepreneur to fail to pay enough attention to the first business so that it flounders and is unsuccessful.
Examples of Serial Entrepreneurs
Many high-profile entrepreneurs have come to attention because of their long-term association with a single startup. Microsoft co-founder Bill Gates, who is not thought of as a serial entrepreneur, is an example of one of these. However, serial entrepreneurs have a special way of gaining public attention because of their repeated, sometimes spectacular, successes in a variety of fields.
One of the best-known serial entrepreneurs is Richard Branson, who has begun hundreds of ventures in fields from airlines to soft drinks, all under the Virgin label of his first company, a mail-order record firm. Many of Branson’s new companies have been folded after failing to achieve traction. But Branson’s multiple wins in such diverse fields is one matched by few other serial entrepreneurs.
Oprah Winfrey is another serial entrepreneur who parlayed an early success into the foundation of a diverse empire, this one focused on media. Winfrey has started prominent players in television production, cable television and magazine publishing.
A more recent arrival to the scene, Elon Musk, began as a web software entrepreneur, moved to online financial services and has since been upending industries from tunnel construction to space transport. However, he joined Tesla, the electric car company that may be his most prominent venture, after it was founded.
The Bottom Line
Serial entrepreneurs go from one idea for a new business to the next, starting companies and then selling, closing or delegating them to others to manage. While their track record may not be one of perfect repeated success, their hard-won experience and demonstrated diligence makes serial entrepreneurs attractive to some new venture investors.
Tips for Entrepreneurs
- Starting even one business is a complex and uncertain process. Before taking it on, consider working with an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- Keeping close rein on a startup’s expenses is critical. There are four tips for doing that successfully. It’s also essential to squeeze every dollar spent to get the most out of it.
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An Alternative to Paying Mortgage Points
If and when you take out a mortgage, you’ll be faced with an important choice. To pay or not pay mortgage points.
In short, those who pay points should hypothetically secure a lower interest rate than those who do not pay points, all else being equal.
That’s because mortgage points, at least the ones that are bona fide discount points, are just a form of prepaid interest.
So you’re essentially paying a portion of the interest on the underlying loan upfront, as opposed to monthly over the life of the loan term.
The caveat is that it is possible for a home buyer or refinancer to obtain a lower mortgage rate than another borrower without paying any points, assuming they shop around and use a mortgage lender with lower rates.
Now back to whether you should pay points or not, especially at a time when mortgage rates continue to hit new all-time lows.
Mortgage Rates Have Hit Record Lows 12 Times This Year
In an environment where mortgage rates are declining over a long period of time, paying mortgage points can be a mug’s game.
After all, you paid money upfront for a lower mortgage rate, only to find yourself back at the refinancing table. No bueno.
Indeed, many homeowners these days are asking the question, how soon can I refinance again?
Those who went the no cost refinance route have basically nothing to lose, other than maybe resetting the mortgage clock.
While those who paid several thousand dollars in closing costs, of which points made up the lion’s share, potentially have a lot to lose if they take out a new home loan right away.
Paying Points vs. Paying a Little Extra Monthly
| $400,000 Loan Amount | Pay Points | Pay Extra Monthly |
| Upfront Cost of Points | $4,000 | $0 |
| Mortgage Rate | 2.5% | 2.75% |
| Monthly Payment | $1,580 | $1,680 |
| Extra Payment | $0 | $47 |
| Loan Balance After 48 Months | $362,324 | $361,316 |
| Total Paid After 48 Months | $79,840 | $80,640 |
| Net Savings | $208 |
Let’s consider a $400,000 loan amount where a borrower pays one discount point to obtain a rate of 2.5% on a 30-year fixed mortgage.
And an alternative where the homeowner decides not to pay any points and settles for a rate of 2.75% instead.
The homeowner who paid $4,000 upfront would enjoy a monthly payment of about $1,580 versus the higher payment of $1,633 for the no-points borrower.
That’s a difference of about $53 per month, which would take around four years to recoup when you consider the lower-rate mortgage reduces the outstanding principal balance faster.
Now if you didn’t want to pay that extra $4,000 at closing, you could simply go with the higher mortgage rate but still wind up with a similar mortgage balance after four years.
Simply pay $47 extra each month ($1,680 total) and your remaining loan balance would be around $361,316 after 48 months.
Meanwhile, the cheaper mortgage would be roughly $362,324 at that time with regular monthly payments.
That’s about a $1,000 difference for an extra $4,800 in payments over that time ($100 x 48). So the net cost is $3,800 over that time, slightly lower than the $4,000 paid upfront.
In the end, both borrowers are in a similar spot after four years, but the borrower who didn’t pay points had the option to refinance if rates moved even lower.
And they could pay extra each month to stay on track or just pay the minimum and invest the money elsewhere at hopefully a higher return.
Now, after those first four years are up, the math will start to benefit the homeowner who opted for the lower-rate mortgage in exchange for upfront points.
But how many homeowners are actually keeping their mortgage (or house) that long? Lately, not many.
In summary, this is just an inverse way of looking at buying mortgage points, which illustrates how those who don’t stick around for a long time can actually benefit from not paying points.
The counterargument is that rates are at record lows and will likely only go up from here, so if you can lock an even lower one in today, why not?
But we thought they had hit rock bottom years ago, only for them to defy the odds over and over again.
And as I mentioned, a borrower who actually takes the time to comparison shop could enjoy the best of both worlds.
[Watch out for low mortgage rates you have to pay for!]
Benefits of Not Paying Mortgage Points
- You basically get flexibility versus a non-refundable upfront payment
- Can refinance to a lower rate without worry at any time
- Can sell your property whenever you want without leaving money on the table
- Can still save on interest and reduce the loan term simply by paying extra each month
- Gives you the option either way if you stay with the mortgage/property longer than planned
About the Author: Colin Robertson
Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.
Source: thetruthaboutmortgage.com
3 Questions for Anyone Refinancing to a 15-Year Mortgage
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If you’re tired of having mortgage debt, refinancing from a 30-year loan to a 15-year loan will allow you to pay it off faster. On top of that, you’d also pay less in interest, as shorter loans come with better rates. Refinancing to a 15-year mortgage has some definite perks, but it’s not always the right move for everyone. Asking a few key questions beforehand can help you decide if it makes sense for your situation.
Refinancing your mortgage can have an effect on your overall financial plan. Talk to a local financial advisor today.
Question #1: Can I Afford the Payments?
Shortening your loan term conversely increases your monthly payments and you need to understand how that’s going to affect your budget before signing on. Seeing your payments increase by several hundred dollars may not mean much if you were already paying extra toward the principal, but it could be a deal breaker if it becomes too taxing on your income.
If you have a $200,000 mortgage, for example, refinancing to a 30-year fixed term with a 4 percent interest rate would put your monthly payments at about $955, assuming that you made a 20 percent down payment. Going with a 15-year loan instead with a 3 percent rate would increase your payments to nearly $1,400 a month. That’s roughly the equivalent of a car payment, so if you don’t think your budget can handle it, you want to know that sooner rather than later.
Question #2: Is the Savings on Interest Worth the Higher Payment?
Refinancing to a 15-year loan will certainly save you some money on interest, but it’s important to figure out whether it’s justified by those higher payments. Using the same $200,000 mortgage as an example, that 30-year fixed loan would initially cost you about $666 per month in interest. On the other hand, you’d start out paying about $498 per month in interest by choosing a 15-year fixed mortgage.
Obviously, that’s a pretty big difference, but you also have to take into account what the extra money you’re spending on payments would be worth if you invested it instead. If the difference in your payments with a 15-year loan versus a 30-year loan comes to about $168 a month, that’s money you could put into an IRA.
Question #3: Will I Risk Losing Out on a Bigger Tax Break?
Homeowners can ease the sting of all that interest they’re paying on a 30-year loan by writing it off at tax time. The IRS allows you to deduct interest you pay on primary and secondary mortgage loans as long as you itemize. Deductions reduce the amount of your income that’s subject to tax.
When you refinance to a 15-year loan, you can still take the deduction for your mortgage interest but it loses some of its value since you’re not paying as much interest. You’ll also have less time to benefit from it, which may work against you as you get closer to retirement. If you’ve built up a substantial nest egg and you’re expecting your tax rate to increase during your golden years, the loss of the mortgage interest deduction could make a significant difference in the size of your tax bill.
Bottom Line
If you’re heavily in favor of getting rid of your mortgage, refinancing to a 15-year loan can put you on the fast track to mortgage debt freedom. Just be sure you’ve weighed all the pros and cons first so you don’t end up getting in over your head.
Financial Planning Tips
- Before deciding whether to refinance or not, think about the impact that altering your mortgage could have on your budget and financial plan. SmartAsset’s free tool can match you with financial advisors who can help you determine what’s best for you. Get started now.
- Having a stringent budget in place is a great way to get your long-term financial plan off on the right foot. This might include not only watching your spending on a monthly basis, but also on a weekly basis. From here, you can begin to safely set aside money for your retirement savings and other goals for the future. For help putting together a budget, stop by SmartAsset’s free budget calculator.
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Is Refinancing Worth It?
With mortgage rates at or near record lows, a lot of existing homeowners are probably asking themselves, “Is refinancing worth it?”
The problem is there’s no absolute right or wrong answer to this question, though with interest rates a lot lower than they were a year or two ago, the answer to this question will often be YES.
Simply put, if there’s a larger spread between your existing mortgage rate and current refinance rates, it’s that much easier to save money.
Conversely, if rates haven’t budged much since you last obtained a home loan, you’re going to have to get knee-deep in the math to ensure it makes sense financially.
This Is the #1 Reason Homeowners Don’t Refinance
- If you’re questioning whether a refinance is worth it you’re not alone
- It’s actually the top reason why homeowners don’t bother refinancing
- 34% said so in a new survey from YouGov for Forbes Advisor
- But instead of wondering, take action and determine if a refinance can save you money
As noted, lots of homeowners are probably mulling over a mortgage refinance, even those who just refinanced last year, or perhaps even earlier this year.
The top reason they haven’t yet is because they’re not sure it’s worth it, followed by a good chunk saying they just recently refinanced (how soon can I refinance?). Others are concerned about fees, rightfully so.
A mortgage requires work – it isn’t a set it and forget it situation. Since mortgage rates can change tremendously over time, you’ve got to be an active participant.
Or, you can simply say forget it and miss out on substantial savings. But why would you continue to pay a 30-year fixed set at 5% if you could snag a rate in the 2% range or lower?
Just for quick illustration, the monthly mortgage payment on a 30-year fixed set at 5% is $1,610.46 for a $300,000 loan amount.
If you were to refinance that same loan amount down to a 2.75% rate, all of a sudden your monthly payment is $1,224.72.
That’s a savings of roughly $385 per month, which could afford you a pretty nice car every month. Or go toward your retirement savings, or simply boost your emergency fund.
There’s plenty you could do with an extra ~$400 per month, but there aren’t a lot of ways to easily generate those types of savings nearly overnight.
Refinance Savings Can Be Incredible, But Don’t Forget the Closing Costs
- Once you take into account the difference in monthly payment on the old and new loan
- You need to consider the closing costs required to fund your refinance loan
- Along with your expected tenure in the property (and how long you plan to keep the mortgage)
- Also pay attention to loan term to ensure you don’t regretfully reset the clock
Before we get ahead of ourselves, it’s not simple enough to merely compare before and after mortgage payments. I wish it were, but it’s not.
You’ve got a few more things to consider before submitting your refinance application.
One of the biggies is closing costs, which can amount to thousands of dollars. Going back to our example, imagine it costs $8,000 to complete that refinance.
Yes, lots of different parties need to get paid for refinancing your loan, including loan officers, processors, underwriters, appraisers, title and escrow companies, and so on.
All of a sudden, you’re in the hole. The good news is each lower mortgage payment will extinguish that debt, and each payment will pay down more principal since you’ve got a lower interest rate.
So while it may not take long to get back in the black, it could still take a year or two to get there depending on the savings.
And if we’re talking about narrower margins, unlike our example above, it could take 3-5 years to break even on those refinance costs.
That’s why you also have to consider your expected tenure in the property. What happens if you refinance your mortgage, then decide to move a year later?
Well, if you paid a bunch out-of-pocket, you may have lost money, and the refinance actually wasn’t worth it.
The same could be said about a situation where mortgage rates drift even lower, and you find yourself refinancing just six months or a year after your prior refinance.
The good news is there are options to avoid losing money if your plans take an unexpected turn.
I’m referring to a lender credit, where the bank pays all or most of your closing costs in exchange for a slightly higher mortgage rate.
This is how a no cost refinance works, and could be a good compromise for someone who isn’t sure how long they’ll stick with the mortgage/house, but wants to take advantage of the savings on offer.
While your rate may not be the lowest out there, if there’s a sizable margin, you could still make out pretty well.
One last thing to consider is resetting the clock – that is, restarting your loan amortization if you refinance from a 30-year fixed to another 30-year fixed, or to any home loan that extends your aggregate term.
This essentially sets you back in terms of when your mortgage will be paid off, which if it’s a goal of yours, can get in the way of your plans.
The good news, once again, is you always have the option of paying more each month on the refinanced loan.
So if you don’t want to commit to a shorter-term mortgage, such as a 15-year fixed, you can still make 15-year fixed sized payments each month and stay on track.
Of course, some folks are happy to extend their loan term and put their hard-earned money to work elsewhere where it can generate a better return, such as the stock market.
With mortgage interest rates in the 1-2%, it doesn’t take much to beat the market, and a mortgage can be good debt.
As for refinance rules, I don’t buy into them because everyone is so different and your unique situation needs a little more thought than a blanket rule.
Read more: The Refinance Rule of Thumb
(photo: Quinn Dombrowski)
Source: thetruthaboutmortgage.com