Home Loans: When Should You Refinance Your Mortgage?

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If you are wondering if it is time to refinance your mortgage, the first thing you need to know is how much you can save and how much it will cost you to refinance.

Ideally, refinancing will save you money in both the short and long term by reducing your monthly payment and lowering your interest rate. However, you need to make sure that the savings are large enough so that you do not lose money after paying the closing costs of refinancing your mortgage.

Related: Check out your personalized refinance rates with a better mortgage

What is Mortgage Refinancing?

Mortgage refinancing is the replacement of your existing mortgage with a new mortgage with different terms. Usually one of these terms is a lower interest rate. Sometimes it is a different number of years to pay off. Less often it is a fixed instead of a variable interest rate or vice versa.

It can also be another type of loan, such as a conventional mortgage instead of a Federal Housing Administration (FHA) mortgage. Either way, the goal is to make your new mortgage more beneficial to you, such as lower monthly payments, than your existing mortgage.

When is a good time to refinance my mortgage?

Freddie Mac, a quasi-government agency that supports the mortgage market, said homeowners refinanced $ 2.6 trillion in mortgage debt last year thanks to record-low mortgage rates. Interest rates remain exceptionally low, so it’s worth analyzing the numbers and seeing how much you can save by refinancing now. Here are some signs that the time may be right.

  • You can cut your rate by at least 0.5%. There is no hard and fast rule that determines which drop in interest rates makes refinancing worthwhile. You need to calculate how much you would save based on each lender’s offer. But if current prices are lower than your existing price, it’s a good time to do the math and look for options. The typical homeowner who refinanced himself in 2020 has lowered his rate by 1.2 percentage points, according to Freddie Mac. Borrowers with very good to excellent credit ratings receive the best conditions.
  • You can pay off your mortgage faster. Refinancing into a shorter mortgage term can potentially save you more by combining a lower interest rate with fewer years of payment.

For example, if you borrowed $ 300,000 and your interest rate on a 30 year mortgage is 3.5%, your monthly payment will be $ 1,350 and you will be paying $ 185,000 in interest over 30 years.

If you refinance that amount into a 15 year loan at 2.1%, your new monthly payment will be $ 1,900 and you will pay $ 49,000 in interest over the next 15 years (plus the approximately $ 10,000 interest you paid in the first year to have). Your 30 year mortgage). You will save $ 126,000 in the long run, minus approximately $ 3,000 in closing costs.

The question is whether you can comfortably afford the higher monthly rate for the shorter mortgage: in this example, an additional $ 550 per month for 180 months.

  • You want a different type of mortgage. If you have a variable rate mortgage but prefer to set a fixed rate, this is a valid reason to refinance. If you originally took out an FHA loan because your credit wasn’t good, but now your score is much higher, you may want to refinance to a conventional loan to stop paying the FHA mortgage insurance premiums.
  • You want to withdraw part of the equity. Zillow said home values ​​were up 15% year over year in June. If you’ve been looking for a source of money to spend on home repairs, remodeling, or paying off high-yield debt, then paying off refinance can make sense if you can get your mortgage rate down.

Related: View your personalized refinance rates with a better mortgage

When is refinancing a bad idea?

It is tempting to want to refinance when you see how low current market rates are and how many others are. However, if you take your own circumstances into account, you may find that refinancing is not a good choice for you if any of these situations apply.

  • You significantly extend your loan term. Let’s say you have a 30 year mortgage. When you refinance into another 30 year loan, you put yourself in a situation where you pay a 35 year mortgage instead. Since you usually pay interest in the first few years of a 30-year loan, this type of refinancing can become expensive in the long run, even if it lowers your monthly rate in the short term.
  • When your break-even period is too long. If refinancing in a shorter term is out of the question, you should calculate your break-even point. Divide your closing costs by your monthly savings to see how long it will take to get ahead of the game by refinancing. For example, if you paid $ 3,000 to refinance a new 30-year mortgage that saves you $ 200 a month, it would take you 15 months to break even. If you were planning to sell your home in a year’s time, you would lose money refinancing it.
  • You don’t have a good plan on how you are going to use refi money to withdraw. Just because you can get a cash out refinance doesn’t mean you should. If your goal is to be mortgage free someday and your cash out refinance doesn’t significantly improve your finances or quality of life, you may want to just skip it.
  • You are unemployed. If you are unemployed, in most cases you will not be able to get refinancing. If you have an FHA or VA loan, you can still qualify for a streamlined refinance. If you are struggling to make payments on your conventional loan, you can qualify for a loan modification. However, without a stable source of income, you will likely not be able to refinance your traditional loan.

How do I refinance my mortgage?

Refinancing will likely feel easy since this is not your first time applying for a mortgage. You already know how the process will play out.

However, you don’t have to stick with your current lender. You can and should look around and obtain at least three offers. It makes sense to go for the option that will save you the most money.

Something that may have changed since your last mortgage application is that many lenders have moved their processes more online. You may be able to avoid paper documents by uploading the information requested by the lender through a secure online portal. You may even be able to sign your graduation papers online and have them certified by a remote notary, depending on where you live and how your lender is doing things.

What to Expect When Refinancing

After submitting your application, you will need to provide the lender with documents such as recent bank statements, tax returns, W-2s, and pay slips that prove that you can repay the new loan. Then you will wait.

In June, the average time to complete a refinance was 48 days, according to ICE Mortgage Technology.

interest charges

At some point in the refinancing process you will need to lock your interest rate. Your lender should be able to tell you how long you can expect to close your loan based on current company processing times.

You want to make sure your installment lock lasts long enough to get you through the deal. You will likely want to lock your interest rate early in the application process to eliminate the risk of an interest rate hike that would affect your decision to refinance.

Additional fees

Refinancing typically costs less than 1.3% of the loan amount, including taxes, according to ClosingCorp, a company that conducts cost analysis on real estate deals. The average closing cost for a refinance for a single family home in 2020 was $ 3,398 including tax.

You can expect these fees when refinancing:

  • Registration fee
  • Lending fee
  • Credit Report Fee
  • Points to buy down your prize (optional)
  • House valuation fee
  • Pest inspection fee
  • Property transfer taxes (if applicable in your jurisdiction)
  • Title search and title insurance fee of the lender
  • Land surveying (sometimes)
  • Escrow / Closure Service Fee
  • Notary fee

If the numbers are in your favor, a refinance can be a great way to save money. While the process can have its administrative headaches, it ends up being worth the wait (and work).

Related: View your personalized refinance rates with a better mortgage

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