One of the biggest reasons homeowners refinance their mortgage is to
obtain a lower interest rate and lower monthly payments. By refinancing,
the borrower pays off their existing mortgage and replaces it with a
new one. This can often be accomplished with a no-points no-fees loan
program, which essentially means at “no cost” to the borrower.
In the
no-points no-fees scenario, the mortgage consultant uses rebate monies
paid by the lender to pay off non-recurring closing costs for the
borrower. These are “one time” fees such as escrow or attorney fees,
title insurance, document preparation, tax service, flood certification,
processing and underwriting fees, etc. The borrower is still
responsible for recurring fees such as interim insurance, property taxes
or insurance policy payments.
Refinancing typically occurs when
mortgage interest rates drop significantly, but borrowers with recently
improved credit scores (from paying off credit card debt, making
mortgage payments on time, etc.) are often candidates for better
interest rates as well. If you haven’t checked your credit score in a
while, it’s a good time to call a mortgage consultant.
For example: Let’s say you have 25 years remaining in your current loan,
and you refinance back to a 30-year loan with a slightly lower interest
rate, resulting in a payment reduction of $200 per month. (Note: This
is just an example. The actual amount could vary.) You could then take
that extra $200 per month and apply it toward the principal on the new
loan. At this rate, the loan will be paid off in 22 years and 4 months,
which is 2 years and 8 months less than the original loan.
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