What Is Mortgage Refinancing?
A mortgage refinance replaces your current home loan with a new one. You’re re-financing it. Basically, you are revising your original loan so you can reduce the interest rate, cut monthly payments, or tap into your home’s equity. There are other good reasons why homeowners are refinancing their mortgage. Let’s dig into those reasons in more detail.
Why Refinance Your Mortgage?
Lock in that lower interest rate – Refinancing your mortgage at a lower interest rate can allow for the same thing on a bigger scale. So when at some point during your 15-year or 30-year mortgage a better interest rate than your original one becomes available, it’s only wise to refinance your mortgage because it will lessen your monthly mortgage payment.
Tap your home equity – When you need cash, your home equity can be an excellent source of funds. Cash-out refinancing is one of the ways to tap home equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. People often get a cash-out refinance and a lower interest rate at the same time.
Reduce your loan term – When your goal is to become debt-free faster, refinancing your mortgage can help you reduce your loan term. The sooner you pay off your home, the sooner you’re keeping every bit of income you earn to yourself. The one disadvantage is that your monthly payments usually go up but, you will pay less interest rate over the life of the loan. Plus, if you get a lower interest rate, you can pay more toward your principal each month.
Get rid of your private mortgage insurance (PMI) – If you put less than 20% of the purchase price when you bought your home, then your lender has required you to pay for PMI. PMI is one of the costs of homeownership. Homeowners pay this monthly on top of their mortgage payment. So, if you’re looking into refinancing and your new loan would be 80% or less of your home’s current appraised value, ask about having your PMI canceled.
Switch from an adjustable to a fixed-rate loan – Interest rate on adjustable-rate mortgages is unpredictable. The interest rate can be low in the first year and can go up over time. Fixed-rate loans stay the same so if you prefer steady payments, you can refinance your way out of ARM. Refinancing from an ARM to a fixed-rate loan provides financial stability.
When is the Right Time to Refinance Your Mortgage?
Before you think about refinancing your mortgage, take a careful look at your financial situation. How much money will you save by refinancing? Refinancing can cost between 2% and 5% of a loan’s principal and requires an appraisal, title search, and application fees. It’s important to know whether refinancing is a wise financial decision.
Another question to ask yourself is how long do you plan to continue living in your house? If you are not planning to live in your house for more than a few years, the cost of refinancing may negate any of the potential savings. It’s better to just keep your mortgage the way it is.
If refinancing is still your best option, the right time to refinance your mortgage is when you can make your current mortgage better with a new interest rate. With current mortgage rates on the decline, it may be a great time to look for the best refinance rates that will save you money on your mortgage.
How to Get the Best Refinance Rate
Do the math – Before you shop for the best refinance rates, play with the numbers using a mortgage refinance calculator. Using a refinance calculator can help you shop for the best mortgage because it will help you assess your new interest rate and your new loan. It will also show your refinance break-even point.
Shop around for the best rates – To get the best refinance rate you’ll need to do a little research and some comparison shopping. Get a Loan Estimate from each potential lender. A Loan Estimate is a document that details the loan terms, projected payments, estimated closing costs, and other fees. Once your submit your information to potential lenders, you should receive the estimate in a few days. Once you receive them, compare the loan details from each lender and decide which one has the best rate.
Make sure your credit score is good – Your credit score plays a role in the interest rates you’re offered much like when you obtained your original loan. The higher the score, the lower the rate. So if you see your credit score climb since you got your original loan, you have the advantage of getting a lower interest rate.
Stay away from debts – Lenders are not only looking at your credit score. They also want to know if you aren’t burdened by too much debt. They check your debt-to-income ratio, or DTI, which is simply the percentage of your gross income that your debt payments will eat up. A good rule of thumb is to keep your DTI ratio to 28/36. The 28/36 rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses; it should spend no more than 36% on total debt service — those include student loans, car payments, and minimum payments on your credit card balances, as well as your potential mortgage.
How Much Does It Cost To Refinance Your Mortgage
Refinancing is similar to buying a home, there are application fees, home appraisal fees, attorney’s fees, survey fees, title searches — the list of things you may pay for to refinance will probably cost at least a few thousand dollars.
Because closing costs and fees to pay to refinance your mortgage are not exactly cheap, be sure to decide whether it makes the most sense to pay cash at closing or add them to your loan. If your goal is to save money, you definitely don’t want to refinance if it’s going to cost you more.
The big thing to consider is your closing costs. Your closing costs could be somewhere around 2–6% of the overall amount you’re borrowing. Compare your closing costs to how much your refinance will save you over time. If your closing costs will cost you more than you’ll save, then refinancing is not the best thing to do.
How to Refinance Your Mortgage
Once you’ve decided you’re ready to refinance your mortgage, here are the steps to tackle the refinance process:
If you’re ready to refinance or just want to talk to someone who can help you decide if it’s the right move for you, then contact us and we will connect you with trusted lenders and loan officers who are there to help you work through your goals
Due to the coronavirus pandemic, the Mortgage Bank Association reported that the Refinance Index increased to the highest level since April 2009. Refinancing may be a bit of a challenge because of the large volume of requests to refinance. If you can’t pay your current home loan, the first and best move you can make to protect your home and your financial health is to contact your mortgage lender as soon as possible. There are ways you can protect your home during this COVID-19 pandemic.
Get this free booklet for more information about programs or options available to you if you are facing financial hardship due to the COVID-19 crisis.