The pros and cons of refinancing your home

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Editor’s Note: The APYs listed in this article are current at the time of publication. They can fluctuate (up or down) based on changes in the Fed’s rate. CNBC will update as changes are made public.

In these uncertain economic times, refinancing your mortgage can give you some breathing space by lowering your monthly payments and / or saving you money over time. Americans apply for refinancing loans from a 38% higher rate compared to last year, in part because the Fed reduced interest rates when the coronavirus pandemic struck and borrowing is now more affordable.

But at the same time, refinancing can be a bit tricky, especially if your credit rating is far from ideal or you are not sure what to expect.

When you refinance, that means you’re essentially taking out a brand new loan on your property, often for the rest you owe (but not always). Ideally, this new loan has better terms than the old one. It depends on a number of factors, including your home equity (that is, how much of the loan you’ve already paid off) and your credit score when applying.

While refinancing looks great on paper, it might not always put you in a better position. It is best to weigh the pros and cons taking into account your personal situation.

CNBC Select speak with Darrin Q. English, a senior community development loan officer at Quontic Bank, on the pros and cons of refinancing your home. Here’s what to keep in mind.

The benefits of refinancing your mortgage

Depending on the type of loan you are eligible for, refinancing can offer you one or more benefits, including:

  • a lower interest rate (APR)
  • a lower monthly payment
  • a shorter repayment term
  • the ability to cash in your equity for other uses

The most immediate benefit of refinancing is that it helps cash-strapped borrowers find room in their monthly budget. This could be beneficial if you expect your cost of living to increase (maybe you are going to have a baby) or if your income has decreased (due to job loss or decreased income). hours).

But when you refinance, you can also use it as an opportunity to use some of your home’s value money for other costs: “Basically 50% of people are taking the money out, and they’re considering to reinvest that money in other properties or send their kids to college or something, ”says English.

Other times, homeowners want to refinance to reduce the term of their current mortgage from 30 years to 15 years. Depending on the interest rate you’re entitled to, this could change your monthly budget slightly while helping you pay off your loan faster.

When you refinance, you can also skip a mortgage payment while the new loan is taken out and the paperwork is being processed.

“You have 30 days before the actual amortization begins. So there are times when you can have up to 60 days before payment is due,” says English. While this is not a reason to refinance, it is a great advantage and can be a good opportunity to build up an emergency fund if you don’t already have one in place, using the money that would usually be used. to pay off your mortgage to fund the Account.

The pitfalls of refinancing your home loan

While refinancing has many benefits, it can come with some pitfalls if you are not prepared.

For starters, refinance loans have closing costs just like a regular mortgage. Mortgage Lender Freddie Mac suggest budget approximately $ 5,000 for closing costs, which includes appraisal fees, credit report fees, title services, lender setup / administration fees, investigation fees, fees subscription and attorney fees. It all depends on where you live, the value of your home, and the amount of loan you take out.

Some lenders may offer free refinancing, but that usually means closing costs are included in your loan amount. If you refinance with your existing lender, you may get mortgage tax relief, depending on your state’s laws.

“It’s a carrot they’re hanging,” said English. However, you should always compare rates, terms, and programs.

Once you’ve figured out your closing costs, do some quick math to make sure you’ll get that money back by saving on your new monthly payment. If your closing costs are $ 5,000 and you save $ 500 per month on your new mortgage, it will take 10 months to break even. However, if you only save $ 200 per month, your “breakeven point” would be 25 months (a little over two years). Stay home for less than that and you won’t really save money in the long run.

You should also have a clear idea of ​​how you will be using the money you free up when refinancing. This is especially true if you plan to cash in on your equity. If you plan to reinvest your equity in another property, education, or other purpose, be sure to weigh the costs against the rewards.

And if you’re considering refinancing so you can pay off high-interest debt, have a clear plan to avoid overspending in the future: “One of the downsides I’ve found is that people will have everything. new disposable income, a lower rate and / or longer terms, ”says English. “And now they could save between $ 500 and $ 1,000 a month on the mortgage. They are paying off their debt, but they have the option of reloading those cards and they will fall back into the trap.”

If you’re spending the equity you’ve earned to pay off your debt, you’ll have to wait until your home’s value increases and you’ve spent more years of mortgage payments, before you can tap into this source again. silver. .

It’s also worth remembering that banks have limits on how much equity you can take out of your home. Most banks won’t let you withdraw more than 70% of the home’s current market value, English says. You shouldn’t think of your home as a source of quick cash.

A better option for quick access to cash

A better option to ensure you have access to cash is to set up a emergency savings fund, says the Englishman. “It is important that we all have reservations and something to build on. It is the surest way to prepare for the future.”

Don’t procrastinate saving just because you think you can’t afford it. You can save $ 1,000 in a year by setting up a weekly direct deposit of $ 20 from your current account into high yield savings. Over time, you can increase the amount you save, especially if your mortgage payments go down because you refinance.

Look for a high yield savings account that has no monthly fees, no minimum deposit, and no balance requirement. CNBC Select’s first choice is Marcus High Yield Online Savings by Goldman Sachs, free of charge and easy mobile access. This is a simple and easy to use savings account for when you are just starting out.

Marcus High Yield Online Savings by Goldman Sachs

Information about Marcus High Yield Online Savings by Goldman Sachs was independently collected by CNBC and was not reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is a member of the FDIC.

  • Annual percentage return (APY)

  • The minimum balance

    None to open; $ 1 to earn interest

  • Monthly fee

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

For a higher APY, the Varo savings account is a good option.

Varo sets itself apart with its unique multi-tiered APY program which allows you to earn up to 2.80% APY if you meet certain monthly requirements: Account holders must make a minimum of five purchases with their Varo Visa® debit card. , make direct deposits totaling more each month, and keep a savings account balance of no more than $ 10,000 (there is no minimum balance) all within the same month.

Varo savings account

Information about the Varo Savings Account was independently collected by CNBC and was not reviewed or provided by the bank prior to publication. Bank Account Services are provided by FDIC Member Varo Bank, NA.

  • Annual percentage return (APY)

    Start earning 0.20% and qualify to earn 3.00% if you qualify ^

  • The minimum balance

    Nothing; $ 0.01 to earn savings interest

  • Monthly fee

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

    Yes, if you have a Varo bank account

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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