Three Mortgage Refinance Strategies
July 6, 2020 | By Kevin Smith
After a video interview with Nick Flanagan of Summit Funding, I asked if he could share some helpful examples of the different types of mortgage refinancing. Here is what he gave us. Special thanks to Nick for the education.
Cost refinancing is a great option if you plan to stay in the home for a long period of time. When doing a “cost refinance” the borrower is paying closing costs (which can be financed into the new loan) and achieving the lowest interest rate available at that time.
For example: If you purchased your home in 2015 and have an interest rate of 4.25% on a 30 yr. fixed rate loan with a loan amount of $300,000 your monthly payment would be $1475.82
In this refinance scenario you would finance (or pay at time of closing) about $4000 in closing costs. If your new loan is a 30 yr. fixed loan at 2.875% your monthly payment would be $1244.68. This is a monthly savings of $231.14 over a 30 yr. period it would save you $84,211.32!
This option is best for buyers who plan to stay in the home for a long period of time. Paying/financing the closing costs makes sense as the cost to achieve the savings of $231.14 divided into the $4000 closing costs has a break even period of 17 months. In other words, By spending the $4000 you are hedging a bet that you will keep the loan >17 months in order to achieve the savings of $231.14 month 18 all the way through month 360 (30 years.
No Cost Refinancing:
No Cost refinancing is a great option for borrowers who plan to stay in the home for a short period of time. You may be moving or selling the home and you don’t want to spend the money on closing costs.
In this case you would have a slightly higher interest rate but you would not pay any closing costs, nor would you finance any closing costs into the new mortgage.
For example: If you have a $300,000 loan at 4.25% interest when you bought the home in 2015 you would have a monthly payment of $1475.82. In the example of a NO Cost refinance you would have a new loan of $300,000, pay zero costs at closing, finance zero costs into your new loan, and accept a higher interest rate of 3.375% which would make your monthly payment $1326.29
Yes, It is not the lowest payment like the scenario above But, You wouldn’t have to pay any closing costs either. Therefore if you move, sell the house, or refinance again, you didn’t pay any money to achieve the savings of $149.00 per month and there is no period of time required to recoup your upfront closing costs.
Home equity (also known as cash out refinancing) is a great option to pay off high interest rate debt (like credit cards), put a child through college, make home improvements or reinvest in the market, or just keeping a little cash on hand for a rainy day.
The basics of home equity refinancing is withdrawing equity earned in your home. For example: If you purchased a home in 2015 for $325,000 and you made a down payment of $25,000. You would have $25,000 of equity in the home at time of purchase. Due to the appreciation over the last 5 years the house is now worth $450,000, therefore you have $150,000 in available equity. The Texas home equity laws allow you to borrow up to 80% of the current market value of the home. So, After making 5 years of payments as an example lets say you now owe $275,000. You decide to take a home equity loan on a 30 yr. fixed at 3.125% with a loan of $360,000 and your new monthly payment is $1542.00 which is $66.32 higher than the payment you are use to making and you now have $85,000 in cash!
With this cash you can pay off credit cards, remodel a kitchen, reinvest, or whatever you want!
All of the above options can be tailored to the borrowers specific situation. The term of the loan can also be changed (meaning going from a 30 yr. fixed loan to a 15 or 20 yr. fixed loan) along with eliminating monthly mortgage insurance and much more. I am happy to have a conversation with anyone to see which options best fit your needs.
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