Dave Ramsey says: Refinancing home at great rate is worth higher monthly. ... Our current rate is 4.875%, with 28 years remaining on the loan. We found a 15-year refinance at 2.5%, which would raise our monthly payments about $200, but we can handle that.
If your original mortgage is a 30-year term (or more), then refinancing is a good way to get to the ultimate goal of locking in a 15-year fixed-rate mortgage. We say 15-year fixed-rate mortgages are the goal because they're better for you than 30-year mortgages.
The catch with refinancing comes in the form of “closing costs.” Closing costs are fees collected by mortgage lenders when you take out a loan, and they can be quite significant. Closing costs can run between 3–6 percent of the principal of your loan.
Generally, a refinance is worthwhile if you'll be in the home long enough to reach the “break-even point” — the date at which your savings outweigh the closing costs you paid to refinance your loan. For example, let's say you'll save $200 per month by refinancing, and your closing costs will come in around $4,000.
For decades, Dave Ramsey has told radio listeners to follow the 25% rule when buying a house—remember, that means never buy a house with a monthly mortgage that's more than 25% of your monthly take-home pay.
A: Dave Ramsey recommends a 15-year, fixed-rate conventional loan. A conventional loan is not secured by a government agency, making it a little trickier to qualify if you don't have a credit score.
By adding $300 to your monthly payment, you'll save just over $64,000 in interest and pay off your home over 11 years sooner. Consider another example. You have a remaining balance of $350,000 on your current home on a 30-year fixed rate mortgage.
When you refinance a loan, the original escrow account remains with the old loan. ... All the property tax and insurance payments you have made to that account, since the last payment was made, will be returned to you, usually within 45 days via wire transfer or check.
Your Mortgage Refinancing Payoff Amount is Always Higher
Every month when making your payment you see your mortgage balance on your statement. ... When you apply for mortgage refinancing your payoff amount actually includes interest for the current month because you're only paid up through the end of the previous month.
The equity that you built up in your home over the years, whether through principal repayment or price appreciation, remains yours even if you refinance the home. ... Your equity position over time will vary with home prices in your market along with the loan balance on your mortgage or mortgages.
Another reason lenders might encourage you to refinance is to prevent you from seeking out a lower rate elsewhere. By offering the best rates, banks are able to keep their account holders' business, and ensure a positive experience to promote future business.
Do you lose equity when you refinance? Yes, you can lose equity when you refinance if you use part of your loan amount to pay closing costs. But you'll regain the equity as you repay the loan amount and as the value of your home increases.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
So when does it make sense to refinance? The typical should-I-refinance-my-mortgage rule of thumb is that if you can reduce your current interest rate by 1% or more, it might make sense because of the money you'll save. Refinancing to a lower interest rate also allows you to build equity in your home more quickly.
You can take equity out of your home in a few ways. They include home equity loans, home equity lines of credit (HELOCs) and cash-out refinances, each of which have benefits and drawbacks. Home equity loan: This is a second mortgage for a fixed amount, at a fixed interest rate, to be repaid over a set period.
When you refinance the mortgage on your house, you're essentially trading in your current mortgage for a newer one, often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
What are refinance closing costs? Closing costs are lender fees and third-party fees you pay when getting a mortgage. You have to pay these on a refinance, just like you did on your original mortgage. Closing costs aren't a set amount, though.
It is typically included in the total loan amount to avoid any upfront, out of pocket costs. Expect to pay around 1-1.5% of your principal balance to make up these charges. So, if you have a principal balance of $250,000, expect to pay around $2,500-$3,750.
That is what a mortgage is — you pay for the use of someone else's money. No enslavement is involved. If you follow Ramsey's advice and pay off your mortgage quickly, it does provide a feeling of security, but this is an emotional benefit that you get by giving up financial benefits.
Ramsey suggests avoiding 30-year mortgages and instead opting to either pay cash for a house or take out a 15-year mortgage loan. There are a few problems with this advice. First, there's a huge opportunity cost to doing this.
A Critical Number For Homebuyers
One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn't be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio.