No Cost Mortgages in Burlington VT - While some in the mainstream press still like to say "you need a two percent drop in mortgage interest rates before you should refinance", I say there are simply too many variables to throw out blanket statements like that. How much are the closing costs? How long do you plan on owning your home? What is the loan size? Do they even understand No Cost Mortgages? With higher loan amounts, you would need less of a rate improvement for the refinance to make sense. While you may need a two percent rate drop with a $100,000 loan, lowering your rate by only 0.750% might be all you need with a loan amount of $300,000 or more. And with No Cost Mortgages, perhaps only an eighth or a quarter-point drop would motivate you to refinance your home loan.
Of course there are many reasons to refinance your current mortgage. Maybe you need cash out for debt consolidation or for home improvement. Do you currently have mortgage insurance that could be reduced or dropped altogether? With the current low rates, maybe you can take some cash out AND lower your monthly payment. Perhaps you have only one year left on your Adjustable Rate Mortgage, or you want to get out of that Option ARM. In these cases, the rate is not the sole deciding factor. Only for the "Rate & Term" refinance, where you are simply refinancing to lower your rate or to reduce your term, does it really come down to the new rate and its corresponding costs.
To determine if the refinance makes sense, calculate the number of months to break even. Simply take the total cost of the refinance and divide by the monthly savings. With a refinance costing $2400, for example, a $200 monthly savings would result in a twelve-month break-even period. Then consider how many more months you plan on being in your home AND loan. In this case, if your outlook is longer than the break-even period, within reason, then it makes sense to refinance.
Oh, the Uncertainty! We all know the future is uncertain. Imagine spending $2400 on a refinance only to sell your home or to refinance again within the next year. Do you know how much longer you will be in your home? What happens if rates drop again? What if the dollar continues to weaken? Should you take maximum cash out now while you still have a chance? What about gold? WHAT SHOULD I DO? The answers to these questions require fortune tellers and crystal balls. As you can see, it can get a bit overwhelming.
When In Doubt, Save Your cash. No Cost Mortgages are the way to go if you have any doubts at all about your future home plans or about the direction of interest rates. Keep in mind, there really is no such thing as a loan with no costs. Instead of "No Cost Mortgages", perhaps they should be called "No Closing Costs, in Lieu of Higher Rate" Mortgages. The costs exist - the question is how to pay for them. For No Cost Mortgages, the rate is slightly higher compared to a typical mortgage where you pay the closing costs yourself. Lenders pay higher yields on loans with higher rates, so the closing costs are covered in exchange for the higher rate. How much higher for No Cost Mortgages? Well, the larger your loan amount, the better this works. Let's see how the numbers shape up on that $300,000 loan with a No Cost refinance.
Let's say you can lock in a No Cost rate of 5.00%. In this case, your payment would drop from $1727 to $1610, a $117 monthly improvement. While less than the $162 monthly savings at 4.750%, you would not have to pay the $2400 in closing costs. But while the payment improvement is less, the payback period is much better - in fact for No Cost Mortgages, the pay-back period is IMMEDIATE since you would pay no closing costs. Which way is better? Well, would you pay $2400 to save an additional $45/month for only as long as you have your mortgage? That's a 53-month break-even period. So if you keep your mortgage for at least four years and five months, you would be better off paying the costs and going with the lower rate. But no one knows what the future will bring. Since there is no pre-payment penalty with No Cost Mortgages, if rates go down again, you could simply refinance again at no cost.
When is the Right Time for No Cost Mortgages? It is easy to determine if a No Cost home loan makes sense. There are no closing costs, and the payback period is immediate, so it simply comes down to comparing the new no-cost rate to your current rate. If the no-cost rate is lower, you should look into refinancing. It is really that simple. Mortgage rates are still at all-time lows - some say artificially low. If your current rate is even in the 5's, you should look into lowering your rate. No Cost Mortgages may or may not be right for you. Every situation is different. Whether it's a no cost, low cost, no point, or a loan with points, an experienced loan officer can help you determine your best refinance options.
Ronald Borch is a loan officer with WJ Bradley Mortgage Capital Corp, located in South Burlington, VT.
Ron is your guide to USDA Rural Development Housing Loans, FHA Purchase & Refinance, FHA 203k Rehab loans, VA Purchase & IRRRL, and conforming purchase and refinances in the state of Vermont.
Reach Ron at 802-233-0623 or RBorch@gmail.com
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