Should you refinance your home loan, pay off your home or buy another? Should be the first question you and your spouse ask yourselves before you decide to refinance your existing home loan.
Recent reports show that some homeowners are borrowing to the constant enticement of lower home loan rates. And, without an analysis, find that they are backing themselves into a corner of more years and more costs on their loans, including more escrow cost and higher points. The savings they “thought” they were getting on a home refinance, turned out to be huge loss.
After you purchase a home, within a few months most new homeowners will get a barrage of snail mail suggesting you refinance your nearly new home.
The reason why you will be encouraged to refinance many times after the purchase, is because of profits for mortgage companies. Just remember, your home is not an ATM machine, it is best to ignore those offers for several reasons.
When you refinance a mortgage, companies collect a whole list of payments from your refinance, as with your original loan. Refinances wildly benefit the mortgage company but can hurt you badly. In fact, the people who do not get this memo may end up purchasing their own home 3-4 times during their lifetime when refinancing.
It is Not Wise to Refinance If:
-Your purchase is new ( less than 5 years old)
-There have been years of payments on your home, the focus – pay it off
-You are not going to save enough money to make a difference
-Your home has been refinanced before
-The difference in the interest rates are small
-You will add another round of escrow cost
-You will get higher points to offset the so-called lower interest
-You are going to add years to your existing loan, losing the years you have paid
It Is Wise to Focus on Paying off Your Existing Loan:
-So you can focus like a laser beam and live mortgage free with a paid off home.
-If you continue to have a payment after several years, your payment will go down in regard to inflation.
-There are many tricks in refinance loans, because of this you can make big mistakes and increase your chances of lost.
-If the difference of total money saved and new interest rates are too small.
-When you don’t have the expertise and cannot do research to understand the loan process first.
A True Story About a Refinance Loan That Worked
I counseled a woman and her husband, who wanted to know if they should refinance their home, due to a decrease in her husband’s salary.
Here is The Analysis We Did:
1. We obtained her original loan documents and discovered her original and current loan was 33 years. They did not know this; they were told it was a 30-year loan. And because it was stated in months, they did not bother to calculate it.
At the time of the analysis they had 23 years left on her original loan.
With a new 15-year loan, she will shave 8 years off her original number of loan years. This includes the years from the remaining:
23 years (original loan) – 15 years (the new loan) = 8 less years to pay a mortagage in total, with the new loan.
2. They original loan interest was 6.7%. The interest rate on the new loan was 3.8% for a 15-year loan.
So, now they has 2 out of 3 major factors that will decrease the cost of their loan. The cost will decrease by both significant interest rate and number of years. Because of this she will not lose money in the refinance but will instead save money, lots of money.
3. Their payment will go from $3400, Principle+interest+taxes+insurance, to $2400. They will pay $1000 dollars less a month in payments. Coupled with the decrease in years, this is a real winner and takes a financial burden off the family.
Why Did the Above Mortgage Example Work?
The above 3 facts are called being in the right place at the right time. It was right because the low interest rates intersected with the savings from years.
They saw the savings and went with the new loan. Also, 5 years later, she had enough money after their finances improved, to pay off their new loan. Now, they live loan free and shaved 10 years off their mortgage.
This is one of a few cases I analyzed where it made sense and saved money to refinance. In most other cases, the refinance costs, coupled with years lost, do not make a new loan cost effective. Usually, the hidden costs are huge.
Considering the continuing low-interest rates on home loans, is it time for you to consider purchasing a home? — Or refinancing your existing home? Some homeowners are said to be refinancing their existing loan over and over.
If you are in the market for a new home, one of the best times to purchase a primary mortgage is when interest rates are low. Also, you need to find a reasonably priced home. But as far as refinancing, in my opinion, I do not feel that many of the constantly refinancing homeowners understand all the facts (and high cost) surrounding home refinancing.
A one-time refinance is appropriate if you have done your homework and analysis, before you contact a mortgage broker. Then you know that a refinanced loan will be a benefit to you.
If you do not correctly answer the question, “How does refinancing work?” before deciding to refinance, you could get yourself and your home loan security at risk. Know for absolutely, if you should refinance your home loan.
Refinancing an Existing 30-year Loan
1. Each time you refinance to a new 30-year loan, you can go over your 30-year period to 40 years, 50 years and sometimes 60. If a homeowner does this every 5 year for 20 years, then at the end of 20 years you will have 30 years left to pay on your mortgage. Instead of 10 years if you did not refinance your original loan.
The extra years of interest and principle will substantially increase the amount of money you pay on your mortgage over time. And this will increase the actual cost of your home.
-Calculate how many years you have already paid on your home loan.
-Look at the number of years on your new prospective loan
-Compare the interest rate of your old loan to your new loan
-Find out the total cost that will be charged to you for the loan, by the Mortgage Broker
-If you have a 30-year loan with 15 years left to pay. Then try for a 10-year loan if the interest rate is very low. There should be a significant difference between your existing interest rate and the new interest.
-Make sure every loan you get has no pre-payment penalties. Also, pay extra to principle each month to make sure you don’t go over the 30-year mark. Paying off any mortgage loan early can save thousands of dollars.
The issue becomes, “Why are you getting the refinanced mortgage in the first place?” Are you desperate for money to use for medical purposes, college, or some other dire emergency?
Or, are you looking to save money on your overall cost and either put the extra savings into a general savings account, retirement? Perhaps you want to retire earlier with no mortgage, pay down other bills, or lower your existing payments due to financial stress? And Does refinancing your home work or hurt you?
These are questions you must answer and make your intentions crystal clear to yourself and your spouse before you decide to refinance.
How Much Will it Cost to Refinance Your Home Loan?
It will cost you a hefty sum of money each time you refinance your existing home loan or purchase one for a new home. And even the so-called no-cost loans will cost you. The purchase price of a new loan is either 2%-4% of the new loan. In the case of the no-cost loans; the fees are added into your loan as a higher interest rate on monthly payments.
You will, therefore, pay for the cost included in your monthly payments. It can take as long as four to six years to pay off the cost of your home refinance, so plan to stay put for a while if you choose to refinance.
Home Loan Resources for Primary and Refinance Loans
There are several resources to help you make a wise decision when it comes to choosing a loan for a new home. Understand how detrimental repeatedly refinancing your existing home can be. Refinancing your home should be a rare consideration and carefully calculated decision before you visit a mortgage company.
Credit unions and your local banks offer the best solutions for a mortgage. If you do not have optimal credit and money saved in a bank or credit union then carefully select a mortgage company.
The U.S. Department of Housing and Urban Development offers numerous resources on its Web site, www.hud.gov, for homebuyers. It publishes an eight-page booklet, “Looking for the Best Mortgage,” which offers advice on finding the best deal. General tips include:
1. Contact several mortgage lendersand brokers for information.
Check hsh.com to see what the average mortgage rates are now.
3. If you have a good relationship with your local bank, start with them. Especially if you have a substantial saving or checking account with them. The mortgage division is usually a separate business in your bank, but a relationship with the bank will make getting a mortgage easier.
4. Obtain all cost information, including interest rates, points, fees, down payment requirements and private mortgage insurance.
5. Negotiate your mortgage where possible. Mortgage deals vary from day-to-day. Once you find a deal you like, lock it in.
6. Federal law prohibits discrimination in mortgage lending, know your rights.
7. Understand your credit. If it’s not good, finding a loan could be difficult. To obtain a copy of your credit report, contact free credit report .
You should know your credit score and examine your credit report before you shop for a refinance.
Sometimes credit reports have mistakes on them and they can be taken off by contacting your credit reporting agency in writing, before you shop for a loan.
The primary goal for you is to make sure you answer the question thoroughly, “Does refinancing your home work?”. know should you refinance your home or buy a new one.
The More You Know, The More You Grow – Your FinancesMsFinancialSavvy, Lois Center-Shabazz
Lois Center-Shabazz| Money Strategist | Course Delta Agency
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It is best to build equity in your home over a number of years. Your goal should be to pay your home off in 15 or 30 years or earlier, if possible. Then sell it, and live off the proceeds as part of your retirement, or leave money to your heirs to purchase their own home.
Should you decide to acquire a new home loan your income should easily support the new payment. If you do not have an income or your income is limited, you should not acquire a new loan. A loan has to easily supported by your income NOT your equity. The income you have is what you will use to pay your monthly mortgage with
If you do acquire a new home loan you should:
- Have income to easily support your home loan.
This sounds like a simple concept. But, for many who want a home they think, “buy the home first, then figure out how to pay for it”. Please don’t put the “cart before the horse”, so to speak. You make yourself susceptible to bad loans and bad lenders when you buy a home before you have done your research and determined that you can afford a quality loan. The keyword being quality. The high quality loan, the more qualified you are the more likely you are to stay in your home long term, build equity, and retire without a payment, because it will be paid off by you.
- Have researched an affordable, high-quality loan yourself or have a relative research one for you. Compare several home loans, read the fine print, ask plenty of questions, understand all of the terms of the loans. See home buying at Msfinancialsavvy’s home buying course where you will learn over 100 ways to successfully buy a home. It is targeted to women, buy of course men will benefit too. Home buying is tricky, so I recommend you take this very inexpensive home buying course well in advance of buying a home.
- Make sure the appraised value of other homes in your neighborhood substantiates the added cost of a new or additional home loan. Understand and verify in writing you have a high-quality loan with no balloon payment attached. Some home buying purchase a home based on emotions and not all of the facts they need to make sure they are not cheated. You can easily overpay for a home when you buy on emotions. This can happen if the sellers lie about amenities or if the neighborhood is going down in value, so for instance you check the last four home sales in the area, but home values are trending down, so you get a home that you could have negotiated way down if you had this information.
- Understand in writing, the actual interest rate of your loan, obtain an interest rate you can afford or do not obtain the loan. Sometimes interest rates change before signing for your new loan.
- Understand it does not make good financial sense to replace a loan that is nearly paid off with a long-term loan of 15 or 30 years. Once you have your home paid off you are home free. No more payments, you can call it rent/mortgage free, so DON’T mess it up at this time. Especially if your income is not set after retirement, you don’t want to increase your liabilities with a new loan if you are not increasing your income.
- Visit, www.fdic.gov (see “looking for a mortgage”)
There has been a lot of information in the media lately about predatory lenders, they prey on the poor, under-educated homeowners with lots of equity in their homes. If you know of anyone in this category educate them about the dangers of unsolicited home loans or home loans with potential balloon payments.
Remember; do not forget to read the fine print. Also, if you don’t have a job, don’t get another loan. If you need a business loan, don’t use your house; get a bank business loan or Small Business Administration loan, see www.sba.gov. Another option is to delay starting a business until you can acquire proper funding.
You may be able to sell your home tax-free. This is a tax saving Americans rarely discuss when they are complaining about tax rates. The tax-free benefit that comes with the sale of a home is one of the major benefits of home ownership. The interest deduction is another benefit that occurs while occupying the home.
Most earned income is taxable, but the income you earn from the sale of your home may not be. Therefore, you will not have to pay taxes on the equity from the sale of your home if you meet certain IRS requirements.
In most states, if you sell your home with a real estate broker you will have to pay fees to the real estate company for the sale as well as other costs.
Other cost includes sellers escrow cost and repairs to the home as required by law or requested by the buyers.
Many of your cost are tax deductible, which means you will get some of the money back when you file your taxes.
To get homeowners tax breaks when you sell your home pay attention to the requirements for a tax-free home sale
If you qualify, you can exclude part or all of the gain from the sale of your home. To get the exclusion, the tax law requires that you use the home as your main home, and own it for 2 out of 5 years prior to the date of sale.
There are exceptions to this rule if you are military, handicapped, or have been in the peace corps. Read IRS publication 523 for the specific rules.
There is a limit to the financial exclusions when you buy a home. You can only get up to $250,000 tax-free if you are single and a $500,000 tax-free gain if you are married. In most cases, you can exclude the gain on the sale of your home every two years. If you
sell your home at a loss, it is not tax deductible.
If your home sale is not taxable you may not need to report the sale to the IRS, if all or part of the sale is taxable you will need to report the sale.
Some of you may have used the first time home buyers credit to buy your home, if so, this is an exception and certain rules will apply to your sale.
These rules are current as of August 2016, verify if there are new rules in place when you sell your home after this date, by going to IRS.gov.
There are many advantages to selling your home tax-free up to the exclusions.
1. You get to keep some or all of your profits from equity up to the $250,000 for singles or $500,000 for married couples.
2. You can have a large down payment for your next home or use it for retirement income.
3. When you sell, you can use part of the money to pay off bills, fund an education or start a savings account.
4. You don’t have to purchase your next home immediately; you have time to evaluate all of your options for a new home.
5. If you live in your previous rental home 2 of the 5 prior years, you can sell your home tax-free now that it is not be considered a rental home.
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