- 7 Steps to Maximize Mortgage Refinance Savings
- 1. Know what you owe
- 2. Check your credit score
- 3. Put a freeze on new debt
- 4. Shop at least 3 mortgage refinance lenders
- 5. Refinance away mortgage insurance
- 6. Forget cash-out and extended-term refinancing
- 7. Evaluate your mortgage refinance strategy
- All set? Prepare for the paperwork
- What To Do With Mortgage Refinance Savings
- When is it a good idea to refinance?
- What to do with refinance savings
- 1. Start a business
- 2. Beef up your retirement savings
- 4. Build your emergency savings
- 5. Continue your education
- 6. Invest in real estate
- 7. Make home improvements
- 8. Get adequate insurance
- 9. Pay off your mortgage faster
- How to get the most your refinance
- Learn more:
- 4 Ways to Lower Your Mortgage Interest Payment | First Bank Mortgage
- 1. Ready, Set, Refinance
- 2. Lengthen Your Loan
- 3. Say Goodbye to PMI
- 4. Pay Down the Principal
- Get Started on the Right Foot
- 6 Ways to Save on a Mortgage Refinance
- Pay closing costs and points
- Don’t take cash out
- Shop around
- Have a history with your lender
- Prepare for an appraisal
7 Steps to Maximize Mortgage Refinance Savings
When the time is right to refinance your mortgage, you’ll probably want to make it as painless as possible.
It’s a natural inclination to simply contact your current mortgage holder and take them up on one of the many offers they may have made to you through emails and direct-mail promotions.
However, to realize maximum savings and make the whole process worthwhile, here are seven important items to put on the to-do list.
1. Know what you owe
Before you trigger a mortgage refinance, review the balance and terms of your current loan. This will help you determine how much you’re ly to save when you take into account prevailing refinance rates, the payoff with your current lender and the fees and closing costs you’ll encounter.
You can also get a good idea of your best possible savings scenario, as well as the minimum acceptable loan terms you’ll want to negotiate.
2. Check your credit score
If your creditworthiness has improved significantly since you took out your existing mortgage, you could be in for a pleasant surprise. A higher credit score can earn you a lower mortgage rate.
Review your credit history for accuracy by getting a free report from AnnualCreditReport.com, the official website set up under the federal law that guarantees free reports for consumers.
Then consider purchasing your current credit score from one of the three main credit bureaus.
There are many variations of the popular FICO score; be sure to ask for the one most commonly used by mortgage lenders.
Many banks and credit card companies offer free credit scores to their customers. These can be helpful, but you may not be getting the score most relevant to a mortgage application.
Research conducted by the Consumer Financial Protection Bureau found that different scoring models can change the credit-quality category for nearly one-quarter of consumers.
(For example, from “good” to “average.”)
» MORE: Check your free credit score
3. Put a freeze on new debt
If everything checks out OK with your credit history, lock in your qualifications by resisting the urge to make additional credit card purchases or open new credit accounts. If anything, hoard available cash and pay down any debt that you can. Protecting your credit score can be instrumental in maximizing your mortgage refinance savings.
4. Shop at least 3 mortgage refinance lenders
Research shows that borrowers obtain the biggest savings by shopping at least three lenders. In a recent study, the CFPB found that 47% of consumers consider only one lender when seeking a mortgage, potentially missing out on thousands of dollars of savings by overlooking a home loan lender with a lower interest rate.
5. Refinance away mortgage insurance
If you put less than 20% down on your original mortgage, you’re probably paying for mortgage insurance. That’s a fee that protects the lender in the event of borrower default.
By now, your home’s appreciation may have given you enough equity that further mortgage insurance premiums are unnecessary — but some lenders don’t have to automatically terminate mortgage insurance until the balance on your loan falls to 78% of the original purchase price of your home, or until the midpoint of your mortgage payoff, whichever comes first.
Refinancing away — or at least lowering — your mortgage insurance premiums can provide significant savings, particularly if your original home loan was backed by the Federal Housing Administration, or FHA.
6. Forget cash-out and extended-term refinancing
It’s a common temptation to take a cash-out refinance, which converts your equity to cash that you can spend. Maybe it’s even for worthy causes, funding a college education or paying off high-interest credit cards.
The thing is, you’re raiding your home’s value — and that can be a slippery slope, especially if home values start heading south again. If you default on the loan, you could lose your home. Or you might decide you want to move in a few years, only to discover that your home equity has been eliminated by that previous spending.
Another possible pitfall: extending the payoff term of your home loan. Sure, it can lead to a lower monthly mortgage payment, but it will greatly increase the interest you’ll pay over the long(er) term.
Real savings come from paying off debt, not adding to or extending it.
7. Evaluate your mortgage refinance strategy
Maybe your current home loan is an adjustable-rate mortgage, and you think interest rates are sure to rise. Or, you have a higher-rate fixed-term loan and believe that a lower-rate ARM is the way to go.
Depending on your circumstances, including short-term and long-term housing needs, it may be time to rethink your mortgage refinance strategy. By taking a close look at various scenarios, you may find that a different type of mortgage better suits your needs and saves you a money.
All set? Prepare for the paperwork
With a firm savings strategy in mind, it’s time to start the application process. If it’s been a few years since you’ve tackled a home loan, prepare yourself for the paperwork. The days of “low doc” or “no doc” mortgages are over.
You’ll ly face more disclaimers and fine print than you’ve seen in a while. And you may encounter your share of LOEs — letters of explanation — requesting that you explain anything from your employment history to random bank deposits.
In the end, it’s ly to be well worth all the effort, as your savings grow with each refinanced mortgage payment.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. : @halmbundrickThis article was updated on Jan. 26, 2016
What To Do With Mortgage Refinance Savings
Saving more money each month can have a big impact on your overall finances — and one way a lot of Americans are trimming their expenses these days is by refinancing their mortgage. Read on to find out when a refinance may make sense for you, and what you can do with the money you save by doing it.
When is it a good idea to refinance?
Many homeowners look to refinance when interest rates dip lower, with the goal of one or more of the following:
“It makes the most sense when the new loan will save or make the borrower more money,” explains Nicola Smith Jackson, an Atlanta-based financial advisor and wealth strategist. “In these challenging economic times, stabilizing or improving one’s financial security should be a main focal point.”
Even though the savings associated with some types of refinancing can be attractive, there are times when it’s best to hold off. If you’re moving soon or if the time left on your mortgage won’t allow you to recoup the closing costs, it may be best to stick with your current loan.
Here’s more on when it’s smart to refinance.
What to do with refinance savings
If you decide to refinance, it’s important to have a strategy to make the money you’ll ultimately be saving work for you. Here are some ideas on how you can leverage that extra cash:
1. Start a business
If you have a goal to start a business, consider using your mortgage refinance savings to help fund the new venture. Look for a path with low startup costs, if possible.
“This is an opportunity to create your own financial outlook without waiting on anyone else to decide when you can go back to work,” says Smith Jackson, citing the coronavirus-driven layoffs.
2. Beef up your retirement savings
“Refinancing to a lower interest rate may free up significant amounts of cash, which can be used during retirement,” says Shelby McDaniels, channel director of Chase Corporate Home Lending.
It goes without saying retirement saving is a high financial priority, so adding to your nest egg can be a smart way to allocate your refinance savings. Talk to your financial adviser to determine which retirement saving strategies will work best for your situation.
“One of the primary reasons to consider refinancing is to consolidate high-interest debt,” McDaniels says, including credit card debt and personal loans.
If you’re carrying high-interest debt, try to use your refinance savings to pay it off. It’ll help free you up even more for other financial goals.
4. Build your emergency savings
Having ample liquid cash in reserve can offer you peace of mind when the unexpected happens — think job loss, illness or a big car repair.
For an emergency fund, “a three- to six-month savings is no longer enough money with our current economic conditions,” says Smith Jackson, so “make the goal 12 to 18 months.”
A cash-out refinance can help you start or add to your emergency savings.
“With a cash-out refinance you get a new mortgage that’s greater than the amount of your existing mortgage principal but less than the current value of your home,” explains McDaniels. “You use the money from the new loan to repay your original mortgage — and pocket the rest of the cash.”
5. Continue your education
Attaining higher education can lead to a more stable financial future, despite the upfront cost.
“A cash-out refinance can give you money in a lump sum that you can use to pay for education expenses,” McDaniels says. ‘The refinance interest rate may be lower than other education loan options available to you.”
If you refinance for a lower monthly payment without pulling cash your home, you can also apply those monthly savings toward education costs.
6. Invest in real estate
Smart investments make your money work for you, and investing in real estate is one way to do just that. If your refinance will net you significant savings, repurposing the funds for a real estate investment may be an option.
Smith Jackson suggests that you partner with a trusted professional — such as a real estate agent, financial adviser, attorney or all three — to guide you. Your strategies might include purchasing a rental property, flipping a home or participating in a crowdfund.
7. Make home improvements
“Many lenders have refinance options that can give you extra funds to help renovate or repurpose your home to fit your needs or style,” McDaniels says.
If doing a cash-out refinance, you can use the funds to make upgrades to your home, which can lead to a bump in its value if you plan them strategically. Depending on the type of renovation you do, it can also afford you a tax benefit, so it’s worth considering to maximize your savings.
8. Get adequate insurance
Having proper insurance isn’t a luxury, but a necessity. With the added margin in your budget from refinancing your mortgage, it might be time to reevaluate your coverage, including health, income replacement, disability, car and life insurance.
“Ask a professional which policies are suitable for your income goals and/or health conditions,” Smith Jackson recommends.
9. Pay off your mortgage faster
If you’re saving serious money each month thanks to your refinance, you can reapply the savings to your new loan principal. You’ll own your home free and clear that much sooner.
There are a few ways to prepay your mortgage, including making an extra payment each year or making a one-time lump-sum payment. Your lender will need to sign off on your strategy.
How to get the most your refinance
When mortgage rates fall, it can be a good time to explore refinancing. Here are a few strategies to get the most savings as you compare your options:
- Determine your goals. Be clear about both your long-term and short-term objectives in refinancing. “It’s important to establish your goals to determine which mortgage product meets your needs,” explains McDaniels. “For example, if your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term. If you want to pay less interest over the length of the loan, look for the lowest interest rate and at the shortest term.”
- Shop around for the best lender. Every lender’s offerings will vary slightly, and those differences can mean more or less savings for you. “Review different lenders and options to determine the best combination of rate, costs and service,” McDaniels suggests. “Doing your research and scouting out lenders and their fees, interest rates and availability can help you find a refinance deal you’re happy with.” You can use Bankrate’s mortgage refinance calculator to estimate your new monthly payment and evaluate your options.
- Find someone you trust. The refinancing process can be confusing, so it’s important to use a trusted lender. “Having a reliable lender to answer your questions can make the difference between a smooth, easy process and a tough experience,” McDaniels says. “A dependable lender will help to keep everything on track and on time and make a significant contribution to your personal peace of mind.”
4 Ways to Lower Your Mortgage Interest Payment | First Bank Mortgage
For most homeowners, your mortgage is your greatest monthly expense.
If monthly bills are weighing you down, you’re probably thinking about ways to trim your grocery budget, get rid of unneeded subscriptions or reduce your heating and cooling costs. All these tweaks can add up to big savings.
But did you know that if you lower your mortgage interest payment, you’ll ly have the biggest impact on your budget and the amount of cash you have in the bank?
If your mortgage is feeling a little heavy, check out these effective ways to lower your mortgage interest payment.
1. Ready, Set, Refinance
If you have good credit, refinancing is a great way to lower your monthly mortgage payment. This means you pay less interest – and less money – over the life of your loan.
To qualify for refinancing, homeowners must typically have good credit.
If your credit isn’t stellar, talk to your lender about government refinancing programs or other options that may make it possible.
2. Lengthen Your Loan
Depending on the number of years on your existing mortgage, you may be able to significantly reduce monthly expenses by increasing the term of your loan. If you have a 15 year mortgage, extending to a 30 term will cut down your payment.
Going this route is not without drawbacks – your interest rate will ly go up. But if you’re looking for greater cash flow because of other expenses in your life, a longer term means more money in your pocket at the end of the month.
Another upside? When you can, making additional payments on the mortgage as though you were on a 15year loan can help pay it down more quickly.
3. Say Goodbye to PMI
If you bought your home without putting down a 20% down payment, private mortgage insurance (PMI) is ly part of your loan. PMI is a special type of insurance that protects the lender against loss if you default on your loan and can add hundreds (or even thousands) to your mortgage each year.
But there’s good news! There are ways to eliminate PMI if you have a conventional loan. The first step is to repay enough of your mortgage – enough to get at least 20% equity in your home. Once you do, you can ask your lender to remove PMI from your loan.
It’s important to note that PMI doesn’t automatically come off your loan once you’ve reached 20% equity. You have to specifically request it.
Borrowers should discuss with their lender if they have made additional principal payments or improvements that increased the value or feel the local market value has appreciated.
Another option for a conventional loan borrower is to take care of PMI by paying the cost all at once, which generally includes a one-time fee.
Even though the fee may be a large amount, it may lower your mortgage interest payment. Borrowers may also pay a portion of the single premium at closing and the remainder in their monthly payment.
The result is a lower PMI premium and lower monthly total housing payment.
4. Pay Down the Principal
Although this is a long-term strategy, making extra payments on your mortgage each month can help you lower your mortgage interest payment over time. It also means you’ll pay off your mortgage faster.
What’s more, making double payments (or even adding a few hundred dollars to your payment each month) decreases the interest you pay over the life of your loan! These extra payments will build the equity you have in your home.
They’ll get you to the 20% mark faster, so you can request to have PMI removed.
Get Started on the Right Foot
It can be hard to wait when you’re ready to buy a home. If you’re just beginning the process and looking for ways to keep your mortgage payment low, having the 20% down payment is a great first step. Setting a larger amount of money aside also gives you options when it comes time to decide how much you want to pay for your mortgage each month.
Even if you’ve been approved and can afford a specific mortgage payment, a larger down payment lowers the amount of principal you owe and removes PMI costs that can add a large amount to your overall payment.
No matter what stage of the home buying (or home owning) process you’re in now, it helps to have a trusted advisor to answer your questions and create a plan that’s best for you and your financial situation.
At FirstBank Mortgage, our goal is to help our customers get to a better place – whether that’s in new home or a new financial position. For more information, questions or concerns, please email mortgageinfo@firstbankonline.
com and we’ll connect you with a loan officer in your area.
6 Ways to Save on a Mortgage Refinance
Getting a lower interest rate is the main way homeowners save when refinancing a mortgage. A lower interest rate on the loan leads to lower monthly mortgage payments, which can be one of the main reasons for a refi.
But there are other ways to lower costs during a mortgage refinance, including ways to improve your financial profile to a lender so that you’ll qualify for a lower interest rate. Here are six ways to save on a mortgage refinance:
Pay closing costs and points
Many lenders advertise “no closing cost” loans, which sound great until you find out that the costs are buried in the higher interest rate, says Casey Fleming, a mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Instead, consumers should ask their mortgage broker or lender what happens if they pay for costs and discount points. “Discount points” specifically refers to the fee paid to buy a lower interest rate; the more generic term “points” may refer to any upfront fee calculated as a percentage of the loan amount.
By paying the lender’s costs to buy down your interest rate, it allows more of your payment to go to principal reduction each month, Fleming says. “After a few years you owe quite a bit less than you would with the higher interest rate,” he says.
Fleming gives an example of a homeowner refinancing a $396,950 loan for a 30-year fixed mortgage, but one they planned to leave in seven years.
One option is for a 4.25 percent interest rate and no closing costs that has a monthly mortgage of $1,952 and a total cost of financing over the seven year holding period of $110,637.
The second option is a 3.75 percent interest rate with the borrower paying closing costs and 1.51 “points” that add up to $10,124 in costs. The monthly payment drops to $1,838 and the total cost of financing drops to $107,217.
The third option has the lowest interest rate at 3.625 percent, but with 2.392 “points” to be paid to get that low rate, the cost rises to $13,625 and brings the total cost over seven years up slightly to $107,349. The monthly mortgage is $1,810.
The second option is the least expensive option over seven years when comparing out-of-pocket costs with upfront and interest costs, and is $3,400 less than the first option of no closings costs or points.
Even with similar information in front of them, more than half of Fleming’s clients choose a zero-cost loan and finance at a higher rate, he says. Why? Persuasive advertising, he says.
A low credit score can lead to a higher interest rate and a higher cost to buy down that rate. A high score of 740 is often needed for the best mortgage rates seen online, says Allen Seelenbinder, a regional sales executive for Bank of America.
Before applying for a mortgage refi, homeowners should check their credit score (such as at AnnualCreditreport.com for a free report) and review it for accuracy. If something is wrong, ask to have it fixed, and work on improving the score. Someone with a lot of credit cards and credit card debts can improve their score by 70 to 80 points by paying off the cards.
You can also help your credit score by not using credit cards or opening new accounts while refinancing your mortgage
It’s important to do all of this before applying for a refi, Seelenbinder says.
“Once you apply for a mortgage loan, that credit score is going to stick with you through your application,” he says.
Don’t take cash out
Refinancing to a lower loan rate can make borrowing against your home equity through a cash-out refinance enticing.
Doing so can mean paying a slight premium on the rate, Seelenbinder says.
But it could also cause you to lose more equity in your home if home values start dropping again. If you decide to move in a few years, that money you cashed out with a refi could eliminate all of your home equity.
Shopping around for the best price makes sense for many things, from clothes to groceries and cars to a mortgage — which is ly to be the most expensive purchase of your lifetime.
But when shopping at lenders, be sure you’re comparing apples to apples and getting more than just the loan amount and terms, Seelenbinder says.
“When people shop frequently they just shop for a rate,” he says. Also ask if the loan-to-value ratio, or LTV, makes a difference in the refinancing rate. An LTV of less than 60 percent usually doesn’t make a difference in rates, Seelenbinder says, but having it be 5 percentage points higher could increase the rate or points to be paid to lower the rate.
Have a history with your lender
Refinancing with your current lender could save you money. At the very least, it could be less paperwork because you’re already a customer.
Having substantial assets at your bank could help you save on closing costs. Bank of America offers its Preferred Rewards members a lower origination fee on home loans.
Prepare for an appraisal
Not every mortgage refinance requires an appraisal of the home — where a professional assesses the value of the property — but an appraisal could help if the home is ly worth more than what the lender states.
That could lower your LTV and help avoid paying private mortgage insurance, along with receiving a lower interest rate.
To prepare for an appraisal, it can pay to spruce up your home with fresh paint, cleaned carpets and manicured landscaping, says Jeremy David Schachter, a mortgage advisor at Pinnacle Capital Mortgage in Phoenix.
If major remodeling is being done to improve the home’s value, make sure it’s complete before the appraiser gets there and not in a construction phase, Schachter says. He’s had clients who didn’t have kitchens or bathrooms and a refinance was delayed or cancelled.
Low mortgage rates can be an enticement for homeowners to refinance their loan and get a lower rate and a lower monthly mortgage payment. Getting those low rates, however, can take a little more legwork than walking into a lender and taking the first rate they offer.
By using the above methods, borrowers can hopefully get lower interest rates on a refi than they could have otherwise.