In most situations, the answer is no, but there are costs, and you should understand your strategy and why you are refinancing. You want to see it all the way through and understand what costs and savings you create with a refinance.
Refinancing can have several purposes, and you want to understand each one. You may be refinancing to pull cash out, or you may be refinancing to lower your interest rate and monthly payments. However, as mentioned before, there are refinancing costs, and you want to see the picture all the way through before making a refinancing decision.
Your interest rate and monthly payments are lower in a rate and term refinance, and the loan term is shortened. Going over your options with the lender is important because while a lower interest rate and monthly payments might seem like an obvious choice if a reduced loan term is available but without the option of a lower rate and lower monthly payments, the reduced loan term may make sense depending on your financial plans. Perhaps you are anticipating increased student loan payments in years that are further away, and a reduced loan term makes sense regarding coordinating your finances. Maybe a shortened loan term brings you peace of mind when it comes to paying off your debts. It is important to consider the numerical and non-numerical factors when it comes to refinancing. To further comment on the costs and factors in a rate and term refinance, it is important to know that solid credit is the most important factor when refinancing rather than putting money down. Lenders typically look for an 80% loan to value ratio or lower and good credit rather than money down. However, just because putting money down is not typically necessary doesn’t mean it shouldn’t be considered. A refinance with cash-in can reduce your interest rate and monthly payments and potentially eliminate the need for private mortgage insurance. Thus, putting money down has the potential to reduce your long-term costs.
Refinancing does come with closing costs. According to Freddie Mac, the average closing costs are in the range of $5000. These closing costs include the appraisal fee, loan origination fee, credit report fee, the survey fee if needed for property boundaries, discount points, and title search and insurance. After December 1st, 2020, there will also be a newer refinancing fee. According to Fannie Mae and Freddie Mac, there will be a 0.5% fee applied to refinances of $125,000 and higher.
The costs of refinancing have the possibility of being rolled into the loan. The disadvantage with this is that you’ll be paying interest on a higher loan amount. However, this may make sense, depending on your financial plans. If you don’t plan on owning the home for an extended period of time, a no-closing-cost can be a good choice.
A cash-out is another refinancing option. This type of refinancing is often used by real estate investors, although the typical homeowner can also use it. A cash-out refinance the property owner to take out equity, hence, money out of the property, resulting in cash to the homeowner and increased debt on the mortgage. For example, suppose a homeowner paid $100,000 cash for a house. In that case, a cash-out refinance option could include taking out $80,000 in equity and acquiring a mortgage with an 80% loan to value ratio, which maintains $20,000 and thus 20% equity in the property. This can be a smart move, especially when combined with financial plans. Perhaps the homeowner would like to purchase a rental property in addition to his or her live-in home. The cash pulled out of the property could be used to purchase another property or pay off higher-interest debt such as credit card debt. Knowing your whole financial picture rather than your real estate financials is important because money can be used differently. Applying your funds to the right opportunities and the right areas is important. You can save money overall in your life when you’re aware of your whole financial picture rather than just where you stand with your real estate financials.
While refinancing might not technically require money down, it does come with costs, and it is vital to consider and be aware of those costs. Refinancing can bring interest on increased loan principal, potentially increasing your total costs over time. If you refinance more than once, the costs involved may not be worth the potential benefits, although rather than assuming, you should see for yourself what the situation entails. Remember that there are numerical and non-numerical factors important to the decision when considering refinancing, and you want to see the picture all the way through.