Refinancing your mortgage is a highly flexible financial tool, available to many homeowners. Mortgage refinancing allows home owners to potentially get lower interest rates and lower monthly payments, to switch from an adjustable to a fixed rate mortgage, to take out home equity, to consolidate debt, and even to combine two mortgages into one.
Though highly flexible, the real value of mortgage refinancing comes when the costs of refinancing can be recouped in a short period of time. You see, getting any type of mortgage costs money in terms of various fees, and refinancing is no exception. Costs for refinancing include: application fee, appraisal fee, survey costs, attorney fees, title search and title insurance, home inspection costs, origination fees and possibly mortgage insurance as well. The total costs typically add up to an average of 3% to 6% of the total outstanding mortgage balance.
In order to take advantage of the mortgage refinance deal, you must calculate what is known as the break even period (also called a payback period).
The break even period is an equation that relates the sum of total monthly savings over a period of time to the refinancing costs (fees). For example, if it takes 18 months to cover what you paid in closing costs before you actually start saving money, and you plan on moving out in 12 months, than refinancing does not make sense. On the other hand, if you know you're not going anywhere, than mortgage refinance can be a great tool to start saving money long term.
Here is a sample calculation to illustrate how easy it is to compute:
Before Refinance
Home Value: $300,000
Mortgage: $220,000
Mortgage Length: 25 years
Interest Rate: 7.5%
Monthly Payment: $1,609
After Refinance
Home Value: $300,000
Mortgage: $220,000
Mortgage Length: 25 years
Interest Rate: 4.1%
Monthly Payment: $1,157
Break Even Period
Refinance Cost: $ 6000 (3% of the 220,000 mortgage)
Monthly Savings at New Interest Rate: $1,609 – $1,157 = $452
Break Even Period: 14 months
As you can see from the example above, it will take 14 months to save $6,000 with the new monthly savings. In this case, it makes good sense to refinance if you are planning on living in the same home for more than 14 months.
Qualifying for Obama's Mortgage Refinancing Plan
On March 4th 2009 Obama launched the Making Homes Affordable program designed to help home owners who have suffered a financial hardship in our harsh economy.
Are you eligible for refinance under the Making Homes Affordable Program? – if you answer Yes to all the questions below, you are most likely eligible:
- Is your home your primary residence?
- Is the amount you owe on your first mortgage equal to or less than $729,750?
- Are you having trouble paying your mortgage?
- Did you get your current mortgage before January 1, 2009?
The home Affordable Refinance Program is also available to homeowners who are late on payments, or who can prove they will not be able to keep up with payments, due to respectful reasons, such as a lay off or a salary reduction. The home that is being refinanced must be the primary residence of the borrower. Vacation homes and commercial buildings are not accepted. Specifically the following types of properties are eligible: houses, condominiums, one to four unit properties, manufactured homes, co-ops.
If you are determined to be eligible you may be able to reduce your interest rate to as low as 2%, and extend the term to up to 40 years. You may also refinance from high risk loan types such as an interest only mortgage or a balloon mortgage to a more stable option such as a fixed rate mortgage, so it’s definitely worth your while to see if you qualify.
About the author: Terry Henson is a financial writer with an emphasis on mortgage products and financial trends that affect mortgage rates. Terry also writes for the Canadian mortgage rate comparison website Kanetix.ca, which offers competing quotes for mortgage refinancing, home equity loans, second mortgages and more. Visit the website to find out more.
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