With the recent turmoil in the mortgage world, people have lots of questions about refinancing. There are times when borrowers need to consider paying money at the closing in order to complete the refinance. Can this be a good deal for the borrower? Let's consider a couple of situations and see how the math works out.
A married couple buys a home valued at $250,000 and finance it for 30 years with a 6.875 interest rate. At the time they only had a 5% down payment, so they are paying Private Mortgage Insurance of $136 monthly. A few years have gone by and they decide to refinance at 5.00% for 20 years. But here is the problem. Due to the decrease in property values, their home has declined. With the new value of $235,000 they would need a refinance loan of $187,900 in order to avoid paying private mortgage insurance. The loan they are considering, including closing costs, is $192,000.
If they pay the $4,100 at closing, their new loan payment will be $1241 compared to their previous payment of $1,560, a savings of $319, in addition to the $136 that they will be saving by not paying Private Mortgage Insurance. This brings the total monthly savings to $455. Over the course of the next 10 months the mortgage savings will allow them to recover their $4,100 cost.
Another reason to consider paying cash at closing is to avoid jumbo mortgage rates. Someone that is considering buying a home that is between $5,000 and $10,000 above the conforming loan limits could seem similar savings by paying the money at closing rather than financing it.
Every situation is different and every borrower has their own goals. Talk to your mortgage lender and find out if paying cash at closing is the best scenario for you.
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