Think twice before you jump into refinancing your home. Getting a new loan comes with big costs up front. You'll need to pay for someone to check your home's worth. You'll also need to pay for insurance and bank fees. If you have a low credit score, you'll have to pay even more money.
A lower monthly payment might look good now. But if you make your loan longer, you end up paying much more money over time. In fact, you could pay tens of thousands more in the long run.
Before you decide to refinance, ask yourself how long you plan to stay in your home. You need to live there long enough to save more than what you paid in fees. This helps you know if refinancing will really help you save money.
Hidden Costs of Refinancing
When you get a new home loan, there are costs you mightn't see coming. Just like when you first bought your home, you'll need to pay fees. These fees are about $2 to $5 for every $100 you borrow.
You will need to pay for:
- Someone to check what your home is worth ($300-$500)
- Insurance to protect the loan ($500-$1,500)
- Fees to the bank (about 1% of what you borrow)
Your old loan might charge you money for paying it off early. This can cost you a lot.
You may also need to buy extra insurance if you don't own 20% of your home yet.
Think about time too. If you've paid your loan for 10 years and start a new 30-year loan, you'll pay more money over time.
Look at all these costs and see if getting a new loan will save you money in the long run.
Your Credit Score Matters
Getting a new loan means your credit score is super important. If your score is low, you'll pay more money each month. Bad credit can make you pay 0.5% to 2% more than someone with good credit.
When you ask for a new loan, the bank checks your credit. This check hurts your score a little bit – about 5 to 10 points. The check stays on your report for two years.
If you want to ask many banks for loans, do it all at once. Try to ask them all within 14-45 days. This way, it only counts as one check on your credit.
Poor Score Raises Rates
Bad credit means you pay more when you try to get a new home loan. If your credit score is under 620, you might pay $2 or $3 more for every $100 you borrow than people with good credit.
Let's say you want to borrow $300,000 for your home. With bad credit, you could pay $379 more each month. That adds up to a lot of money over time – more than $136,000!
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Wait to get a new loan until you fix your credit. Here's what helps:
- Pay your bills on time
- Use less of your credit cards
- Fix mistakes on your credit report
Banks like to see you pay your bills on time for at least one year. This helps you get a better deal on your loan.
Hard Credit Checks Impact
When you look for a new home loan, each time a lender checks your credit score, it can go down by 5-10 points. These checks stay in your file for two years, but they hurt less after one year.
If you want to talk to many lenders, do it all within 14-45 days. This way, it only counts as one check on your credit.
Think of your credit score like points in a game. You don't want to lose too many points at once. If five lenders check your credit, you could lose 40 points. This might give you worse loan rates.
To keep your points safe, ask lenders for a simple quote first. These simple quotes won't hurt your credit score. Then pick the best one and let them do the full credit check.
Break-Even Point Analysis
Let's look at when you should get a new home loan. First, add up what you need to pay right now – things like loan costs and house checks.
Next, look at how much money you save each month with the new loan. Take your old monthly payment and subtract what your new payment would be.
Then divide what you need to pay now by how much you save each month. This tells you how many months it takes to get your money back.
If you plan to live in your home longer than that, getting a new loan might help you save money.
Calculating Total Upfront Costs
Let's add up what it costs to get a new home loan. You need money upfront before you can save money later.
First, you must pay fees to ask for the loan – about $250 to $500. The bank also needs money to make your loan, which is a small part of how much you want to borrow.
You'll need someone to check what your home is worth. This costs $300 to $600. You also need to pay to make sure no one else owns your home. This costs $400 to $900.
The bank will look at your credit score. This costs $30 to $50.
Some people buy points to get a lower rate on their loan. Each point costs 1% of your loan amount.
You must pay to put your new loan on record. This costs $25 to $250. A lawyer might help you with the papers, which costs $500 to $1,000.
If you have a homeowners group, they might need to write a letter. This costs $100 to $250.
Make sure to count every cost. If you miss one, you won't know how long it will take to save money with your new loan.
Monthly Savings Vs Expenses
Let's look at when your savings will cover your costs. It's like filling up a piggy bank!
Take what you pay now for your home each month. Take away what your new payment would be. This tells you how much you save each month.
Next, look at your total costs. Divide these costs by your monthly savings. This shows how many months until you get your money back.
| Cost | Example ($) | Your Numbers ($) |
|---|---|---|
| Closing Costs | 4,000 | _____ |
| Monthly Savings | 200 | _____ |
| Months to Break Even | 20 | _____ |
Think about how long you want to stay in your home. Will you live there long enough to save more than you spent? If you plan to move too soon, you might lose money.
Remember to think about your job and life plans too. Make sure you can keep up with the new payments.
Time Until Costs Recover
Let's talk about getting your money back when you change your home loan.
Want to know when you'll start saving money? Take the cost of changing your loan and split it by how much you save each month.
Say you pay $4,000 to change your loan and save $200 each month. You'll get your money back in 20 months.
You need to live in your home longer than this time to make changing your loan worth it. If you might move soon, think hard about this choice.
Most people like to get their money back within 2-3 years. If it takes more than 4 years to get your money back, you may want to keep your old loan.
Extended Loan Terms
When you think about making your house payments smaller, you might want to stretch out how long you pay your loan. This means changing from paying for 15 years to paying for 30 years.
Your monthly bills will go down, but you'll pay more money over time. Here's what this means:
Say you owe $200,000 on your house. With a 15-year loan, you pay $1,430 each month. If you switch to a 30-year loan, you only pay $955 each month.
This feels good now, but you end up paying $88,000 more in the long run.
Also, you own less of your house as time goes by. This can hurt your money plans for when you get older.
Think hard about if paying less now is worth paying more later.
Market Timing Risks
When you want to get a new home loan, timing matters a lot. Just like the weather can change fast, loan rates go up and down quickly too. You need to decide if you should act now or wait.
Think about these things that can affect your timing:
- Rates might go up while you get your papers ready
- Your home's worth can change
- The Fed can make big money changes that affect loans
- Your bill-paying score might change
- Banks can be slow, and rates could go up while you wait
Many people miss out on good rates. In fact, 6 out of 10 people say they waited too long to get a better rate.
Remember: You're making a big choice about your home loan. Take time to think, but don't wait too long. What's good today mightn't be there next week.
Home Equity Considerations
Your home's value changes over time, just like your neighborhood's homes do.
To see if you can get a new home loan, you need to know how much your house is worth now. Think of equity as the part of your home you truly own.
Most banks want you to own at least 20% of your home before they give you a new loan with good rates.
Look at what you still owe on your loan and what your home is worth today. This will help you see if getting a new loan makes sense for what it will cost.
Property Value Market Trends
Property values go up and down a lot. This matters when you want to get a new home loan. Before you try to get a new loan, you need to know what your house is worth now.
Look at these things to know your home's worth:
- Home prices in your area
- How many people have jobs near you
- What other homes sold for on your street
- New buildings going up nearby
- The best time of year to sell
Your home might be worth more or less than when you bought it. This can make it hard to get a new loan. Most banks want you to own at least 20% of your home's worth to give you a new loan.
Keep in mind: If home prices are going down where you live, it may be harder to get a new loan.
Existing Equity Vs Debt
Your house is worth money. This worth changes how much of it you really own. Before you get a new home loan, you need to know two things:
- How much you still owe
- What your house is worth now
The more of your house you own, the better deals you can get.
Here's what you can do based on how much of your house you own:
- Own 20% or more: Get the best loans
- Own 10-19%: Need extra insurance
- Own 5-9%: Few choices
- Own 0-4%: Very few choices
- Owe more than it's worth: Can't get a new loan
If you owe more than 80% of what your house is worth, you'll pay more each month. You might also need to buy extra insurance.
Taking cash out from your house means:
- You'll pay more each month
- You'll be paying longer
- You might spend more money over time
Future Moving Plans
Think about how long you plan to stay in your home before you get a new loan. You need to live there long enough to make back the money you spend on loan costs.
These costs are usually $2,000 to $5,000 for every $100,000 you borrow.
Moving too soon after getting a new loan can cost you money. Here's what to think about:
- If you might move in less than 2 years, wait to get a new loan
- Find out how many months it will take to save enough to cover loan costs
- Think about if your job might make you move
- Plan for big life events like getting married or having kids
- Look at how fast home prices go up in your area
Wait to get a new loan until you're sure about staying in your home. If you sell too soon, you could lose money.
Monthly Payment Trade-offs
You need to make a big choice about your house payments. Think of it like picking between two paths. One path means paying less money each month, but more money over time. The other means bigger monthly bills but less money in the long run.
Let's say you owe $200,000 on your house. You could pay $500 less each month by picking a longer loan. But this means you'll end up paying $100,000 more in the end.
Look at what other people like you do. Many who plan to stay in their homes for years pick shorter loans. They pay more each month but save a lot of money later.
Young families often pick longer loans with smaller monthly bills. This helps them have more money to spend now.
Just know what you're picking. Make sure you see the full cost of your choice before you decide.
Debt-to-Income Ratio Impact
Your money story matters when getting a new home loan. Think of DTI as how much you owe vs. how much you make each month. Lenders want to make sure you can pay them back.
Most banks like to see you spend less than 43 cents of each dollar you make on debt. Some may let you go up to 50 cents, but that's the limit.
Here's what changes your DTI:
- Lower monthly bills make your numbers look better
- Taking cash out means you owe more
- Moving other bills to your house loan doesn't fix the problem
- Making more money helps, making less hurts
- Adding someone to your loan can help or hurt based on what they owe
Before you ask for a new loan, do the math. Add up your bills and divide by what you make. This saves time and keeps your credit score safe.
Prepayment Penalties
When you want to pay off your home loan early, some banks charge you extra money. This is called a penalty fee. The fee can be very high – between 2% to 5% of what you still owe.
Let's say you owe $300,000 on your home. A 3% fee would mean you pay $9,000 extra.
Many people don't know about these fees when they sign for their home loan. You aren't wrong if you missed it too. To find out if you have this fee, look at your loan papers. Look for words like "early payoff fee."
If your fee will go away in six months, you might want to wait. The money you save by not paying the fee could be more than what you'd save by changing your loan now.
Alternative Financial Solutions
When you need help with money, you don't have to get a new home loan. You can try other ways to save money and keep your current loan.
Talk to your bank to see if they can lower your rate or give you more time to pay.
Pay your loan every two weeks instead of once a month. This helps you pay less over time.
Get a second loan based on your home's worth. This can help pay for big things while keeping your first loan the same.
If you've paid off 20% of your home, ask to stop paying extra fees for loan insurance.
Look at ways to join your bills into one payment without using your home as backup.
These choices often cost less than getting a new loan. They can help you save money and keep the time left on your loan the same. Your home stays safer too.
