- Should I Refinance to a Shorter Term Mortgage?
- Can I afford a higher mortgage payment?
- Will I be able to meet my other financial goals?
- How much of my mortgage have I already paid off?
- Am I planning to move within the next few years?
- Can I pay off my loan faster another way?
- Can You Sell Your House After Refinancing? | 2021 Refi Rules
- How soon can you sell your house after refinancing?
- Owner-occupancy clauses
- Prepayment penalties
- Can you refinance while your home is listed for sale?
- Is it a good idea to refinance right before you sell?
- Reasons you might want to refinance before selling
- Drawbacks to refinancing before you sell your home
- Is a no-closing cost refinance a good idea?
- What are today’s refinance rates?
- When Is It A Good Idea To Refinance Your Mortgage?
- When it’s a good idea to refinance your mortgage
- What is a cash-out mortgage refinance?
- How long does it take to recoup the costs of refinancing?
- How to calculate your break-even point for closing costs
- Example of a mortgage refinance
- How long does it take to refinance a mortgage?
- Learn more:
- When Should You Refinance a Home?
- When Refinancing Your Home Loan Makes Sense
- Grabbing a Lower Interest Rate
- Refinancing to Access Your Home’s Equity
- Refinancing to Get a Shorter Loan Term
- Refinancing to Get Rid of an FHA Loan
- Refinancing to Get Rid of PMI
- Refinancing to Switch from an Adjustable-Rate to a Fixed-Rate Loan, or Vice Versa
- 30-Year Vs. 15-Year Refinance Mortgage
- Calculate Your Mortgage Refinancing Savings
- Find the Best Refinance Rates
- 8 Steps to Refinancing a Mortgage
- Mortgage Refinancing Benefits
- Mortgage Refinancing Drawbacks
- Should you refinance your mortgage if you plan on moving?
- Should you refinance if you plan on moving?
- 1. Substantial debt reduction
- 2. You’ve got real estate investing goals
- 3. Your primary objective is to lower your monthly payment
- 4. Potential savings
- What is the downside of refinancing your mortgage?
Should I Refinance to a Shorter Term Mortgage?
Tap to learn more about refinancing during COVID-19
Due to the coronavirus outbreak, refinancing may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues. If you can’t pay your current home loan, refer to our mortgage assistance resource. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s financial guide to COVID-19.
You might think that refinancing your mortgage to a shorter-term loan is a win-win: You save on interest and pay off your home sooner. But there may be other ways to achieve those goals.
To figure out whether paying your home off sooner makes sense for you, ask yourself these questions:
Can I afford a higher mortgage payment?
For some homeowners, especially those who have young families or who are cash-strapped for other reasons, squeezing an extra few hundred dollars the monthly budget and limiting access to ready cash may be a risk.
Shorter-term loans offer lower interest rates but can come with substantially higher monthly payments.
Since failing to make payments will harm your credit and could put you in jeopardy of losing your home, you need to be sure that larger payments fit your budget.
Even if you feel confident about your ability to make bigger monthly payments, your debt-to-income ratio must be low enough to prove to a lender that you can afford it. For most loans, your DTI, including home-related expenses, should be no more than 36%, according to Fannie Mae, a government-sponsored enterprise that guarantees mortgages.
A higher DTI doesn't necessarily mean you'll be turned down for a loan, but it makes you unly to get a lender's lowest rate. Keep in mind that lenders include all your debt when calculating DTI. If you have substantial credit card debt or a sizable car payment, prepare yourself for a higher mortgage rate.
» MORE: Find current refinance rates
Will I be able to meet my other financial goals?
A mortgage refinance to a shorter-term loan may work if you have few long-term debts and enough money coming in each month to pay your bills (with extra cash to spare). But if your budget is tight or you’re not contributing to other savings, putting more money into your home may not be an optimal long-term strategy.
Rather than build home equity faster, it might make better financial sense to put that money to work in other ways, such as a 529 college fund, retirement accounts, life insurance policies or investments.
» MORE: Investing vs. paying off your mortgage
How much of my mortgage have I already paid off?
Depending on how far along you are on repaying your mortgage, moving to a shorter-term loan can increase your monthly payments, but it can also shrink them — along with total interest costs — if current rates are lower.
For example, cutting your loan term in half after paying it down for only a handful of years can significantly increase your monthly payment. But shaving a couple years off a loan that has been repaid over a long period of time will have less of an impact, and could even slightly decrease your monthly payment.
To get a better sense of where you stand, try using a mortgage amortization calculator. “Amortization” refers to the way the principal and interest is repaid.
Interest payments tend to be higher at the onset, while the amount of your monthly payment going towards principal increases as the loan is repaid.
An amortization calculator will allow you to see the principal and interest paid with each payment, and the remaining balance during any month of your loan.
» MORE: Mortgage refinance closings costs to watch out for
Am I planning to move within the next few years?
If you plan to stay in your current home for only a few more years, refinancing might not save you money. Figuring out your savings isn't just about the interest rate — you also need to consider the costs that go into refinancing your mortgage.
Dividing the total loan costs by your monthly payment savings will give you the number of months it will take to reach the break-even point. If you don't stay in the home long enough to reach the break-even, you won't see any savings before you move.
Can I pay off my loan faster another way?
Refinancing isn’t the only way to shorten your mortgage. With these strategies, you won't change your interest rate, but you also don't have to pay closing costs. Here are some ways to pay off your mortgage more quickly without refinancing to a shorter-term loan.
- Take your current mortgage payment, divide it by 12 and add that amount to your monthly payment. (Check with your lender, and keep an eye on your monthly statements, to be sure the extra amount goes toward principal, not interest.) If you make those additional payments consistently, you could knock years off of a 30-year mortgage.
- Another way to add an extra monthly payment is to go on a biweekly mortgage payment schedule. Paying every two weeks gives you the equivalent of a thirteenth payment. Though some lenders make biweekly payment schedules fairly painless, be wary of setup fees or of using a third-party servicer, which can diminish your savings.
- Crunch the numbers on what the payments would be on a shorter-term loan, and simply make those exact payments each month without going through the motions of refinancing. If you’re short on cash some months, you can simply revert to your standard payment amount without the risk of penalties.
Can You Sell Your House After Refinancing? | 2021 Refi Rules
There are a number of reasons you might want to refinance your home before selling it.
Maybe you want to cash out home equity for repairs. Maybe you’ve already moved and you’re paying two loans. Or maybe you’re just looking for a lower interest rate and monthly payment.
Understand most lenders won’t let you refinance if the home is already listed for sale.
But if it’s not listed, there’s no rule that says you can’t sell your house after refinancing.
However, you might run into a few roadblocks. Here’s what you should know.
Verify your refinance eligibility (Mar 25th, 2021)
In this article (Skip to…)
How soon can you sell your house after refinancing?
Many mortgage lenders don’t dictate how often you can refinance your mortgage. But they might impose restrictions on how soon you can sell after refinancing.
Depending on the language in your refinance agreement, you may have an owner-occupancy stipulation that stops you from selling (or renting out the house) within the first 6-12 months after refinancing.
By signing the refinancing paperwork, you affirm that you “intend to occupy the home as your primary residence for a period of usually one year.”
If your agreement doesn’t include this stipulation, you can sell at any time after refinancing.
But if your agreement does include this clause, selling too soon could trigger legal issues with your lender.
The good news is that this isn’t a hard and fast rule. Some lenders will not enforce this clause if you have extenuating circumstances or a valid reason for selling within this window.
If you plan to sell after refinancing, make sure to look for owner-occupancy clauses in the refi agreement and ask your lender what it considers an acceptable reason to sell before the waiting period is up.
Even if you don’t have an owner-occupancy clause in your refinance agreement, your agreement might have a prepayment penalty.
This is a fee that some lenders charge when a borrower pays off their mortgage loan early, usually within the first three years of getting the loan.
Most new mortgage loans do not have prepayment penalties. But make sure you review your mortgage paperwork to confirm this before selling your home.
In cases where one does apply, there are two types of prepayment penalties: a hard penalty and a soft penalty.
A hard penalty restricts both selling and refinancing within the first three years, whereas a soft penalty only applies to refinancing.
If you have a hard penalty and sell within the penalty-period, you’ll pay either a percent of the remaining loan balance or a certain number of month’s worth of interest.
This is need-to-know information because prepayment penalties are costly.
Let’s say you have a 2% prepayment penalty and a remaining loan balance of $200,000. In this example, you would pay your lender $4,000.
Again, prepayment penalties are rare; but on the off chance your loan has one, you’ll want to be aware of it before selling.
Verify your refinance eligibility (Mar 25th, 2021)
Can you refinance while your home is listed for sale?
There are several seemingly good reasons to refinance while your home is listed for sale.
Maybe your adjustable-rate mortgage is about to reset, and you want to lock in a fixed-rate mortgage in case the property doesn’t sell. Or maybe you already moved, and you’re currently paying two mortgages.
Even if you have a valid reason for refinancing after listing your home, understand that many lenders will not refinance under these circumstances.
If you want to refinance while the home is listed, you may have to remove the listing and keep it off the market 3-6 months.
From a lender’s perspective, you don’t intend on living in the home long-term, so approving the refinance is too risky.
You might find another home before renting or selling this one and let the old mortgage default.
Lenders have to protect themselves. They may have to cover the cost of foreclosure if they refinance real estate that’s listed for sale, then the mortgage defaults after selling it on the secondary market.
So in most cases, no, you cannot refinance your home while it’s listed for sale. The lender will require that you remove the listing, and you might have to keep it off the market for at least three to six months.
However, there are ly some non-traditional lenders, hard money lenders, and others who may consider a property that was just removed from a sale listing.
Is it a good idea to refinance right before you sell?
Even if you’re given the green light to refinance right before selling, should you?
First, let’s dive into a few reasons why someone might consider refinancing before selling their current home.
Reasons you might want to refinance before selling
As earlier mentioned, if mortgage rates are on the upswing, you might refinance to quickly convert an adjustable-rate mortgage to a fixed-rate mortgage and avoid a possibly higher rate down the road.
Some homeowners might want to refinance for a better interest rate and monthly mortgage payment to save money while preparing to sell.
Or, maybe you want to pull a little cash from your equity with a cash-out refinance. If you have enough equity, you could use the money to make improvements to the property before listing.
This could potentially increase the home’s value and help you get a better offer from home buyers when you do sell.
Drawbacks to refinancing before you sell your home
Although you might have good reasons for refinancing before selling, it doesn’t always make financial sense.
Remember, refinancing isn’t free. There are closing costs to consider, which range from 2% to 5% of the loan balance — the same as when you bought the home.
Selling a house after refinancing means you’re less ly to recoup what you spend at closing.
For example, if you pay $5,000 in closing costs, and refinancing reduces your mortgage payment by $250, you’ll need to live in the home for at least another 20 months to break even.
In addition, if you plan to move, refinancing could make qualifying for a mortgage on your new home a little more difficult.
For instance, paying closing costs could reduce savings for a down payment on your new loan. And applying for a refinance could take a couple of points off your credit score, which might have a bigger impact on your future interest rate than you’d think.
If you plan to move, it generally makes more sense not to refinance, and to put your cash towards the down payment and closing costs on your next property instead.
Is a no-closing cost refinance a good idea?
You might ask: Couldn’t I just get a no-closing cost refinance?
This is a good question, but it’s important to understand how a no-closing cost mortgage works.
The benefit of this strategy is that you avoid paying closing costs pocket. The downside is that a no-closing cost refinance typically involves paying a higher mortgage rate to compensate for the lender absorbing these fees.
Or, the lender might simply roll the closing costs into your new mortgage, thus increasing your total mortgage balance.
So although a no-closing cost refinance lets you keep money in the bank, you’ll pay the price in other ways.
Still, it could be a good idea — but only when a higher rate still results in monthly savings, or when rolling closing costs into the balance doesn’t cut too much into your home equity.
And if you think you’ll sell in the near future, make sure you understand the refinance agreement before moving forward
Look for an owner-occupancy clause, prepayment penalties, and count the upfront cost to determine whether refinancing makes financial sense.
You should only refinance if you’ll see a real financial benefit — not just a lower interest rate.
What are today’s refinance rates?
Today’s refinance rates are at historic lows. Many homeowners stand to save by refinancing — but if you plan to sell in the near future, a refi isn’t always the best move.
If you’re on the fence, talk to a loan officer or mortgage broker who can help you explore your options.
Before signing on, you should fully understand and how a refinance will affect your personal finances as well as your homeownership plans in the short- and long-term.
Verify your new rate (Mar 25th, 2021)
When Is It A Good Idea To Refinance Your Mortgage?
When mortgage rates fall, many homeowners refinance their loans. While refinance activity is up dramatically over last year, that doesn’t mean it’s always the best move. Knowing when to refinance your mortgage is the trick.
When it’s a good idea to refinance your mortgage
Generally, if refinancing will save you money, help you build equity and pay off your mortgage faster, it’s a good decision. With rates this low, even people who have fairly new mortgages may be able to benefit from refinancing.
Consider refinancing if you can lower your interest rate by one-half to three-quarters of a percentage point — this can substantially lower your monthly payment.
Make sure your total monthly savings offset the cost of refinancing, however. It may not be a good idea if you plan to move in the next two years, which gives you little time to recoup the cost.
The question of when to refinance is not just about interest rates, either; it’s about your credit being good enough to qualify for the right refinance loan. Mortgage interest rates are determined by market factors, including the yields on long-term Treasury bonds, and the best rates and terms go to those with the best credit.
Your financial goals, how long you plan to stay in your home, how much equity you have in the home and your overall financial condition are important considerations when it comes to refinancing. Ask yourself the right questions.
There are a variety of ways to refinance your mortgage. Finding the right loan depends on your goals. You may want to switch from an adjustable-rate mortgage to a fixed-rate loan that has a steady monthly payment, or you may want to shorten the term of your loan from a 30-year to a 15-year and save yourself a bundle in interest charges.
A refi is also a way to get rid of private mortgage insurance after you have reached 20 percent equity in your home.
Most homeowners opt for a straight rate-and-term refinance that lowers their interest rate and gives them a comfortable repayment term. Some want a lower monthly payment to free up money for other expenses, such as college tuition or an auto loan.
What is a cash-out mortgage refinance?
Other homeowners go with a cash-out refinance, in which they borrow more than they owe on the home and use the cash to retire credit card debt, pay for home renovations or some other major expense.
Wiping out credit card balances with a lower-interest loan can be a wise move, but if you start racking up card balances again, you’re setting yourself back and increasing your risk. Your mortgage is a debt secured by your home; if you start missing mortgage payments, you could lose your home to foreclosure.
“A borrower should consult with a mortgage professional to determine if their financial needs are best suited for a cash-out refinance vs. other forms of credit,” says Richard Liu, a mortgage consultant for C2 Financial Corp., a San Diego-based mortgage brokerage.
How long does it take to recoup the costs of refinancing?
The interest rate is not the only cost to weigh when you’re considering whether refinancing is worth it. There are costs to close the refi loan, and they can be steep. Expect closing costs to total 2 percent to 5 percent of the principal amount of the loan. If you borrow $200,000 and closing costs are 3 percent of that, you would owe $6,000 at closing.
There’s also a new refinancing fee, effective Dec. 1, which tacks on 0.5 percent of the loan balance to your closing costs if your refi is higher than $125,000. This doesn’t apply to FHA or VA refinances.
Rather than require all that money upfront, many lenders let you roll the closing costs into your principal balance and finance them as part of the loan.
To decide whether a refinance makes sense, calculate how long it will take for the cost of the mortgage refinance to pay for itself. If you plan to sell the house before your break-even point, refinancing might not be worth it.
“If a borrower is refinancing strictly to lower monthly mortgage payments and closing costs are $2,400, the borrower should expect to save at least this amount in interest payments for the duration they plan to have the loan,” says Liu.
To determine your break-even point, divide the total closing costs by the amount you save each month with your new payment.
How to calculate your break-even point for closing costs
Let’s say your new mortgage saves you $192 a month and closing costs are $3,000.
$3,000 / $192 a month in savings = 15.6 months to break even
If you plan to sell the house before you break even, refinancing is not a good strategy.
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
Example of a mortgage refinance
Let’s say you took out a 30-year mortgage for $150,000 at a fixed interest rate of 6 percent. Your monthly payment is $899 and over the life of the loan, you’d pay $323,755, including $173,755 in interest.
Five years into the loan, you’ve paid $10,418 toward the principal and $43,541 in interest. Now you want to refinance the remaining $139,581 of your principal balance with a new 30-year fixed-rate loan of 4.5 percent. Using Bankrate’s mortgage refinance calculator, you can figure out whether this would be a money-saving move.
Your new loan would slash your monthly mortgage payment by $192 a month — to $707. Over the life of the loan, you’d pay $254,605, of which $115,024 would be interest. Add in the $53,959 in principal and interest you paid in five years on the previous mortgage and your total cost will be $308,564 — including $158,565 in interest.
By refinancing, you not only lower your monthly payments significantly; you see a long-term savings of $15,190 in interest.
How long does it take to refinance a mortgage?
The time it takes to refinance depends on your lender as well as how long it takes to complete inspections, appraisals, credit checks and other requirements. Many lenders’ websites allow you to read about different loan products, compare interest rates, fill out loan applications and submit documents.
“Within the past few years, technology has streamlined the mortgage process tremendously,” says Liu. “With online applications, mobile document-scanning apps and e-signatures, borrowers can perform most tasks without printing a single document. Most refinances can be closed within 30 days.”
Use Bankrate’s mortgage calculator to compare your own loan scenarios:
- See what happens when you input different mortgage terms (in years or months).
- Reveal the amortization schedule to see how much total interest you would pay.
When Should You Refinance a Home?
Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
It makes sense to refinance a home when it will save you money or make paying your monthly bills easier.
Some experts say you should only refinance when you can lower your interest rate, shorten your loan term or both. That advice isn’t always correct.
Some homeowners may need short-term relief from a lower monthly payment, even if it means starting over with a new 30-year loan.
Refinancing also can help you access the equity in your home or get rid of an FHA loan and its monthly mortgage insurance premiums.
When you refinance, you get a new mortgage to pay off your existing mortgage. Refinancing works just getting a mortgage to buy a house. You’ll be free from the stress of home buying and moving, though, and there’s less pressure to close by a certain date. Further, if you regret your decision, you have until midnight of the third business day after your loan closes to cancel the transaction.
From April 2019 through August 2020, the average time to refinance a conventional mortgage ranged from 38 to 48 days, according to Ellie Mae’s Origination Insight Report. When interest rates drop and many homeowners want to refinance, lenders get busy and refinancing can take longer. Refinancing an FHA or VA loan can also take up to a week longer than a conventional refi.
When Refinancing Your Home Loan Makes Sense
Refinancing can lower your monthly mortgage payment by reducing your interest rate or increasing your loan term. Refinancing also can lower your long-run interest costs through a lower mortgage rate, shorter loan term or both. It also can help you get rid of mortgage insurance.
Closing costs such as the origination fee, appraisal fee, title insurance fee and credit report fee are always an important factor in deciding whether to refinance. These costs typically amount to 2% to 6% of the amount you’re borrowing.
You’ll need to know the loan’s closing costs to calculate the break-even point where your savings from a lower interest rate exceed your closing costs. You can calculate this point by dividing your closing costs by the monthly savings from your new payment.
Here are a few examples of how a break-even period works.
A break-even period of 25 months is fine, and 50 might be, too, but 75 months is too long. There’s a good chance you will refinance again or sell your home in the next 6.25 years. Between 1994 and the first quarter of 2020, the median number of years a borrower has kept a mortgage before refinancing is 3.6 years, according to data from Freddie Mac.
If you think your new loan will be your last, make sure to account for any additional years of interest you will be paying. For example, if you have 27 years left and you’re starting over with a 30-year refi, that’s three extra years of interest, and your break-even period is longer.
Now, let’s talk about the most common reasons to refinance.
Grabbing a Lower Interest Rate
When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both.
Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly over more years.
In the first quarter of 2020, which mostly includes pre-pandemic refinance activity, 55% of borrowers who refinanced maintained their current principal balance or increased their balance by less than 5% (by financing their closing costs), according to Freddie Mac data. This is the most common choice: a rate-and-term refinance.
A higher credit score will help you get a better interest rate on your mortgage. To get the best rates, you’ll need a credit score of 760 or higher. Almost 3 in 4 homeowners who refinanced in April 2020 had a credit score of 750 or higher, according to mortgage processor Ellie Mae. The average FICO score was 763.
Bringing cash to closing might also get you a slightly lower interest rate or allow you to avoid private mortgage insurance (PMI). Three percent of borrowers did this during the first quarter of 2020.
Related: Compare Personalized Refinance Rates From 6 Lenders
Refinancing to Access Your Home’s Equity
In the first quarter of 2020, 42% of all refis involved an increased principal balance by at least 5%, indicating the owners took cash out, financed closing costs or both. While cash-out refi rates can be a bit higher than rate-and-term refinance rates, there still may be no cheaper way to borrow money.
You can access your home equity through a cash-out refinance if you will have at least 20% equity remaining after the transaction. Here’s an example.
If your only goal is to get cash and not to lower your interest rate or change your loan term, a home equity loan or line of credit may be less expensive than the closing costs on a cash-out refi.
Refinancing to Get a Shorter Loan Term
If you refinance from a 30-year to a 15-year mortgage, your monthly payment will often increase. But not only is the interest rate on 15-year mortgages lower; shaving years off your mortgage will mean paying less interest over time. The interest savings from a shorter loan term can be especially beneficial if you’re not taking the mortgage interest deduction on your tax return.
That said, with mortgage interest rates so low, some people prefer to spend more years paying off their home so they have more cash to invest at a higher rate and more years for their investment earnings to compound.
In 2019, 78% of borrowers refinanced from a 30-year fixed-rate mortgage into the same loan type, according to Freddie Mac. Another 14% went from a 30-year to a 15-year fixed. And 7% went from a 30-year to a 20-year fixed.
Refinancing to Get Rid of an FHA Loan
FHA loans have mortgage insurance premiums (MIPs) that cost borrowers $800 to $1,050 per year for every $100,000 borrowed. Unless you put down more than 10%, you must pay these premiums for the life of the loan—which means the only way to get rid of them is to get a new loan that isn’t backed by the FHA.
Refinancing to Get Rid of PMI
Eliminating private mortgage insurance on a conventional loan is not, by itself, a reason to refinance. Un FHA MIPs, you don’t have to get rid of your loan to get rid of PMI. You can request cancellation once you have enough equity—typically 20%.
Refinancing to Switch from an Adjustable-Rate to a Fixed-Rate Loan, or Vice Versa
Some borrowers refinance because they have an adjustable-rate mortgage and they want to lock in a fixed rate.
But there are also situations when it makes sense to go from a fixed-rate to an adjustable-rate mortgage or from one ARM to another: Namely, if you plan to sell in a few years and you’re comfortable with the risk of taking on a higher rate should you end up staying in your current home longer than planned.
30-Year Vs. 15-Year Refinance Mortgage
Most of your monthly payments go toward interest at the beginning of a 30-year loan. You’ll have little home equity for many years unless you’re able to build it faster through home-price appreciation or extra principal payments. Refinancing into a 15-year mortgage helps you build equity faster, but it may increase your monthly payment, as the table below shows.
Is it Worth Refinancing Into a 15-Year Mortgage?
For some people, getting a lower monthly payment is the most important reason for refinancing. It may not be an ideal long-term plan to recommit to 30 years of payments, but it may be essential to keeping your home and paying your bills in the short term. If things improve later, you can pay down your principal faster to save money, or even refinance again.
Calculate Your Mortgage Refinancing Savings
To calculate your monthly savings from refinancing, use a mortgage calculator to enter these numbers and get your new monthly payment:
- Amount to refinance (your current principal balance, or your current principal balance plus the amount you’re cashing out, or your current principal balance minus the amount you’re cashing in)
- New interest rate
- New loan term
Compare your new monthly payment to your old monthly payment. The table below shows how grabbing a lower interest rate could save you $204 per month, or $2,448 per year.
Don’t just look at the monthly payment, though. How much will each loan cost you in total interest assuming you pay off the mortgage and don’t sell your home or refinance again?
To get this information, select the calculator’s option to view the amortization table. At the bottom, you’ll see the total interest for the new mortgage. Write that number down.
Then, do a new calculation with the mortgage calculator. Enter your:
- Original principal amount
- Current interest rate
- Current loan term
Then, view the amortization table for that calculation and see what your current total interest over the life of the loan will be. How much will you save in the long run by refinancing?
Keep in mind that you’ve already paid several years’ worth of interest on your current (original) loan, so your savings is not $162,000 minus $113,000. It’s $162,000 minus $113,000 plus the interest you’ve already paid.
Find the Best Refinance Rates
To find the best refinance rates, you’ll have to do some work, but it won’t take much time. Look at banks, credit unions and online comparison sites. You also can work with a mortgage broker if you want someone to do the legwork for you and potentially get you access to lenders you wouldn’t find on your own—lenders that might offer you better terms.
Submit three to five applications to secure formal loan estimates. The government requires the loan estimate to show your estimated interest rate, monthly payment and closing costs on a standard form that makes it easy to compare information across lenders.
On page 3 of the loan estimate, you’ll see the annual percentage rate, and on page 1, you’ll see the interest rate. When you’re buying a car, it usually makes sense to pick the loan with the lowest APR, because APR includes a loan’s fees.
With mortgages, it’s different. The APR assumes that you will keep the loan for its full term. As we’ve already seen, that doesn’t usually happen with home loans. You might be better off with a loan that has a higher APR and a higher monthly payment but no fees.
Instead of putting cash toward closing costs, you could keep that money in your emergency fund or use it to pay down debt with a higher interest rate than your mortgage.
Another problem is that if you’re comparing the APRs on a 30-year and a 15-year loan, the 15-year loan might have the higher APR despite being much less expensive in the long run.
8 Steps to Refinancing a Mortgage
- Do the math to see if refinancing makes sense.
- Decide what type of mortgage to refinance into.
- Get loan estimates from three to five lenders.
- Apply with the lender that offers the best price.
- Gather and submit the required financial documents.
- Lock your interest rate (could happen after step 4).
- Three days before closing, make sure your closing cost statement is in line with your loan estimate.
- Sign the closing paperwork.
Mortgage Refinancing Benefits
Depending on what type of mortgage you’re paying off and what type you’re refinancing into, the benefits of refinancing your mortgage might include the following:
- Lower your monthly payment
- Pay less interest over time
- Cash out some equity
- Stop paying mortgage insurance premiums
Mortgage Refinancing Drawbacks
- Increase your monthly payment
- Pay more interest over time
- Pay closing costs
- Spend time shopping for a new mortgage and submitting required paperwork
The reason to refinance is that small changes in monthly payments and interest costs can add up to big savings over time. If you anticipate selling your home in only a year or two, however, it may not make sense to pay the costs involved in refinancing.
Depending on your lender and your loan terms, you may pay as little as a few hundred dollars or as much as 2% to 3% of the new loan value to complete a refinancing. If it’s going to cost you $3,000 to complete the refinance and it will take four years to recoup that money, it may not make sense for you.
Alternatively, if you can refinance and pay only $1,000, and have no plans to sell anytime soon, it’s very ly worth paying that $1,000 to save over time. In addition, some lenders allow you to roll your closing costs into the amount of the loan, so you don’t have to come up with money pocket for closing costs.
One downside to refinancing is that if you sign up for a new 30-year mortgage, you’re restarting the clock until you’re mortgage free. If you’re already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean you’re carrying debt into your 60s when you’re ly going to be thinking about retiring.
It’s possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If you’re in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what you’ll be doing with those new freed up dollars each month.
Should you refinance your mortgage if you plan on moving?
We’re all familiar with the token financial advice that dominates the news cycle every January: contribute 10% of your salary each year to retirement, save an emergency fund, eliminate high-interest debt first, and don’t refinance your mortgage if you want to move in the near future.
But what if it is time to shake up that advice? Due to the COVID-19 pandemic and its effect on interest rates, current mortgage rates may still be low enough for it to make sense to refinance – even if moving is in the near term future.
Want to see current interest rates without impacting your score? Visit Credible to compare refinancing rates and lenders instantly.
Should you refinance if you plan on moving?
Just because you're moving doesn't mean refinancing is off the table. In fact, there are some compelling reasons to consider refinancing despite your upcoming move. Here are just a handful.
- Substantial debt reduction
- You have real estate investing goals
- Your primary objective is to lower your monthly payment
- Potential savings
1. Substantial debt reduction
Refinancing with a cash-out refinance could swap home equity for funds to pay off high-interest consumer debt. The added benefit? Homeowners are able to deduct mortgage interest on their taxes, which is why it may make more financial sense to roll the debt into the new mortgage.
“Putting higher interest rate debts 'into' the mortgage increases monthly cash flow,” explained Wendy Thompson, President of The Wendy Thompson Team, a mortgage broker and lender.
“For example, someone might have consumer debt totaling $20,000 with a minimum monthly payment of $300 to $400 a month…this amount would only be $100 extra each month if included within a 30-year mortgage.”
While mortgage rates are hitting record lows, you still may have some hesitation when it comes to a cash-out refinance. That's OK. Visit Credible to view loan options across multiple lenders with fewer forms to fill out.
5 REASONS TO GET A CASH-OUT REFINANCE
2. You’ve got real estate investing goals
Many homeowners leverage a cash-out refinance for money to put down on an income property, but even if you’re looking to keep your current home and turn it into a rental, you should consider refinancing. This way, the mortgage on the property is at the lowest interest rate and monthly payment possible, which will yield more profit each year.
Visit an online marketplace Credible to view refinance rates and get cash out to pay off high-interest debt.
IS A CASH-OUT REFINANCE A GOOD IDEA?
3. Your primary objective is to lower your monthly payment
Some homeowners may need relief sooner rather than later. But what about closing costs? Certain lenders may allow homeowners to use credit to offset closing costs.
“Depending on the size of the loan it is quite possible that someone could refinance with little to no costs,” said Thompson. “Let’s say you had a $400,000 loan at a 3.5% current rate and could take that to 2.625% with no closing costs.
With the costs rolled in, it would still save nearly $200 a month.”
Without cash needed for closing costs, a homeowner can snag the opportunity to lower the monthly payment substantially without money coming pocket.
To see how much a refinance can lower your monthly mortgage payment and to better understand your total cost savings, enter your current loan amount into Credible and crunch the numbers instantly.
THIS MORTGAGE RATES MISTAKE COULD COST YOU THOUSANDS
4. Potential savings
With so much uncertainty still lingering a year into the COVID-19 pandemic, we all know plans are constantly in flux. It’s important if the house you’re in currently is not the “forever home” to then utilize a mortgage refinance calculator to see how much money you could potentially save by refinancing.
Specifically, look at the “break-even” date, or when the savings on the loan pay off any closing costs associated with the refinance. For example, on a $300,000 mortgage, closing costs could be 1.
5% of the refinanced amount, or $4,500. Let’s assume with the refinance you save close to $500 each month.
This means the refinance will pay for itself in 9 months’ time and then, after that, you’ll begin saving money.
Being familiar with the breakeven date on your mortgage refinance is important because it allows you to attach some figures to very important life choices. If the interest rate savings on the new loan are high enough to offset the closing costs within a matter of months, it would still make sense to refinance, but again, it depends on your moving timeline.
HOW REFINANCING YOUR MORTGAGE COULD PUT CASH IN YOUR POCKET
What is the downside of refinancing your mortgage?
Even with the advantages refinancing can provide, there are still many instances when it just doesn’t make sense.
- Home equity: Most lenders require a homeowner to have a certain amount of equity in their home in order to refinance.
- Closing costs: While some lenders allow homeowners credits to offset closing costs, some lenders do not. If you are low on cash, it may not make sense to part with it in order to refinance.
- Adverse market fee: Depending on the amount refinanced, the newly implemented adverse market fee (around $500 for every $100k refinanced) may make the refinance too expensive to make sense.
Because of the historically low interest rate environment we’re living in right now, depending on your primary financial objective, refinancing may be the best route to get there.
The first step to learning about what refinancing options exist is to shop interest rates with at least three lenders.
The best place to do this is Credible, where borrowers can browse multiple lenders with fewer forms to fill out.
THIS MORTGAGE RATE MISTAKE COULD COST YOU THOUSAND