Refinancing can shave years off your loan and help you pay off your home faster. When you refinance your home, your loan amount can be whatever you choose it to be. It can be a lower amount than what you currently owe on your home, which would require bringing in cash to close escrow. Or it can be equal to your loan amount where cash to close would still be needed, or it could be high enough to roll any associated closing costs into the loan amount, subsequently financing those fees over the term of the loan.
Here's a basic snapshot of how each option works.
Paying Down Your Principal Balance
Here is how to aggressively pay off your home faster — write a check and pay down your principal. Moving to a shorter-term debt structure can very easily reduce your interest expense and provide an opportunity to substantially reduce the cost of homeownership. Paying down your principal balance will mean bringing in cash and any associated closing costs based on your interest rate.
Let's say you have a loan of $420,000 on a 30-year fixed rate of 4.375%. You're refinancing a new loan and you can pay your loan down to $400,000 and get an interest rate at 3.625%. Let's say your closing costs are $1,500 and your impound account monies are $2,000. Let's say the mortgage payment on the old loan you're paying off was $2,500 per month. The total cash to close you would need would be $26,000, which is the difference in principal, the $1,500 in closing costs, the $2,000 for the impound account, and additional mortgage payment of $2,500 (estimated payoff added to current principal) as the lender will need to obtain payoff from the lender being refinanced.
New Loan Equal to Principal Balance
This one is a biggie. By keeping your loan equal to the amount of current principal balance you're continuing to chip away at the debt over time in a cost-favorable way. The new lender financing your home would have to set their new loan amount equal to your exact current principal, which means closing costs, any impound account monies and payoff/prepaid interest would be due at close of escrow, requiring cash.
Rolling Fees In
This is the most common approach because the fees rolled in results in a payment change of just a few dollars per month. For many, that can be a lot easier than writing a check in cold hard cash. Your new loan amount is reflective of paying off your existing note, interest, fees (if applicable) and accounting for an escrow account (if applicable). Rolling fees into the loan can help keep your cash liquid while at the same time meeting your payment and cash flow objectives of the refinance.
If you're looking to refinance your house, you can begin by checking your credit reports for any errors that could hinder your ability to get a new loan. (Remember, a good credit score generally entitles you to better rates on a mortgage.) If you find any, you'll want to dispute your credit report errors. You can get your free credit reports at AnnualCreditReports.com, and you can monitor your credit scores by getting two free credit scores at Credit.com.
Next, you'll want to talk to an experienced mortgage lender (full disclosure: I am one). They can walk you through the cost benefits and options available so your goals are in alignment with your liabilities.
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