Refinance Your Mortgage
Refinancing your mortgage can save you a small fortune; assess all your options before making a commitment.
Reasons to Refinance
Since interest accounts for a large part of your monthly payment, refinancing is a good financial decision when interest rates fall. The general rule is to refinance if you can save at least 2% in interest, though this number depends on your monthly payment. For a homeowner with a $250,000 balance, an interest reduction of just 1% can lower monthly payments and reduce long-term interest expenses by thousands of dollars.
Another reason to refinance is to consolidate outstanding debts, such as rolling a first and second mortgage into one. You may consider refinancing in order to switch from an adjustable-rate mortgage to a fixed-rate mortgage, or to take advantage of home equity.
How to Refinance
Look for lenders offering low interest rates, fixed-rate mortgages, and flexible terms, such as early payoff without penalty. Speak with your current lender, as they may work with you to achieve more favorable terms. Be sure to look for any hidden fees and check with a mortgage broker to cover all your bases. Refinancing to a shorter-term mortgage will also help save you money over time, but your monthly payments will increase.
The Cost of Refinancing
- Loan application fee: For most lenders, the fee to apply for refinancing will vary from $250 to $500.
- Lender closing fee: As with first mortgages, lenders charge $700-$800 to refinance.
- Title check and/or title insurance: Title checks and insurance are not common practice in Costa Rica, but can help save you future headaches. Have your lawyer check the National Registry and verify that the home title shows no liens or other problems. If you purchase title insurance, which costs about 1.25% of the home price, be sure it comes with an airtight title guarantee.
- Document preparation: Be prepared to pay $200+ for the service.
Home Equity Loans
A home equity loan allows you to borrow against the value of your home, using the property as collateral. In general, home equity loans carry a term of 15 years or less. A home equity line of credit, or HELOC, also uses your home as collateral. Instead of disbursing a lump sum, a HELOC extends a line of credit, similar to a checkbook, to draw from as necessary.
Home equity loans are often easier to obtain than a second mortgage, and you are able to spend the money on whatever you choose. Additionally, depending on your circumstances, interest paid may be deductible. However, keep in mind that if you default on a home equity loan, you put your home ownership at risk. Also, if the value of your home decreases, you may owe more than it's worth.
When to Refinance an Adjustable-rate Mortgage (ARM)
Adjustable-rate mortgages, which tie interest rates to a fluctuating index, are common in Costa Rica. You may enter a loan at a low interest rate, but as the market recovers, this number could increase, causing your monthly payments to jump. A good time to refinance your ARM is when interest rates fall (1-2%), or when you can qualify for a low-interest fixed mortgage.
A reverse mortgage allows a homeowner to convert home equity into cash. The difference between a reverse mortgage and a home equity loan is that in a reverse mortgage, you are not required to pay back the loan amount until you no longer use the home as your primary residence, or until you no longer meet the mortgage requirements. Additionally, a reverse mortgage does not depend on your current income or debts; it depends on your age, current interest rates, and the appraised value of your home.