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How Does Refinancing Benefit The Bank

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Why Do Mortgage Companies Want You To Refinance So Badly

Net Bank 0 5% Refinance Can Get Benefits?

If you already have a mortgage, theres a good chance you receive junk mail on a regular basis urging you to refinance.

You may receive solicitations from both your current bank/loan servicer and from a competing lender or mortgage broker looking to acquire your business.

But why do they want you to refinance your mortgage so badly? Whats in it for them, especially if they already originated your mortgage and get paid interest each month?

Wouldnt it be in their best interest to hold onto your mortgage and continue to earn a decent rate of return, rather than give you a new low rate.

How Mortgage Refinancing Can Help The Economy Recover

Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

The mortgage industry had a pretty good start to the year as rates fell and refinancing activity tripled compared to early 2019. However, as reported cases of COVID-19 surged throughout the United States in March, the economy came to a screeching halt.

Claims for unemployment insurance skyrocketed to more than 16 million over a three-week period. To support the economy, Congress passed an initial $2 trillion disaster relief bill, with additional relief packages in the works. Some of the help includes mortgage relief programs for struggling homeowners.

The Federal Reserve has also responded aggressively, announcing various measures to assist the financial markets, including the mortgage market. The Feds purchases of mortgage-backed securities led to a further decrease in mortgage interest rates to the lowest level in history.

The Fed, by guaranteeing liquidity in the financial markets, is trying to buoy all sectors of the economy, including consumers. There is past evidence that the Feds interventions can work. The mortgage sector, in particular, provides a key transmission mechanism for Fed policy to impact the economy through consumer spending.

To Take Cash Out For Investing

Even when the stock market isn’t rocky, this is not a generally good idea. The problem with cash is that it is too easy to spend. If you are disciplined and will truly use the extra money to investor to build your emergency fundthis can be a good option. However, paying down a mortgage at 4% per year can be a better deal than plunking your cash into a CD that earns 2% every year. Make sure you are a savvy investor who understands both the risks and potential upside before playing with the equity in your home.

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Whats The Best Way To Refinance A 30 Year Mortgage

For example, you might want to refinance a 30-year home loan into a 15-year home loan that comes with higher monthly payments but a lower interest rate. Youd have the loan paid off in 15 fewer years. It might make sense to consolidate multiple other loans into a single loan if you can get a lower interest rate than what youre currently paying.

Lock In Your Interest Rate

What Does It Mean To Refinance My Car

Once youre approved for your refinance, most mortgage lenders allow you to lock in your interest rate. With a locked rate, even if market rates rise before you close on the loan, your rate will stay the same. When you lock in your rate, you can start planning your monthly budget because youll have a good sense of how much your payments will be.

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Pay Off Credit Card Debt

Paying less interest on consumer debt, such as credit cards and personal loans, is also a good way to increase long-term savings. But when people think about refinancing to reduce interest on consumer debt, they often think about doing a cash-out refinance and using the cash to pay off their debt.

Is this actually one of the best reasons to refinance? Honestly, it can also be one of the worst. It really depends on you.

  • Will you reduce your home equity by cashing out, pay off your high-interest debt, then get back into consumer debt again? If your financial situation is unstable, you dont have a multi-month emergency fund or you dont have self-discipline, you might end up with more debt than you started with. Bad luck or bad behavior can mess up this strategy.
  • Alternatively, will you never get back into consumer debt again and enjoy the interest savings by paying off your past mistakes at the much lower rate you can get on a new mortgage instead of the high rate youre paying now?

If youre carrying a lot of debt, its possible that your credit score is too low or your debt-to-income ratio is too high to qualify for a refinanceor that you wont get the best mortgage rate.

Make sure to look at the big picture, too. When you refinance debt at a lower interest rate and repay it over 15 or 30 years, youre not necessarily going to come out ahead. Attacking your debt with the snowball or avalanche method can be cheaper and more effective.

Remove Private Mortgage Insurance

With the exception of VA loans, as a borrower, you generally pay private mortgage insurance when you finance more than 80% of your homes value. In this situation, refinancing your mortgage may be an opportunity to remove this expense. This option is available to borrowers whose loan-to-value is less than 80% because of a reduced loan amount, an increased home value, or both.

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How Do You Calculate The Break

Use the step-by-step worksheet below to give you a ballpark estimate of the time it will take to recover your refinancing costs before you benefit from a lower mortgage rate. The example assumes a $200,000, 30-year fixed-rate mortgage at 5% and a current loan at 6%. The fees for the new loan are $2,500, paid in cash at closing.

  • Your current monthly mortgage payment
  • $1,199
  • Subtract your new monthly payment
  • – $1,073
  • This equals your monthly savings
  • $ 126
  • Subract your tax rate from 1
  • Multiply your monthly savings by your after-tax rate
  • 126 x 0.72
  • This equals your after-tax savings
  • $ 91
  • Total of your new loan’s fees and closing costs
  • $2,500
  • Divide total costs by your monthly after-tax savings
  • $2,500 / 91

    Lower Your Monthly Payment

    Does the bank benefit from extra mortgage payments?

    If mortgage rates happen to be lower than when they were when the home was originally financed, or if the homeowner decided upon an adjustable rate mortgage accompanied with a lower interest rate than the current rate, monthly payment will decrease. That is assuming the homeowner doesnt significantly shorten the loan term or cash out equity. When the home owner refinances, that means that monthly payments will be lowered and there will be extra money for those desired extras such as dinners, new clothes, or investing into a retirement or education fund. However, that is not the only reason to refinance, but it is possible for the homeowner to not have the funds to bring to the closing table at the end of the initial mortgage loan. Most of the time, all of the closing costs of the initial loan can be placed into a new loan, which means less money will come out of the homeowners pocket.

    There is a general rule in the industry that states that if the present interest rate is lower than the mortgage by two percentage points, refinancing is something to consider. Mortgage lending competition is starting to turn the industry toward a looser rule of thumb. Those homeowners with good credit can get special deals on their closing costs from various lenders. In these cases, refinancing in order to achieve lower interest may make sense. Here is a rate table highlighting current rates in your area.

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    How Often Can I Apply To Refinance My Mortgage

    While you should only ever refinance your home with good reason, there are no rules that limit how often you can refinance. Lenders, however, will typically set a limit. Keep in mind that your credit report will be pulled each time you refinance, and when this happens too frequently it can negatively affect your credit score. Since your credit score is also a factor in a lenders decision to approve your refinancing, a lower score would also lower your chances of approval.

    Pros And Cons Of Refinancing

    Refinancing has several potential benefits:

    • It can lower your monthly payments if you refinance into a loan with an interest rate that’s lower than your existing rate. This might happen because you qualify for a lower rate based on market conditions or an improved credit score, factors that weren’t in place the first time you borrowed. Lower interest rates typically result in significant savings over the life of the loan, especially with large or long-term loans.
    • You can extend repayment by increasing the term of the loan, but you’d potentially pay more in interest costs. You also can refinance into a shorter-term loan to pay it off sooner. For example, you might want to refinance a 30-year home loan into a 15-year home loan that comes with higher monthly payments but a lower interest rate. You’d have the loan paid off in 15 fewer years.
    • It might make sense to consolidate multiple other loans into a single loan if you can get a lower interest rate than what you’re currently paying. Having just one loan also makes it easier to keep track of payments.
    • You might prefer to switch to a loan at a fixed rate if you have a variable-rate loan that causes your monthly payments to fluctuate up and down as interest rates change. A fixed-rate loan offers protection if rates are currently low but are expected to rise, and it results in predictable monthly payments.

    But refinancing isn’t always a smart money move. Some drawbacks include:

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    Calculating Your Student Loan Interest Deduction

    The student loan interest deduction can reduce your taxable income by a maximum of $2,500. But if, for example, you only paid $1,000 in student loan interest last year, thats the most youll be able to deduct.

    You can quickly calculate your estimated student loan interest deduction by using the Student Loan Planner® interest deduction calculator. For sake of example, lets assume that you make $60,000 per year placing you in the 22% tax bracket for 2021 and you qualify to claim the full $2,500 deduction.

    Looking at the calculator results below, your federal tax savings would be $550. And if you live in a state that charges state income tax, you could save another $125 for a total tax savings of $675.

    If you also happen to be on an income-driven repayment plan , the student loan interest deduction could also reduce your monthly payments by virtue of lowering your MAGI.

    So, after accounting for an estimated $250 per year in lower IDR payments, the student loan interest deduction could net you $925 in total annual savings.

    How Money Is Made On A Home Loan

    How do you know when to refinance a mortgage?
    • Refinancing the loan
    • Selling the loan to an investor
    • Servicing the loan

    In summary, theres a lot of money to be made on mortgages at different steps along the way.

    First, loan officers and mortgage brokers can make commissions on a per loan basis when you refinance with them, regardless of whether they originated your prior loan.

    As noted, lenders can pay these salespeople directly even if you dont .

    Then when the loan is sold to an investor, the originating lender can earn whats called a service release premium, which may be represented as a percentage of the balance, say 1-2% of the loan amount.

    Finally, the company that services the loan can collect interest each month and make money as well.

    This explains why mortgages are so profitable and why everyone wants you to refinance!

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    Can You Refinance With Your Current Lender

    You can refinance through your current lender provided you qualify because financial institutions generally want to keep their customers.

    The latest Mortgage Monitor Report from Black Knight, a leading provider of public property data, shows that just 18% of homeowners in the first quarter of 2019 stayed with their current mortgage company after refinancing. The data cites a refinance market in which competition for your business is rising.

    Change Your Term Or Get A Different Mortgage

    Sometimes your needs change and you may have to pay off your mortgage faster or switch your mortgage type. If you get a bonus at work and want to put it towards your mortgage, consider refinancing into a term with more prepayment privileges, such as an open mortgage. Or, if interest rates have dropped, and you plan to stay in your home for the long haul, you can refinance to a fixed-rate mortgageOpens a popup. to lock in the lower rates.

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    Does Refinancing Affect My Credit

    Refinancing a mortgage can have some impact on your credit, but its usually minimal. This can occur for multiple reasons:

    • Mortgage lenders conduct a credit check to see if you qualify for a refinance, and this appears on your credit report. A single inquiry can shave up to five points off your score.
    • If you plan to apply for other types of debt, such as a car loan or credit card, in addition to refinancing, your credit score can also be affected.
    • When you refinance, youre closing one loan and opening another. Your credit history makes up 15 percent of your score, so having one loan close and then taking on a new one shortens the duration, impacting your score.

    In general, these effects will only be felt for a short period of time. If youre concerned about hurting your score while you compare refinance offers, try to shop for loans within a 45-day window. Any credit pulls related to your refinance in this timeframe will only be counted as one inquiry.

    Who Owns Your Home Loan

    How Cash-Out Refinancing Works with a VA Home Loan | Department of Veterans Affairs | theSITREP
    • Theres a lot of confusion with regard to ownership here
    • The bank that originally funded your mortgage may have nothing to do with it today
    • It could have been sold off years ago to another company
    • But if they still own/service it, they may not be keen to offer you a refinance
    • In that case, just look elsewhere for a new lender who actually stands to benefit

    Some of the confusion regarding whats in it for them might come from the fact that ownership of the loan is unclear.

    So even though say Bank of America closed your loan, it could have been sold to Wells Fargo or some other lesser-known loan servicer after the fact.

    That would explain Bank of Americas willingness to refinance your mortgage. They can make money on closing costs and make money by selling it off again or by servicing the loan.

    If they actually hold onto the mortgage the second time around, they may not want to refinance it again in the future.

    But if they sell it again, theres a good chance youll get an offer to refinance down the road. They may even urge to you cash out to make the loan even bigger and more profitable.

    If you consider a mortgage broker, who closes loans on behalf of a variety of lenders, they can refinance your mortgage over and over with different banks and always make a profit regardless of where the loan ends up.

    Theyll still earn their commission even if your interest rate goes up, down, or sideways.

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    Get A Comprehensive Plan For Your Student Loans

    Taxes are just one piece of the student loan puzzle youll want to consider when comparing refinancing options against other student loan repayment approaches like IDR or pursuing loan forgiveness.

    Your income, where you work and even your marital status could impact your tax and loan repayment strategies. For example, if qualify to join the Public Service Loan Forgiveness program, refinancing your federal loans could be a costly mistake.

    Speaking of refinancing federal loans, there are a number of other benefits that youd give up by doing so. For one, youll no longer qualify for federal forbearance or deferment. Youll no longer have the ability to join income-driven repayment plans either.

    Our Student Loan Planner® advisors are experts in helping borrowers create cost-saving strategies for student loans and income tax. Theyve helped thousands of borrowers build the right student loan plan to save more money. And theyd love to help you too. Book a student loan consultation today.

    Get a Student Loan Plan

    When Should You Refinance Your Personal Loan

    • A lender is offering an attractive rate of interest It is a good idea to refinance your personal loan if you feel that the interest rate charged by your existing lender is high and another lender is offering a good bargain on the interest rate. A lower interest rate would translate to you having to pay lower EMIs each month.
    • Your income has increased substantially If there is a significant increase in your monthly income, you may want to clear off your loan liabilities quickly. In such cases, you can choose to shorten the tenure of the loan by opting for a loan refinancing.
    • Your credit score has improved Many times lenders may offer you good deals on interest rates, processing fees, etc., if there has been an improvement in your credit or CIBIL score. In such cases, you can refinance your personal loan to avail better loan terms.
    • You wish to extend the repayment tenure on your loan Financing on your personal loan can be done when you wish to extend the repayment tenure on your loan so that your monthly EMI gets reduced.
    • Add or delete a co-applicant from the loan You can refinance your personal loan if you have to add or delete a co-applicant from your loan account. When you refinance your loan, you will have a new set of terms and conditions which is when you can add or delete a co-applicant.

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