If you’re like the majority of homeowners in the U.S., you make your mortgage payment monthly, with the idea that someday you’ll own your home outright. As you continue to pay off your total balance, your home equity rises and you become one step closer to owning your home.
The downside is, mortgages, like any other type of loan or line of credit, come with interest. That means you pay the total balance owed, plus the annual interest rate applied to your mortgage loan. Additionally, your lender also assigns specific payment schedules and other terms to your loan, some of which you might find favorable, others not so much. That’s where refinancing comes in.
What does refinancing mean? In the most basic sense, refinancing is a way to alter your mortgage terms by replacing your old mortgage with a new one that is better fit for your financial situation. A lower interest rate, more manageable payment schedule, a shorter loan term, or consolidating multiple mortgages are just a few of the ways refinancing your mortgage can be beneficial.
In this post, we’ll answer some important questions, such as, “what does refinancing mean?”, “when is refinancing a good idea?”, and “what are the pros and cons of refinancing?”. For fast answers on the subject of refinancing, use the links below to navigate ahead. Or, read end-to-end for a complete overview.
What is Refinancing?
Pros and Cons of Refinancing
What is Refinancing?
Refinancing, also known as “ a refi”, is a way for borrowers to restructure their mortgage, auto, personal, or other loan type for more favorable terms. During the mortgage refinance process, you might make one or several of the following adjustments to your mortgage:
Secure a lower interest rate
Switch to a longer or shorter loan term
Change from an adjustable-rate mortgage to a fixed-rate mortgage
Cash-out some of the equity you’ve built in your home
Consolidate multiple mortgages into a single payment
Sounds pretty good, right? It can be. Anytime you’re dealing with changes to a loan, it’s a good idea to read the fine print, take a close look at the pros and cons, and really understand what happens when you refinance.
What happens when you refinance?
When you refinance a loan, whether it be a mortgage, auto, or some other line of credit, you’ll need to start by paying off your original loan, which you can do with the help of your refinanced one, after you’ve been approved for a new loan, of course. Once you have settled up with your original lender, you’ll be left to pay off your new loan according to the payment terms outlined by your new lender.
Am I eligible for a refinance?
Think back to when you applied for your original mortgage — you likely filled out an application, they checked your credit score and lending history, assessed the property, and proposed a mortgage option for you based on your financial profile.
The process for refinancing is essentially the same. The new lender will consider your credit score, lending history, the value of your home, how much you want to borrow, and your income and assets before approving you for a new mortgage. Ideally, your finances would be in a shinier state than when you got your first mortgage, and you’ll likely be asking to borrow less money, therefore, a refinanced mortgage could offer you a more agreeable interest rate or loan terms.
When it comes to determining eligibility, it’s ultimately up to your lender to decide. According to Rocket Mortgage, homeowners looking to refinance should consider the following criteria before applying:
How long you’ve owned the house: Generally, you must have the title for a minimum of six months.
Your credit score: Your lender is ultimately the one who decides what they consider to be a “creditworthy” score, but there are some basic benchmarks you can use to help. A good credit score is considered 670 and higher on the FICO scale and 660 and higher on the VantageScore model.
Your current home equity: The general rule of thumb is that homeowners should have a minimum of 20 percent home equity in order to qualify for a refinance. 20 percent is also the minimum equity needed if you want to get rid of your mortgage insurance.
Other debts: In addition to assessing your credit score and other financial metrics, lenders will typically consider your other debt obligations before approving you for a new loan. Take a look at how you’re managing your current debts before applying for a refinanced mortgage.
Closing costs: When you close on a loan, you’re typically responsible for paying closing costs, including, appraisal fees, title fees, credit check fees, and more. Before applying for a refinance, take a look at your monthly budget to determine whether or not you can afford to pay the closing costs on a new loan. ProTip: Use our budgeting calculator to help!
Financial details: Part of the loan application process involves lenders taking a look at the greater picture of your finances, such as, your income and assets, homeowner’s insurance, title insurance, etc. Make sure you have this information handy to make the refinance process more efficient if you choose to proceed.
Types of mortgage refinancing
Now that you know the basic refinance definition, it’s time to dig a little deeper. It probably comes as no surprise to you, but it’s important to know that there’s no one-size-fits-all refinance. There are several different types of mortgage refinancing that depend on the outcome that you’re looking for.
Rate-and-term refinancing: This type of refinance only adjusts the rate and/or term length of the loan.
Cash-out refinancing: Allows borrowers to adjust the mortgage length and/or term, plus, it increases the amount of the loan. Cash-out refinances are generally used when homeowners want to borrow extra money to make home improvements or other big purchases.
Cash-in refinancing: This is basically the opposite of a cash-out refinance. With cash-in refinancing, you’d pay down more of the principal balance to decrease your loan amount, generally in exchange for a lower mortgage rate.
Note: Another reason some homeowners choose to refinance is to consolidate their debts; instead of making mortgage payments to separate lenders for multiple mortgages, you could refinance and lump all of your mortgages into a single loan.
Pros and Cons of Refinancing
Like any financial decision you’ll make in your lifetime, it’s a good idea to consider the pros and cons of your decision. With that said, let’s take a look at some of the benefits and risks associated with refinancing.
The advantages of refinancing are simple: making your mortgage terms work better for you. That could mean getting a lower interest rate, which would translate to interest savings, you could secure more manageable monthly payments which might work better for your budget, or you could adjust your loan terms to better suit your lifestyle and financial situation.
Penalty fees: Some mortgage lenders impose penalty fees if you pay off your mortgage before the term ends. These fees vary by lender, but could potentially add up to thousands of dollars.
Closing costs: As we mentioned, there are several closing costs associated with refinancing. Keep these costs in mind as you weigh your options.
Longer loan length: Should you choose to extend the length of your loan term in favor of lower monthly payments or some other benefit, you’ll be stuck paying off your mortgage longer, which could be problematic for certain homeowners.
So far, we’ve answered “what is refinancing?”, “what happens when you refinance?”, “what are the types of refinancing?”, and “what are the pros and cons of refinancing?”. If you still have some lingering questions, we’re here to help by answering these refinancing FAQs.
Does refinancing hurt your credit?
One of the costs of refinancing is that it may impact your credit temporarily. When you apply for a loan, your lender will check your credit score , conducting something that’s called a hard credit inquiry. Hard credit inquiries can drop your credit score by a few points, but it won’t impact your score forever.
Bottom line: Refinancing can hurt your credit score temporarily. However, if the savings and benefits are worth it, a quick dip in your score probably isn’t something to be too concerned about, especially if your credit is in good standing.
Is refinancing a good idea?
It depends. Everyone’s financial situation is different, so it’s important to take a close look at your current situation, assess whether you’re eligible for refinancing, and really understand what it means to refinance.
When is refinancing worth it?
Refinancing may be worth your while if you can qualify for a lower interest rate or secure better loan terms than you started with. Some financial experts say that refinancing can be a good idea if you can lower your interest rate by at least two percent.
How do I calculate the break-even period?
Something to consider when you’re refinancing your mortgage is how long it will take you to reap the benefits of your new loan after considering closing costs. Use the worksheet below to help you anticipate your break-even period.
There are plenty of nuances to know about refinancing. As you consider whether it’s the right move for you, let’s recap some important points:
What does it mean to refinance?: Refinancing a loan is when you pay off your original loan and take out a new loan, ideally with more favorable loan terms like a lower interest rate or more manageable payment schedule.
When is it a good idea to refinance?: That depends on your unique financial situation. Refinancing can help you save money on interest and offer other important benefits, but it’s important to consider the benefits and risks in the context of your own finances.
To learn more about where your finances stand, check out the Mint app to set financial goals, glean insight into your financial health, and more.
The post What Does Refinancing Mean? Refinance Your Mortgage appeared first on MintLife Blog.
Original Source: blog.mint.com
Money is a fundamental necessity; we need money for food, for clothing, for education, for healthcare and for sustaining our lifestyles. To make money, we need to put in the dedication and the hard work into our jobs.
We are all so actively engrossed in the process of making more money that we often put other important things like our passions, hobbies, families and friends, in the backseat. Aren’t all those things the very reason we were earning money for, in the first place? What if people could have a secondary, or passive source of income that didn’t require active involvement?
For most people, the concept of passive income has an element of mystery and intrigue to it. For others, it's the way of life. In simple words, passive income is the money earned on an investment — or work completed in the past — that requires little work or no active involvement to generate ongoing revenue.
Active income, on the other hand, is the hard-earned money that one earns in exchange for performing a service. This includes wages, tips, salaries, commissions, and income from freelance projects.
There are many ways to earn a passive income. Display advertising, ebooks, e-courses, YouTube channels, etc. But they require skill, and not everyone is skilled for the same. One surest way of earning a passive income is from wealth, which can be taught using skills and systems.
Having a source of passive income can completely turn things around for people. Think about it — if you could put in some upfront work into a project that would generate income for years to come, would you pass up on that opportunity? If you are inclined to put in the early efforts, passive income could prove to be significantly beneficial.
It could help sustain your lifestyle, and it could give you that extra money you need to buy something you have always wanted. Most importantly, it could give you a financial cushion to fall back on in times of need, such as the present economic downfall due to the COVID-19 pandemic.
You may consider investing your existing wealth in various assets like equity, debt, real estate, gold, and insurance in a way so that you make sure that there is a cash inflow of certain amounts at regular intervals in the form of passive income.
Investing your existing wealth into various assets according to your needs and risk-taking ability and making money out of it is easier than trying to learn a new skill altogether.
However, generating a passive income from existing wealth cannot be achieved through a shortcut. It still requires involvement and hard work in the initial stages, but if you are willing to make the effort, you could end up making money while you sleep. And that’s the goal of passive income.
Ways to earn passivelyInterest earned from investments/lending
Earning interest on investments is one of the most common yet effective forms of earning passively. Most people open Fixed Deposits and start contributing to a retirement fund early on in their careers. The interest earned on investments can add up to a significant amount in the long run.
Contribution in PPF, EPF, NPS, etc. all are classified as long term investing with a goal of regular savings and future income from interest earned. Even lending money just like banks to other institutions in forms of debentures fetches higher rates of return versus the banks.
Also Read14 passive income ideas for earning money as you sleepRental income
While most people invest in property for the outcome of appreciation of property, it is an outcome they can't control. They often forget that making money from rental income is a great way to create monthly passive income.
Although investing in property presents its own challenges, like finding a tenant who can pay the required rent and maintaining the property, it can still be a strong source of passive income and worth the initial effort. One could pull in some significant money in the form of rent money. Investing in stock markets
Dividend stocks are one of the easiest ways for people to create a passive income stream. As public companies generate profits, investors earn a portion of those profits in the form of dividends. Investors can then decide whether to keep the cash or reinvest the money in additional shares.
This style of investments gives investors long term growth along with annual dividends from the companies they have already invested in. Many people nearing retirement like to buy PSU companies that are known for paying high dividends but are weaker in comparative growth.
Also ReadThe science of stock trading during volatile times
Over the last five years, investing in gold has also generated passive income for a lot of people. Investing in gold bonds is a new style of investing, which can fetch from 2.5-2.75 percent yearly interest income, which is at par with the bank interest on many national banks on date.
This is a unique way to not only enjoy the benefits of investing in gold digitally but also getting interest to do so.
Many people consider using the traditional style of investing in insurances as a part of their tax deduction and buy insurance plans that start paying yearly income back to them after a certain time. The most interesting thing about this is that the investment is tax-free, and so is the income received from it. Hence, this arrangement is very lucrative for the individual, especially in the high tax bracket.
Passive versus active incomeUnlike passive income which takes years to build, an active income ensures that you have a consistent income stream and allows you to make money in a short and defined period of time i.e. your salary. Often, an active source of income is necessary in order to lay the foundation for a passive source of income.
For instance, to earn passively from investments, you need to first make enough money to invest. However, a lot of people still look at active income as the only option and are oblivious to the notion of earning passively. In this day and age, people should be looking at both revenue streams in combination.
There comes a point in life when one starts feeling the financial pressure of balancing savings and expenditure. If implemented correctly, passive income can certainly provide that extra stability that one may be looking to achieve.
(Edited by Saheli Sen Gupta)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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Courtesy Eric Rosenberg
When the Federal Reserve lowered interest rates in response to the COVID-19 pandemic, I jumped at the opportunity to save money by refinancing my mortgage.
While I was already focused on my mortgage and home costs, I decided the time was right to shop around for homeowners insurance to see if I could save money.
I found new homeowners insurance and earthquake insurance through Policygenius that offers comparable coverage at a lower cost.
Policygenius can help you compare homeowner’s insurance policies to find the right coverage for you, at the right price »
Earlier this year, the Federal Reserve lowered interest rates in response to the COVID-19 crisis, and mortgage rates quickly followed suit. My wife and I decided the time was right to join a large number of homeowners in locking in historically low interest rates. Then, we turned our attention to our homeowners insurance.
My original mortgage and homeowners insurance
When my wife and I bought our home in 2017, we signed up for a 30-year mortgage with a fixed 4.25% interest rate. That rate was very competitive at the time and we were happy with how the loan came together.See the rest of the story at Business Insider
I ran my taxes through Credit Karma Tax and H&R Block. Here’s how they compare on price, ease of use, and refunds.3 things to consider before switching to a new high-yield savings account as interest rates dropWhen to use a cashier’s check, and how to get one
Original Source: feedproxy.google.com
The average pet insurance policy premium in 2019 for dogs was $48.78 per month for dogs, and $29.16 per month for cats.
Accident-only policies are cheaper than accident and illness policies, according to data from the North American Pet Health Insurance Association.
Your pet’s breed can also influence your price for coverage, with pricing varying widely by a dog’s breed.
Get a pet insurance quote from PetPlan »
Most pet owners know just how expensive a trip to the vet can be, and how much a major health scare with your pet can cost. If you’re considering getting pet insurance, your monthly cost of pet insurance can vary widely.
There are a few factors that can change how much your pet insurance will cost, including the type of pet you have. In general, insurance for dogs is more expensive than insurance for cats. And, for dog owners, the cost can vary widely by breed. See the rest of the story at Business Insider
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Original Source: feedproxy.google.com
The mortgage industry (and interest rates) have a somewhat complicated relationship with the rest of the overall economy. Generally speaking, when the economy is doing very well, the Federal Reserve will start raising interest rates. This can help to try and ward off inflation which is not great for the economy. Conversely, when overall economic conditions are poor, the Federal Reserve will LOWER the interest rates, in an attempt to spur economic growth. Since the interest rates on most mortgage products are (directly or indirectly) tied to the overall Federal Reserve interest rate, these actions have a pretty significant impact on mortgage interest rates.
Mortgage rates can fluctuate daily or even hourly, so it’s good to have a basic idea of what you want to do and what might make you want to refinance. With mortgage rates at historic lows, let’s take a look at what that means and whether you should refinance while rates are low.
Mortgage rates are at historic lows
The mortgage market is a fairly complicated market with several different types of mortgages available. So when you hear that mortgage rates are at “historic lows”, it’s important to understand what type of mortgage is being talked about. Usually, the 30-year fixed mortgage is the loan product that is considered the “standard” mortgage. So if you hear about rates “dropping”, you’re usually hearing about the 30-year fixed. It is true that usually (but not always!) rates for different types of products rise and fall together.
(SEE ALSO: What is a “Good” interest rate?)
It was not uncommon in the 1970s or 1980s to see mortgage rates with double-digit interest rates. Since that time, interest rates have generally steadily dropped, to a low around 3.5% in 2012. Mortgage rates fluctuated in the 3-4% range for the next several years before rising to around 4.5% in 2018 and 2019.
The recent coronavirus pandemic has affected the housing market and sent rates on the 30-year fixed mortgage down under 3.5%, around the lowest those rates have ever been.
Should you refinance to a 30-year mortgage?
As the name implies, a 30-year fixed mortgage will lock in your interest rate for the duration of your loan. You’ll have 360 monthly payments, all of the same amount. The exact amount you pay will depend on the amount of your loan, the duration and the interest rate. You can use our Loan Repayment calculator to find out the exact amount of your monthly payment. Keep in mind that that monthly payment amount will not include your property taxes or home insurance. Your lender may require that you set up an escrow account, or else you’ll need to make sure to budget for those expenses on top of your monthly mortgage payment.
The 30-year fixed mortgage will usually give you your lowest monthly payment. In fact, even if you currently have a 30 year fixed mortgage, you will likely save on your monthly payment by refinancing now. That is because of 2 reasons – the rates are likely lower than when you first got your mortgage and because you’ve paid down your mortgage balance so the amount you’re refinancing is less.
Should you refinance to a 15 or 20-year mortgage?
Another option to consider when refinancing is to refinance to a 15 or 20-year mortgage. A mortgage with a shorter term (like 15 or 20 years) will usually have a lower interest rate than the 30-year fixed mortgage. However, because the shorter term means there are fewer payments, your payment may still go up.
If you’re currently on a 30-year mortgage, you’ll likely (but not always) find that the monthly payments on a 15 or 20-year mortgage will be higher. The good news is that your mortgage will be paid off 10 or 15 years sooner! Overall you’ll pay quite a bit less in interest.
An example of refinancing to a shorter-term mortgage
To illustrate the types of choices you have with refinance, let’s look at an example. Our fictional homeowner bought her house 5 years ago with a mortgage of $250,000, and took out a 30 year fixed mortgage. Her monthly principal and interest payments have been $1,267 per month, and after 60 payments, her mortgage balance is now $228,305.36 with 25 years remaining.
She’s looking to refinance with today’s low rates. We’ll say that her closing costs will make her new loan payoff amount $230,000. Again using our Loan Repayment Calculator, here are some options she could consider:
A 30 year fixed loan at 3.5% – monthly payments would be $1,033.
A 20 year fixed loan at 3% – monthly payments would be $1,276.
A 15 year fixed loan at 3% – monthly payments would be $1,588.
You can see that refinancing to another 30-year mortgage would drop her payments by $234 each month. That comes at a cost of adding 30 more years to the total time it takes to repay. With a 20 year loan, her payments only go up $9 per month but she shaves 5 years and tens of thousands of dollars of interest over the course of the loan. A 15-year loan would pay even less interest but at a cost of increasing the mortgage payment by $321 each month.
Of course, every situation is different but hopefully, this can serve as a guideline to help you as you make your own decisions about refinancing.
The case against refinancing
Even though mortgage rates are at historic lows, refinancing is not right for everyone. Here are a few cases where it might not make sense to refinance, even if today’s interest rates are lower than the rate on your current mortgage:
You’re not sure if you’ll be in your home long term. Refinancing does come with some upfront costs, and if you won’t be in your home long enough to pay them back, it might not make sense
Your credit score or financial situation has taken a recent hit
You want to take advantage of some of your home’s equity with a home equity line of credit.
You don’t have enough money to pay the upfront closing and other costs associated with a refinance. If this is the case, see if it might make sense to roll those costs into your new loan.
For even more information about the pros and cons of refinancing, check out our list of 8 refinancing tips
The post Should You Refinance Your Mortgage While Rates Are Low? appeared first on MintLife Blog.
Original Source: blog.mint.com