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nterest rates are so incredibly low that it makes sense for many homeowners to refinance. Do you understand all the options available to you? Do you know all the ins-and-outs when it comes to getting a mortgage?
It wasn’t until this month that refinancing our home’s loan made any sense. I found a local bank willing to refi our mortgage with a fixed 3.25% loan. Incredible, isn’t it? But does it truly make sense for us?
I’ve done my homework and investigated all the variables, asked all the questions, and crunched all the numbers. In this episode I will describe how to do a quick estimate to see if it makes sense for you, and some things you may not have thought about when it comes to getting approved for a mortgage or refinance.
I also take some time to talk about four of the most popular types of mortgages out there, for first-time home buyers or those who are considering a refi:
Adjustable Interest Rate (ARM)
A loan with an interest rate that adjusts with an index (such as the CMT or LIBOR). It adjusts at certain intervals and will change your payment. The introductory interest rate is usually better than current market rates for at least the first year and typically will adjust yearly.
Balloon Mortgage
Picture a balloon with a string. You start at the end of the string and move closer to the balloon with each payment. Example: A 7-year balloon on a 30 year mortgage at 5% for a $200,000 loan. You pay $1,073.64 each month and that gets you a little further up the string towards the balloon. After 7 years you have arrived at the balloon and still owe about $177,000 on the balance. At this point you must make a decision: You either refinance, allow the bank to adjust the rate to the current market, or sell the house.
Interest Only
A loan that allows you to pay the interest portion of the loan payment only. After a certain amount of years you begin to pay down on the principal. You don’t build any equity, other than your home growing in value at the same time, and I would guess you could do better by renting a home than doing this deal. Sorry, that’s just how I feel about it.
Fixed Rate
An interest rate that is fixed for the life of the loan, usually for a 30, 20, or 15 year term.
Simple.
Things to take into consideration:
- Closing costs
- Money saved by losing rate (reducing the interest rate)
- Reduced Mortgage Interest Deduction
- Current value of the home
- Credit history
- Type of loan (FHA, VA, or conventional Fannie Mae-type program)
Only after you have measured all the risks, done the math, and are in agreement with your spouse (when applicable) can you make an informed decision about refinancing.
Holla From The Impala: Top 5 things that shouldn’t work, but do!
Mentioned in this episode:
Best on-line mortgage calculators: DinkyTown.net
Difference between owning and renting: MoneyPlanSOS.com/031 (House Poor Are You)
Way to prove your stellar payment history instead of using the FICO credit score: MoneyPlanSOS.com/033
What a great podcast! We had to do these same types of calculations last year when we decided to refinance our mortgage! We went from a 20 year fixed rate at 5.99% with 17 years remaining to a 15 year fixed at 3.79%. Because of the interest rate and term, we are paying less than we were with the 20 year every month and more of it is going toward principal. We bought our house as a fixer upper and have been working on it for the past 4 years, so equity wasnt a problem at all in our home.
We are much like you. We owe $53,000 on our mortgage and are looking to pay it off within less than 5 years.
I love it! Let me know when you have a mortgage-burning party!
Game on! 🙂
Let’s see who makes it first! LOL.