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Benefits of Refinancing Your Mortgage

February 14, 2015

It is not always a good idea to refinance your home loan. 

redblockhouoseRates are low and home values are going up.  Today many people are considering refinancing their home loan to save money.  In some instances it may not a good idea.  You will want to consider the following factors:

  • How long do you plan to stay in the home before you sell it?
  • How long will it take to re-coop the cost of the fees (loan origination, lender fees, title/escrow, recording fee, credit report and appraisal fees)?
  • How many years are you extending the term of the mortgage?
  • Can you afford to bring in funds to close to cover the closing costs to keep the loan amount the same as the current balance?
  • Can you bring in additional funds to lower the loan balance under 80% to remove PMI?
  • Are you reducing the interest rate by 1% or more to make it more beneficial?

A word of advice – be careful of fast talking loan officers or lenders who sell you just on the monthly savings and not fully disclosing the drawbacks.  Due to unexpected financial hardships, some people are forced into refinancing to get cash out versus missing a mortgage payment, which would negatively effect their credit scores (or lead to possible default – loss of up to 125 points in some cases). The small benefit would be to also have a one month deferral on their next payment.

Great news for some – FHA has recently reduced their PMI by .5%.  If you are changing lenders you may have to set up a new impound account for your property taxes and insurance and the next half may be due soon.  Although you may have a credit in your current impound account, you will not receive that money for about three weeks once the new loan closes.  If that is the case, you will probably have to raise the rate to cover the closing costs and prepaid fees, which will raise the loan amount.  If your current balance is $400,000 and you don’t want to make that months current mortgage payment, you will still have to pay for it in the loan.  Your current lender will charge the unpaid interest through their payoff demand. They normally pad the payoff to ensure they aren’t shorted and you will receive a refund a few weeks later for any overage due back to you.  Also, depending on what day you close in the month you will also have to pay interest per diem for that month’s interest to the new lender.  If possible, bring in that month’s payment at closing and try to pay he closing costs out of pocket to maximize the overall back end savings.  For many it may take up to 4 years to re-coop the cost of a refinance. Use this calculator: calculating the cost to re-coop to refinance. 

If your current FHA mortgage balance is $400,000 and your interest rate is.4.75% with a home value of $500,000.  Your PMI is about $450 month ($5,400 a year – yikes!), but now you may have enough equity to get rid of that wasted payment.  Let’s say you have a 720 FICO, you either have 20% equity now or you can bring in funds to lower the loan amount to 80% LTV and you can qualify for a Conventional 4.125% today this is what would it look like apples to apples:

Current P&I payment $2,086.59                 Proposed P&I payment $1967.68

Net monthly savings: $121.91 + $450 PMI = $571.91!!

If you have been in that mortgage for 4 years you are starting a 30 year mortgage all over again.  In order to pay off the home sooner make sure to set up bi-weekly payments or when you get your tax refund make an extra payment to shave off over 6 years of interest (or do both to maximize your overall savings).  Download this amazing worksheet to help you plan ahead: Home Mortgage Calculator .

If you are having trouble keeping up with everyday living expenses, credit card payments, personal loans and auto payments you may want to consider consolidating them when refinancing to lower the monthly outgoing payments. Sadly, credit card companies lure us with low introductory rates, but later charge on average 18-24% and maybe even junk fees.  If you things are tight you are probably only making the minimum payment.  The result of doing so will cost you years before you pay the accounts off and it will be harder to ever get ahead.  Use this online credit card calculator on  The interest on these types of accounts are not tax deductible unless it is used for business purposes, but you cannot co-mingle your personal and business expenses in the same account.  The second benefit of consolidate your debt it into your mortgage loan the debt now has tax advantages, but will cost you interest still by raising your loan amount on your mortgage.  The goal into retirement is to be mortgage and debt free.  Unfortunately, because of people’s undisciplined spending habits the average home owner refinances three or more times and never pay their mortgage off.

Your home loan is the largest purchase you will make in your lifetime.  It is very important to shop around and compare at least 3-4 offers (compare the Truth-In-Lending Disclosures: APR and total payments made over the life of the loan) before you move forward.  On a $400,000 loan amount a quarter % difference in interest may equal $15,229 over 30 years. Every Dollar Counts!  Do your homework before you start shopping around.  Here are some other links with great information to help you make a sound financial decision to refinance your home loan:

And if you can handle a 15 year fixed mortgage, that would be ideal. The interest rate of course will be lower and you will pay off your home a lot sooner.  Lastly, make sure to review your credit file with Transunion, Equifax and Experian every year.  You can order a free annual report on  If possible, pay down any accounts on your credit report about 90 days before applying for a home loan to raise your score as high as possible and do not close any accounts in good standing (you will lose 20 points for each one – let them creditor close it after non-use and you won’t lose any points).  Even 20 points could be .25% better in rate, which equals thousands of dollars on the life of a mortgage loan.

PMC offers our clients free credit enhancement prior to submitting your loan to the bank to ensure you get the best rate possible.  If you have a loan scenario email us at – PMC Can Help!

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