- 5 Things to Consider Before Refinancing Your Mortgage
- YOU’LL PAY NEW LENDING COSTS
- YOU’RE NOT GUARANTEED TO SAVE MONEY
- YOU’LL BE RESETTING THE CLOCK ON YOUR MORTGAGE
- YOU COULD GET RID OF PRIVATE MORTGAGE INSURANCE
- YOU COULD USE YOUR REFI TO GET CASH
- 13 Things to Consider When Refinancing Your Mortgage
- 1. Why You Want to Refinance
- 2. The Value of Your Home
- 3. How Long You Plan to Stay in Your Home
- 4. Your Credit Score
- 5. Your Current Debt-to-Income Ratio
- 6. Your Current Income and Employment Status
- 7. The Interest Rate on the New Mortgage
- 8. The Type of Interest on the New Mortgage
- 9. How Long Do You Want to Be Paying Your Mortgage?
- 10. How the Mortgage Term Affects Your Total Payments
- 11. The Total Cost of Refinancing
- 12. Do You Have a Home Equity Loan?
- 13. Do You Want a Cash-Out Refinance?
- Trust Mid Penn Bank for Your Refinance
- Should I Refinance My Mortgage?
- What the New Lower Interest Rates Mean for You
- What Is Refinancing?
- How Does Refinancing Work?
- When To Refinance Your Mortgage
- 1. You Have An Adjustable Rate Mortgage (ARM)
- 2. The Length Of Your Mortgage Is Over 15 Years
- 3. You Have a High Interest Rate Loan
- 4. Your Second Mortgage Is More Than Half Of Your Income
- How Much Does It Cost To Refinance?
- Ready To Refinance?
- When To Refinance: 3 Steps to Deciding Whether to Refinance or Not
- 1. What do you stand to save by refinancing?
- 2. How long will you keep your home?
- 3. Will you — and your home — qualify to refinance?
- My view: When to refinance
- Where you should refinance
- Reali Loans
- Today’s mortgage refinance rates:
- How To Refinance Your Mortgage
- What is mortgage refinancing?
- The refinance clock is ticking
- Step 2: Check your credit score and history
- Step 3: Determine how much home equity you have
- Step 4: Shop multiple mortgage lenders
- Step 5: Be transparent about your finances
- Step 6: Prepare for the appraisal
- Step 7: Come to the closing with cash, if needed
- Step 8: Keep tabs on your loan
- Free up money each month
- Pay your home off faster
- Eliminate private mortgage insurance
- Tap your home’s equity
- Lock in a fixed-rate mortgage
- Refinancing isn’t free
- You may have a prepayment penalty
- Your total financing costs can increase
- Refinance vs. cash-out refinance: What’s the difference?
- Example of a no cash-out refinance (rate-and-term refinance)
- Example of a cash-out refinance
- Next steps: How to get the best refinance rate
- Learn more:
5 Things to Consider Before Refinancing Your Mortgage
Thinking about refinancing your mortgage? If so, you’re in good company. According to data compiled by the Mortgage Bankers Association, refinance applications accounted for about 60 percent of all mortgage activity in the first week of October, driven by low mortgage rates that have fallen since the spring to below 4 percent.
But don’t let mortgage rates alone determine your decision to refinance. Refinancing a mortgage involves paying off an existing loan and replacing it with a new one, and that may not be the right move for every homeowner. Consider these factors before you take action.
YOU’LL PAY NEW LENDING COSTS
Your refinancing costs will depend on the size of your loan and the change in your interest rate, but here are some of the not-so-hidden expenses you should expect to pay (prices estimates by LendingTree). You might pay them separately, or they could be rolled into the cost of the new loan.
Application Fee. This covers the costs of your lender processing your loan application. Cost: $75 to $300.
Appraisal Fee. An appraiser may assess the value of your home before your lender can determine your eligibility to refinance. Cost: $350 to $800.
Discount Points. Optional fees you pay if you want to lower the interest rate on your mortgage. Cost: Depending on how many points you buy, you’ll be charged 1 percent to 3 percent of the mortgage principal.
Document Preparation Fee. Typically, borrowers must pay a fee to the lawyer or title company that prepares the refinancing paperwork. Cost: $200 to $500.
Inspection Fees. In addition to a general home inspection, your lender may require you to get a termite or pest inspection. Cost: $300 to $850.
Loan Origination Fee. Your lender levies this charge to cover the costs of preparing your new home loan. Cost: 1 percent to 1.5 percent of the loan’s principal.
Title Search and Title Insurance Fees. Title insurance covers the risk to your mortgage lender in the event someone else claims ownership of your property.
However, if you purchased title insurance when you originally bought your home, you may be able to negotiate a lower fee if you use the same company — or if you can provide a copy of the original title insurance to your new title company. Cost: $700 to $900.
Recording Fees. The county or city you live in may charge a recording fee for processing the paperwork for public records. Cost: $25 to $500.
Because of the upfront costs involved with refinancing, whether it actually saves you money depends on many factors.
YOU’RE NOT GUARANTEED TO SAVE MONEY
Because of the upfront costs involved with refinancing, whether it actually saves you money depends on many factors, not the least of which is the interest rate cut you’re getting and how long you plan to stay in your home.
Let’s say you owe $250,000 on a 30-year fixed mortgage with a 4.8 percent interest rate for a home you bought in 2011. Now you have the opportunity to refinance to a new 30-year fixed mortgage with a rate of 3.6 percent, but you have to pay $6,000 in refinance fees. By refinancing, you’d cut your mortgage payments by $175 per month and break even in just 35 months. That’s pretty good.
However, if the mortgage you got in 2011 had an interest rate of 4 percent, you’d cut your mortgage payments by only $57 a month — in which case it would take you almost 9 years to break even. So unless you plan to stay in your home for another decade or so, refinancing wouldn’t actually save you much money. That’s why it’s important to crunch the numbers before you decide to refinance.
YOU’LL BE RESETTING THE CLOCK ON YOUR MORTGAGE
By refinancing, you’re restarting the timeline of your mortgage. Depending on how long you plan to own your home, this isn’t necessarily a negative, but it’s something to consider.
When you refinance, you could opt for a shorter mortgage and go from, say, a 30-year loan to a 15-year loan. You’d pay off your mortgage sooner and save money over the long haul.
The caveat? Your monthly mortgage payments would ly rise — perhaps by a lot — so you’d need to make sure the higher mortgage payment fits into your overall budget.
YOU COULD GET RID OF PRIVATE MORTGAGE INSURANCE
If you put less than 20 percent down on your home when you first got it, your lender ly required you to get private mortgage insurance (PMI) at a cost between 0.5 percent and 1.5 percent — or more — of your home loan.
However, if your home has risen in value since then and your new loan would be for 80 percent or less of your home’s worth (meaning you have at least 20 percent equity in your home), refinancing could do away with that pesky PMI.
YOU COULD USE YOUR REFI TO GET CASH
A cash-out refinance loan is simple: Instead of getting a new loan that covers the balance of your mortgage, you refinance for more than what you currently owe and then pocket the difference in cash.
Lenders generally let you borrow up to 80 percent of your home’s appraised value. Say your home is worth $400,000. A lender would let you take out a new loan for as much as $320,000.
If you currently owe $200,000 on your current mortgage, you could still take out the new loan for $320,000 (or less, depending on how much money you want to pocket), pay off the $200,000 you owe, and keep the additional $120,000.
Although you could use this money on whatever you’d , many people to use it on home improvements that will help increase the value of their home.
13 Things to Consider When Refinancing Your Mortgage
Refinancing your mortgage can be a way to lower your monthly payments and save money over the life of your home loan.
However, refinancing a home isn’t the right choice for every homeowner, as it doesn’t always lead to lower interest rates or reduced housing expenses.
If you are thinking about refinancing, several considerations will help you decide whether getting a new mortgage on your home is the best choice for you. Here’s what to think about before refinancing.
1. Why You Want to Refinance
When you refinance a home loan, your current mortgage is paid off, and a new loan replaces it. Usually, the new loan offers some benefit that the previous one didn’t. What that benefit is depends on your specific goals and needs. That’s why it’s a good idea to carefully consider your reasons for refinancing before you begin the process.
Common reasons for refinancing include getting a better interest rate on the loan, reducing the term of the loan, lowering monthly payments or accessing the home’s equity. Each reason has its pros and cons, so it is vital to make sure the pros outweigh the cons before you decide to go forward.
2. The Value of Your Home
One thing that determines whether or not your mortgage is eligible for refinancing is the current value of your home compared to the amount of the loan. The refinancing process typically involves an appraisal of your home, during which an independent party will visit your home and determine its market value.
The appraised value of your home can make or break a plan to refinance, as the loan-to-value ratio typically shouldn’t be more than 80 percent.
If your home’s value has fallen since you purchased it, you might not have enough equity built up to refinance, or you might have to bring cash to closing to make up the difference between the value of your home and the amount of the loan.
While conventional refinance mortgages usually require an appraisal of your home, not all do.
The streamline refinance program from the Federal Housing Administration (FHA) and the Interest Rate Reduction Refinance Loan from the Veterans Administration (VA) don’t require an appraisal.
If you are concerned that an appraisal won’t be in your favor, it can be worth your while to explore the refinancing options available from the FHA or VA, if you meet other eligibility requirements.
3. How Long You Plan to Stay in Your Home
The process of refinancing a home is similar to the process of getting a first mortgage. You’ll need to pay closing costs when you refinance. Depending on the interest rate reduction and how long you plan on living in the home, the closing costs might be more than the amount you end up saving.
It’s a good idea to think about the future before you refinance. While you might be unable to say for certain how long you’ll stay in your current home, it helps to have a ballpark figure so that you can determine whether or not you’ll be able to break even or save money by refinancing.
One way to find your break-even point is to divide the total cost of the refinance by your monthly savings. If you save $150 per month and the closing costs are $4,500, it will take about 30 months, or 2.5 years, before you start to save money on your home loan. If you plan on staying in your home for more than 2.
5 years, then the refinance might be worth it.
4. Your Credit Score
Your credit score can play a role in determining whether you’re approved to refinance and the interest rate you’re offered. The good news is that credit scores for refinances are typically slightly lower than the credit scores needed for purchase mortgages.
According to the Ellie Mae Origination Insight Report, 72 percent of purchase loans went to people who had credit scores above 700 while only 65 percent of people had scores higher than 700 for refinance loans in July 2018. Slightly more than 21 percent of refinance loans went to people with scores between 650 and 699.
Just over 25 percent of refinances were made to people with scores between 700 and 749, and just over 39 percent of refinance loans were made to people with scores over 750.
5. Your Current Debt-to-Income Ratio
Aside from your mortgage, do you have other sources of debt, such as a car loan or credit card debt? If so, they might affect your ability to refinance or the interest rate you receive.
A lender will look at what’s known as your debt-to-income ratio when you apply for a refinance. Calculate your debt-to-income ratio by dividing your monthly debt payments by your gross monthly income.
Usually, the debt-to-income ratio should be less than 43 percent to qualify for a mortgage or refinance.
6. Your Current Income and Employment Status
Just as you did when you applied for your first mortgage, you’ll most ly be expected to provide proof of income and employment when you apply to refinance your mortgage. If your work or income status has changed in the time since then, the change can affect your ability to refinance.
If your income is higher than before, you might find that you get a better rate offered or other more favorable terms on the refinance loan. But if you’ve had a drop in income or recently changed jobs, you might have more difficulty during the refinancing process, depending on how long you’ve been at your new job or how much of a drop in income you’ve experienced.
If you’ve just started a job, it can be helpful to wait a bit before you try to refinance.
It’s worth noting that government-backed loans, such as FHA and VA refinance loans, typically don’t require as much documentation as conventional refinance loans. If you’ve changed jobs or have had a drop income, they might be an option worth pursuing, if you’re eligible.
7. The Interest Rate on the New Mortgage
One common reason for refinancing a mortgage is to qualify for a lower rate. It could be that interest rates have dropped since you got your first mortgage or your financial situation has improved enough that you qualify for a lower interest rate.
Interest rates change frequently the market. In July of 2017, the average interest rate on a 30-year fixed loan was 4.25 percent. By July 2018, the average interest rate on a 30-year fixed loan had climbed to 4.91 percent. If interest rates are currently higher than they were when you first got your loan, it most ly doesn’t make sense to refinance.
8. The Type of Interest on the New Mortgage
It’s not only the amount of interest you pay on a mortgage that’s worth considering when you’re thinking about refinancing. The type of interest charged can also determine whether or not refinancing makes sense for you.
A mortgage with an adjustable rate might offer a low rate for the first few years of the loan. After a set period, the rate will adjust the market. If rates are up, your interest rate will go up.
If rates are lower than when you took out your mortgage, your interest rate will drop.
If you have an adjustable rate mortgage and you foresee a sharp increase in your rate in the future, it can make sense to refinance to a loan with a fixed rate. That way, you’re able to lock in a lower rate and have the rate stay the same throughout the life of the mortgage.
9. How Long Do You Want to Be Paying Your Mortgage?
Refinancing a home is pressing “reset” on your mortgage. Even if you’ve been paying off your current home loan for years or decades, refinancing starts the process all over again. If you refinance your existing 30-year loan into a new 30-year loan, you start back at day one when you close on the loan. That means you’ll have a new mortgage to pay for the next 30 years.
If having a mortgage for 30 more years doesn’t appeal to you, you can consider switching to a shorter term, such as 10 or 15 years. You might get a lower interest rate with a shorter term mortgage, but the monthly payments are ly going to be higher. The trade-off is that you’ll be debt more quickly and might end up saving money in the long run.
10. How the Mortgage Term Affects Your Total Payments
Depending on the interest rate on your new mortgage and the term of the new mortgage, refinancing might not save you money in the long run.
Some homeowners prefer to pay more over time in exchange for a lower monthly payment.
To see if you’ll save money over the life of your new mortgage or not, it helps to evaluate how much you’ll spend if you keep making your current monthly payment versus how much you’ll spend if you refinance.
Your current mortgage has a balance of $100,000 with 10 years left, a fixed rate of 5.5 percent and monthly payments of $1,000. If you keep paying as agreed for the rest of the term, you’ll pay $120,000.
If you refinance your mortgage to a loan with a 30-year term and an interest rate of 4.9 percent, your payments drop to $530.73 per month, which looks considerable savings.
But, over the course of 30 years, you end up paying $191,062.80.
Freeing up nearly $500 per month might be worth it to you, as it can allow you to work on other financial goals, such as paying off other debts or saving for college for your children. There are also people who’d rather pay off their mortgage as quickly as possible and pay as little in total as possible, even if it means paying more up front.
11. The Total Cost of Refinancing
You also want to think about the cost of refinancing your mortgage and whether the cost negates any savings you get from a reduced interest rate or shorter mortgage term. It’s also worth considering your options for closing costs.
While it’s common to pay the fees in full at closing, some lenders offer other options to lower the upfront expense. You might be able to roll the closing costs into the principal of the mortgage so that you pay them over time. Another option is to exchange closing costs for a slightly higher interest rate on the loan.
Doing so can reduce the amount you pay initially but can also reduce any benefits you get from refinancing to a loan with a lower rate.
12. Do You Have a Home Equity Loan?
If you currently have a second mortgage on your home — also called a home equity loan — or have opened a home equity line of credit (HELOC), your additional loans can interfere with the refinancing process.
Having a home equity loan or line of credit won’t prevent you from refinancing, but it can complicate the situation.
When you pay off your first mortgage, the holder of your second mortgage has the right to take over the spot held by the primary mortgage.
For you to refinance, the owner of your home equity loan or line of credit needs to agree to let the refinancing lender take the primary spot. Some lenders will allow it, but others won’t.
If the lender who owns your home equity loan or line of credit won’t approve your refinance, you can pay off the balance on the home equity loan or try to consolidate your two mortgages into one when you refinance.
13. Do You Want a Cash-Out Refinance?
Although some homeowners refinance to save money or reduce monthly payments, many refinance as a way to tap into their home equity.
A cash-out refinance results in a home loan that has a principle that’s more than the principal owed on the existing mortgage.
According to statistics from Freddie Mac, 68 percent of refinances in the first quarter of 2018 were cash-out refinances and were at least five percent higher than the balance left on the first mortgage.
People use the cash from a cash-out refinance for a variety of reasons, such as paying off other debts or paying for home repairs and improvements. In that way, a cash-out refinance is similar to a home equity loan or HELOC.
The big difference is that the term of a refinanced mortgage is typically much longer than the term of a home equity loan or HELOC.
If you’d to tap into the equity of your home, it can be worth comparing interest rates and terms on refinancing to the rates and terms available on a home equity line of credit to see which one would be most cost-effective.
Trust Mid Penn Bank for Your Refinance
The bottom line is there’s more to refinancing a home than meets the eye. You want to consider your overall financial goals and whether or not refinancing will help you reach them.
If you live are looking to learn more about refinancing your mortgage check out the options available from Mid Penn Bank today or feel free to contact us with any questions.
Also feel free to check out our helpful “Should I refinance my mortgage?” calculator to compare proposed loan options to your current loan.
Should I Refinance My Mortgage?
Everywhere you turn right now, there’s a new wave of hype about mortgage refinancing.
That’s all thanks to the Federal Reserve dropping interest rates by half a percentage point at the beginning of March 2020 and then dropping again mid-month to between 0–0.25%.
1,2 Zero percent is pretty attention grabbing, but keep in mind that it doesn’t mean you can get a mortgage with 0% interest (wouldn’t that be nice).
All of this interest-rate shifting is in an effort to boost the economy in the middle of the coronavirus or COVID-19 (you’ve probably heard all about that, haven’t you?). Lower interest rates are great and all, but how do you know if it’s the right time for you to actually refinance?
One thing’s for sure, with rates this low, it’s worth taking the time to see what’s best for your specific situation. And you’ll sleep better knowing you’re making informed, well-thought-out decisions for you and your family and not just jumping on a bandwagon.
What the New Lower Interest Rates Mean for You
If you were already tossing around the idea of refinancing, these low rates couldn’t have come at a more perfect time.
Getting a mortgage with a 1–2% drop in interest rate can make a huge difference in your monthly budget and ability to pay off your mortgage faster.
And if you were thinking of refinancing from your current mortgage term down to a 15-year fixed-rate mortgage (the only one we recommend), now is the prime time to do it.
Pay off your home faster by refinancing with a new low rate!
And if you’re really serious about refinancing, be sure to actually submit a loan application. Some mortgage companies are overstating their published rates right now to slow down the swarm of people asking about lower rates.3 So be on the lookout for that. If you want to see the true low interest rate, your best bet is to submit the application.
Oh, and in case you’re wondering—just because mortgage interest rates are crazy low right now, that doesn’t mean you should roll up all your other debt (credit cards, student loans, etc.) into a refinanced mortgage. Nope. Just don’t.
You want to pay off your smaller debts first (and get energized from those wins). Lumping your student loan debt into your mortgage means it’s going to take a lot more time to pay off those loans and your mortgage too.
It puts you even further away from completing either of those goals. No thanks.
What Is Refinancing?
Refinancing is the process of getting a new mortgage by changing the terms of the one you already have on your home. You might be thinking of refinancing your mortgage for a few reasons— taking advantage of lower interest rates, switching mortgage companies, reducing monthly mortgage payments, or using money from the refinance for a big purchase.
Don’t worry—refinancing doesn’t mean you end up with two mortgages! Instead, your first loan is technically paid off through the refinancing process and a second loan is created in its place.
How Does Refinancing Work?
To refinance your mortgage, you'll need to shop and apply for a loan—just when you applied for your original mortgage. You could contact a lender directly, or use a broker to see if you’re approved and can qualify for refinancing.
To see if you would qualify, you’ll need to dig out some paperwork to make your case. Lenders look for different things, but generally, they want you to meet the following requirements:
- A Maintained Original Mortgage: Lenders need proof that you’ve maintained and paid your original mortgage for at least 12 months before they’ll consider your loan for refinancing.
- Equity: You’ll need to show you have at least 10–20% equity in your home.
- Income: You have to prove you have a regular income, and lenders will also look at your debt-to-income ratio. Basically, they want to make sure you can still pay your bills the amount of money you make, and that any existing debt payments you have won’t interfere with your refinanced mortgage payment every month.
- Credit Status: With lenders who ask for your credit score, having a lower credit score may result in higher interest rates.
But what happens when you don’t have any debt and no credit score? Don’t worry! Lenders Churchill Mortgage will use a manual underwriting process to determine your risk or lihood of paying your mortgage on time.
When To Refinance Your Mortgage
The time to refinance is when you want to make a less-than-desirable mortgage better with a new interest rate.
Do a break-even analysis to see if refinancing is something worth doing in your situation. A break even analysis means running the numbers on whether you’ll be in your home long enough to benefit from the savings that a lower interest rate and payment could bring.
Then you should work out how long it’ll take you to make up the closing costs you’ll have to pay for your refinanced mortgage. Yes, there will be closing costs—we’ll get to them soon!
In general, refinancing makes the most sense if you fall into one of these categories:
1. You Have An Adjustable Rate Mortgage (ARM)
With your ARM having interest rates that are adjustable, you might start off with the first few years at a fixed rate. But after that, the rate can adjust multiple factors the mortgage market, LIBOR market index, and the rate at which banks themselves lend each other money. Bottom line is, ARMs transfer the risk of rising interest rates to you—the homeowner.
So, in the long run, an ARM can cost you an arm and a leg! (Yes, we went there.) That’s when refinancing into a fixed-rate mortgage could be a good financial move. It’s worth it to avoid the risk of your payments going up when the rate adjusts.
2. The Length Of Your Mortgage Is Over 15 Years
If your original mortgage is a 30-year term (or more), then refinancing is a good way to get to the ultimate goal of locking in a 15-year fixed-rate mortgage—ideally with a new payment that’s no more than 25% of your take-home pay.
But if your interest rate is low enough on a 30-year fixed-rate mortgage to compete with the 15-year rates out there, make sure refinancing just to get the shorter term isn’t going to cost you more. You’re better off making extra payments (and are committed to making them) on your 30-year mortgage every month to shorten your payment schedule.
Simply put, you want to own your home as soon as possible instead of your home owning you! Use our mortgage payoff calculator to run your numbers and see what your monthly payment would be on a 15-year loan.
3. You Have a High Interest Rate Loan
If your mortgage has a higher interest rate compared to ones in the current market, then refinancing could be a smart financial move if it lowers your interest rate or shortens your payment schedule.
If you can find a loan that offers a reduction of 1–2% in its interest rate, you should consider it. Remember to factor in your break-even analysis too! Refinance only if you’re planning to stay in your home for a long time, because it will give you time to make up those closing costs.
4. Your Second Mortgage Is More Than Half Of Your Income
A lot of homeowners with second mortgages want to roll it into a refinance of their first mortgage. But not so fast! If the balance on your second mortgage is less than half of your annual income, you would do better to just pay it off with the rest of your debt through your debt snowball.
But if the balance is higher than half of your annual income, you could refinance your second mortgage along with your first one. This will put you in a stronger position to tackle the other debts you might have before you pull your resources together to pay off your mortgages once and for all!
How Much Does It Cost To Refinance?
Depending on the lender, your home’s location, and the amount you borrow, closing costs for a refinance can range from 3–6% of the loan amount.4 So if your loan amount was $100,000, you could end up paying $3,000 in fees at a minimum.
Refinancing costs typically do not include property taxes, mortgage insurance and homeowner’s insurance because they were set up when you first bought your home. Remember, you’re revising the original mortgage, not starting completely from scratch.
Refinance closing costs include:
- Refinance application, a new home appraisal, and title search
- Home inspection fee
- Lender’s attorney review fee
- Origination fee
- Points fees
While you may not be able to avoid all of these closing costs, you can avoid mortgage points fees by asking for a par quote or zero quote. That means the closing cost estimates will not include points.
So, to get your break even analysis, let’s say your closing costs will be $3,000 (3%) on a $100,000 refinanced mortgage. And that your new refinanced interest rate is 1% lower than your previous rate. If we look at how much that 1% reduction would save you every year, it would take around three years to make up those $3,000 in closing costs.
And once you’ve made up the closing costs, you can enjoy the benefits of the lower interest rates through till the end of your mortgage term (or a time down the road if you decide to sell your home.)
You can think about refinancing your mortgage if it means you’re locking in a lower rate of interest at a fixed rate or reducing your mortgage term length. The savings you could make from doing it for the reasons we outlined earlier could be used to help tackle the important stuff, paying down debt or saving for retirement.
Refinancing is a good idea if it helps you take control of your monthly bills. You will feel more confident going forward if you have more money to put toward becoming totally debt-free. Plus, just imagine if you owned your home outright!
But there are times when refinancing your mortgage would not be a good idea. It wouldn’t be wise to refinance (and get into more debt) because you’d a new car, want to remodel your kitchen, or plan to pay off credit card bills. Wiping out your home equity to buy new stuff you don’t need puts your home at risk—especially if you lose your job or encounter other financial difficulties.
And if you’re currently work because of the coronavirus and finding it difficult to pay your mortgage, there’s good news for you.
Depending on your specific situation, you may be able to have your mortgage payments lowered or put on hold for the next 12 months.
5 That can really help to free up the burden you might be feeling right now if you’re concerned about when you’ll see your next paycheck.
Ready To Refinance?
Refinancing your mortgage is worth it if you’re planning to stay in your home for a long while. That’s when the lower interest rates you want to take advantage of really start to pay off!
If you’re ready to refinance, get with the home loan specialists at Churchill Mortgage. They’ll help you get a mortgage you won’t regret!
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When To Refinance: 3 Steps to Deciding Whether to Refinance or Not
Deciding when to refinance your home loan depends on several factors besides whether you can get a better mortgage rate than you already have. And though there are many reasons people refinance their mortgage, some are smarter financial moves than others.
- Using refinance savings on your mortgage payment to up retirement contributions or shore-up your budget? Smart.
- Cashing out equity and going on a spending spree? Not so much.
- Cashing out to renovate your kitchen and bathrooms to increase the value of your home? It all depends.
When mortgage interest rates get low, refinancing becomes popular. But when should you refinance? Does it make sense for you? Answer these questions to decide whether to refinance or not:
1. What do you stand to save by refinancing?
There are two big reasons to refinance:
- To reduce your monthly mortgage payment or;
- To save on the overall interest you will pay on your house in the long run.
In the best case, a refinancing will do both, but that doesn’t always happen.
For example, if you have 25-years left on a 30-year mortgage and refinance again for a 30-year term at a lower rate, you’ll get a lower monthly payment, but may end up paying more interest in the long-run because now you’ll pay your home off over at total of 35 years.
If, however, you have 25 years left on your loan and refinance with a 15-year mortgage, your monthly payment may actually go up, but you may pay tens of thousands less in interest over the long run (and you’ll have your house paid off 10 years sooner).
A loan officer or mortgage broker can help you run scenarios that show you the cost and potential savings of refinancing. Remember: Refinancing costs money, to the tune of several thousand dollars.
You’ll pay application and origination fees, a fee to have your home reappraised and, in some cases, mortgage points that reduce your new interest rate. This article explaining what your mortgage rate really means can help you decode the various costs that go into your mortgage.
Or if you prefer to jump into the mortgage refinance process right away, Credible delivers quotes from multiple lenders in just minutes without affecting your credit score.
Related: Use our simple mortgage calculator to see how much you may save
2. How long will you keep your home?
In most cases, it only makes sense to refinance if you plan on staying in your home for several more years. If you may sell the property soon, don’t refinance. Most refinances take between several months and several years to break even and begin saving you money. Your loan officer or mortgage broker can help you determine when you’ll break even.
3. Will you — and your home — qualify to refinance?
Even if a refinance makes sense in your situation, you’ll still need to qualify. And just because you have a home and are making timely payments does not mean you’ll be able to refinance your loan. Your ability to refinance depends on several factors, especially:
- The amount of equity you have in your house
- Your income
- Your credit
Applying to refinance requires an entirely new underwriting process.
The bank needs to see that the home is worth more than the loan value, that you earn enough to afford the monthly payments, and that you are creditworthy. Check your credit score online for free here.
Unfortunately, if you are underwater on your current mortgage, it may be difficult to qualify for traditional mortgage refinancing.
My view: When to refinance
Although every situation is different, I would recommend refinancing your mortgage if:
- Current interest rates are at least 1% lower than your existing rate
- You plan on staying in your home for another 5 years (give or take)
- You anticipate being approved for the refinance loan
Deciding when to refinance is no small decision, so don’t jump on the refinance band-wagon just because other people you know are doing it. Take some time to figure out what your total costs would be, what your new monthly payments would be, and whether or not it’s the right decision for you.
Want to get personalized refinance offers? Get up to five refinance quotes online with no obligation »
Where you should refinance
It’s never been easier to get rate quotes and complete loan applications, thanks to the many online lenders now available. Whether you opt for the online experience or prefer a more traditional approach, though, it’s important to get quotes from multiple lenders before making a decision.
Even small savings will add up over the years of monthly payments you’ll be making.
To help you get started, I’ve picked out a couple of our favorite online lenders. You can get a free, no-obligation quote to help you make your decision.
In only three minutes, you can prequalify for a mortgage refinance with Credible. During that process, Credible delivers quotes from multiple lenders without affecting your credit score. If you see a rate you , you can do everything online, including uploading documents through the website and monitoring the progress of your application.
Credible can help you with cash-out refinancing, as well. When it comes to mortgage refinancing, though, one of the best things about Credible is its transparency. You can see from the start what fees you’ll be expected to pay and the interest rate you’ll be issued to help you make a fully-informed decision before filling out a detailed application.
If you personalized help with your loan application, Reali Loans should top your list. You’ll get a dedicated home loan advisor to work with you from start to finish, ensuring all your questions are answered. The entire process is online, combining speed and convenience with the one-on-one help some borrowers prefer.
To get started, you’ll just answer a few questions about your situation, including your income, credit score, and the amount you’re requesting to borrow. If you’d prefer, you can do a quick rate check to see the basic rates currently being offered. Whichever route you choose, there’s no obligation and no credit check until you decide to move forward.
Figure is a great option for those who want to cash out. Figure lets you take out a percentage of your home’s value in cash, with funds deposited soon after the loan goes through. While they offer traditional cash-out refinancing, Figure also offers cash-out jumbo refinancing for people who are purchasing higher-cost properties (with a cash-out max of $500,000).
You can apply online and get a no-obligation rate quote with no impact on your credit score.
If you the quote and decide to proceed, you’ll upload your documents and sign agreements completely online, significantly speeding up the time it typically takes to close a home refinance.
If you have any questions throughout the process, you can pick up the phone and speak to a member support representative during business hours.
Today’s mortgage refinance rates:
Editor’s note: This article was originally published in October 2010. It has been thoroughly updated for relevance and accuracy before republication.
¹ For Figure Home Equity Line, APRs can be as low as 2.49% for the most qualified applicants and will be higher for other applicants, depending on credit profile and the state where the property is located. For example, for a borrower with a CLTV of 45% and a credit score of 800 who is eligible for and chooses to pay a 4.99% origination fee in exchange for a reduced APR, a five-year Figure Home Equity Line with an initial draw amount of $50,000 would have a fixed annual percentage rate (APR) of 2.49%. The total loan amount would be $52,495. Your actual rate will depend on many factors such as your credit, combined loan to value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay an origination fee in exchange for a lower rate. Payment of origination fees in exchange for a reduced APR is not available in all states. In addition to paying the origination fee in exchange for a reduced rate, the advertised rates include a combined discount of 0.75% for opting into Credit Union Membership (0.50%) and enrolling in autopay (0.25%). APRs for home equity lines of credit do not include costs other than interest. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.
How To Refinance Your Mortgage
With mortgage rates pushed to historic lows during the pandemic, it can make sense to refinance your loan. Here’s what you need to know about the process, and when it’s a good idea.
What is mortgage refinancing?
Refinancing a mortgage means you get a new home loan to replace your existing one, with the option to withdraw a portion of your home’s equity out as cash in the process. If you can refinance into a loan that has a lower interest rate than you’re currently paying, you could save money on your monthly payment and overall cost of the loan.
The best time to consider a mortgage refinance is when interest rates sink below the level they were when you closed on your original loan. As a rule of thumb, it’s worth considering a refinance if you can lower your interest rate by at least half a percentage point, and you’re planning to stay in your home for at least a few years.
Another good opportunity is when your credit improves to the point where you qualify for a new loan that has a lower interest rate.
There are a variety of reasons to refinance that can make financial sense, including:
- To reduce your monthly mortgage payment by securing a lower interest rate
- When the costs of refinancing can be recouped in a reasonable time period
- To get a shorter term, such as a 15-year loan to replace a 30-year mortgage, so you can pay it off faster and pay a lot less in total interest
- To switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan — a smart move if you think rates are going to go up in the future
- To extract cash from your home’s equity in a cash-out refinance
- To eliminate mortgage insurance if you’ve built up 20 percent equity in your home
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
The refinance clock is ticking
Mortgage rates fell to all-time lows in late 2020 and early 2021. However, rates began edging up in February 2021. Mortgage experts expect rates to rise as the coronavirus vaccine is distributed and the U.S. economy returns to normal.
Mortgage rates probably won’t soar — the Federal Reserve has vowed to keep the rate it controls near-zero until further notice. The Fed doesn’t directly control mortgage rates, but its decisions do influence the mortgage market.
If mortgage rates do in fact follow the experts’ consensus, they’ll probably end up in the range of 3.5 percent by the end of 2021. In other words, the window to refinance is gradually tightening rather than slamming shut.
There should be a good reason why you’re refinancing, whether it’s to reduce your monthly payment, shorten the term of your loan or pull out equity for home repairs or debt repayment.
“Every situation is unique,” says Ann Thompson, Bank of America’s head of retail sales West. “Everyone has different priorities.”
What to consider: If you’re reducing your interest rate but restarting the clock on a 30-year mortgage, you may end up paying less every month, but more over the life of your loan. That’s because the bulk of your interest charges are in the early years of a mortgage.
Step 2: Check your credit score and history
You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan.
What to consider: It may make sense to spend a few months boosting your credit score before you start the refinancing process. Also, mortgage borrowers’ credit scores have risen to record highs as the pandemic made lenders stricter about extending credit.
Step 3: Determine how much home equity you have
Your home equity is the value of your home in excess of what you owe your mortgage lender on your loan. To figure it out, check your mortgage statement to see your current balance.
Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated value of your home. Your home equity is the difference between the two.
For example, if you still owe $250,000 on your home, and it is worth $325,000, your home equity is $75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and fewer fees if you have more than 20 percent equity. The more equity you have in your home, the less risky the loan is to the lender.
Step 4: Shop multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when it’s best to lock in your rate so you won’t have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether they’ll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Be transparent about your finances
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly.
Step 6: Prepare for the appraisal
Some mortgages lenders require a mortgage refinance appraisal to determine your home’s current market value for a refinance approval.
What to consider: You’ll pay a few hundred dollars for the appraisal. In addition, letting the lender know of any improvements or repairs you’ve made since purchasing your home could lead to a higher appraisal.
Step 7: Come to the closing with cash, if needed
The closing disclosure, as well as the loan estimate, will list how much money you need to pay pocket to close the mortgage.
What to consider: You might be able to finance those costs, which typically amount to a few thousand dollars, but you’ll ly pay more for it through a higher rate or loan amount.
Step 8: Keep tabs on your loan
Store copies of your closing paperwork in a safe location and set up autopayments to make sure you stay current on your mortgage. Many mortgage lenders will also give you a lower rate if you sign up for auto-payment.
What to consider: Your lender might resell your loan on the secondary market either immediately after closing or years later. That means you’ll owe mortgage payments to a different company, so keep an eye out for mail notifying you of any such changes.
Free up money each month
A rate-and-term refinance replaces your mortgage with a new loan that has a lower rate, meaning you have to pay less to your lender each month.
“There’s a significant opportunity to reduce your monthly cash requirements,” says Glenn Brunker, president of Ally Home. “Depending on the size of your mortgage, it could be $75 or $100 per month, or even several hundred dollars a month.”
Pay your home off faster
You may be able to refinance into a loan with a lower interest rate and a shorter term.
The savings in interest payments could be substantial, for example, if you’re able to refinance into a 15-year mortgage from a 30-year loan.
Still, if you’re putting more cash into paying off your mortgage, you may have less money on hand for expenses saving for retirement, college or an emergency fund.
Eliminate private mortgage insurance
If your original down payment was less than 20 percent, you have ly been paying private mortgage insurance, or PMI, an extra fee on every payment. If rising home values and your loan payments have pushed your home equity above 20 percent, you might be able to refinance into a new loan without PMI.
Tap your home’s equity
Homeowners with well over 20 percent equity in their home sometimes turn to cash-out refinancing.
That’s when you refinance your home loan into a new mortgage for a larger amount to meet a specific financial need and receive the difference in cash.
This may make sense if you’re considering using the money to invest back into your home through a major remodeling project or to pay off high-interest debt.
Lock in a fixed-rate mortgage
If you’re in an adjustable-rate mortgage (ARM) that’s about to reset and you believe that interest rates are going to rise, you can refinance into a fixed-rate loan. Your new rate might be higher than what you’re paying now, but you’re guaranteed it won’t rise in the future.
Refinancing isn’t free
Your refinanced mortgage comes with costs, such as an origination fee, an appraisal, title insurance, taxes and other fees, just your original mortgage.
Even if the refi results in a lower monthly payment, you won’t actually save money until the monthly savings offset the cost of refinancing.
You’ll need to do some math (use this calculator) to figure out how many months it will take to reach this break-even point. If there’s a chance you’re going to move before then, refinancing is probably not the best move.
You may have a prepayment penalty
Some mortgage lenders charge you extra for paying off your loan amount early. A high prepayment penalty could tip the balance in favor of sticking with your original mortgage.
Your total financing costs can increase
If you refinance to a new 30-year mortgage, you’re ly going to pay significantly more interest and fees over the life of your loan than if you’d kept the original mortgage.
Refinance vs. cash-out refinance: What’s the difference?
When you refinance in order to reset your interest rate or term, or to switch, say, from an ARM to a fixed-rate mortgage, that’s called a no cash-out refinance, or a rate-and-term refinance.
Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral.
This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity more quickly.
By contrast, cash-out refinancing leaves you with more cash than you need to pay off your existing mortgage, closing costs, points and any mortgage liens. You can use the cash for any purpose. To be eligible for cash-out refinancing, you typically need to have substantially more than 20 percent equity in your home.
Example of a no cash-out refinance (rate-and-term refinance)
Jessica gets a $100,000 mortgage with an interest rate of 5.5 percent. Three years later, interest rates have fallen, and Jessica can refinance with an interest rate of 4 percent. After 36 on-time payments, she still owes about $95,700.
In this situation, Jessica can save more than $100 per month by refinancing and starting over with a 30-year loan. Or she can save $85 per month, while keeping the loan’s original payoff date, paying it off in 27 years, and also reducing the total cost of the loan by about $8,000.
Better still in terms of saving on interest would be to refi into a 15-year loan. The monthly payments will be higher, but the interest savings is massive.
Example of a cash-out refinance
Christopher and Andre owe $120,000 on a mortgage on a home that’s worth $200,000. That means that they have 40 percent, or $80,000, in equity. With a cash-out refinance, they could refinance for more than the $120,000 they owe.
For example, they could refinance for $150,000. With that, they could pay off the $120,000 on the current loan and have $30,000 cash to pay for home improvement and other expenses. That would leave them with $50,000, or 25 percent equity.
Next steps: How to get the best refinance rate
Once you’ve determined why you want to refinance and the type of loan you want, you’re ready to shop lenders and compare refinance rates. Get quotes from at least three mortgage lenders, including a mortgage broker, a bank and an online lender. Be sure to compare their rates as well as fees and other charges that could add to the overall cost of the loan.