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 be able to see it all the way through and understand what costs and savings you are creating 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 costs to refinancing, and you want to be able to see the picture all the way through before making a refinancing decision.
In a rate and term refinance your interest rate and monthly payments are lowered, 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 in regard to 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 rather than putting money down, solid credit is the most important factor when refinancing. 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 help to 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 can 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 refinance can be a good choice.
A cash-out is another refinancing option. This type of refinancing is one often used by real estate investors although it can also be used by the typical homeowner. A cash-out refinance allows the property owner to take out equity, hence, money, out of the property, thus resulting in cash to the homeowner but also 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 just your real estate financials is important because money can be used in different ways, and 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 when considering refinancing, there are numerical and non-numerical factors important to the decision, and you want to be able to see the picture all the way through.