Home Loans: When Should You Refinance Your Mortgage?


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If you’re wondering if it’s time to refinance your mortgage, you first need to know how much you can save and how much refinancing will cost you.

Ideally, refinancing will save you money in both the short and long term by reducing your monthly payment and lowering your interest rate. But you need to make sure you save enough so you don’t lose money after paying the final costs of refinancing your mortgage.

Connected: Review your individual refinancing rates with better mortgages

What is mortgage refinancing?

Refinancing a mortgage is replacing an existing mortgage with a new mortgage with different conditions. Usually one of these conditions is a lower interest rate. Sometimes it takes a different number of years before payment is made. Less commonly, it is a fixed rate rather than an adjustable rate, or vice versa.

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

When is the best time to refinance your mortgage?

Homeowners refinanced $ 2.6 trillion in mortgage debt last year thanks to record low mortgage rates, according to Freddie Mac, the quasi-government agency that helps fuel the mortgage market. The rates remain exceptionally low, so it’s worth checking the numbers and seeing how much you can save by refinancing now. Here are some signs that the timing might be right.

  • You can reduce the rate by at least 0.5%… There is no hard and fast rule about which interest rate cut makes refinancing worthwhile. You must calculate how much you will save based on each lender’s offer. But if the current rates are lower than your existing ones, it’s time to take stock and look for options. According to Freddie Mac, the typical homeowner refinancing in 2020 lowered his rate by 1.2 percentage points. Borrowers with very good or excellent credit history get the best rates.
  • You can pay off your mortgage faster… Refinancing for a shorter term mortgage can potentially save you more by combining a lower interest rate with fewer years of payments.

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

If you refinance this amount into a 15-year loan at 2.1%, your new monthly payment will be $ 1,900 and you will pay $ 49,000 in interest over the next 15 years (plus approximately $ 10,000 in interest you paid during first year your 30 year mortgage). You will end up saving $ 126,000 less closing costs of around $ 3,000.

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

  • Do you want a different type of mortgage… If you have an adjustable rate mortgage but prefer a fixed rate mortgage, this is a good reason to refinance. If you originally took out an FHA loan because your credit was low, but now your rating is much higher, you can refinance your loan into a regular loan to stop paying FHA mortgage insurance premiums.
  • You want to cash out some of your capital… Home prices rose 15% in June over the previous year, according to Zillow. If you’ve been looking for a source of cash to renovate your home, remodel, or pay off debt at high interest rates, cash-in refinancing might make sense if you can lower your mortgage rate.

Connected: Review your individual refinancing rates with better mortgages

When is refinancing a bad idea?

It is tempting to refinance when you see how low the current market rates are and how many other people are doing it. However, after considering your own circumstances, you may find that refinancing is not the best choice for you if one of these situations applies.

  • You significantly extend the term of the loan… Let’s say you have a 30-year mortgage for five years. If you refinance another 30 year loan, you end up in a situation where you pay your 35 year mortgage instead. Since you mostly pay interest during the first years of a 30-year loan, this type of refinancing can be costly in the long run, even if it lowers your monthly payment in the short term.
  • When your breakeven period is too long… If refinancing for a shorter period is not possible, you need to calculate a break-even point. Divide closing costs by monthly savings to find out how long it will take you to get ahead with refinancing. For example, if you pay $ 3,000 to refinance a new 30-year mortgage that will save you $ 200 a month, it will take you 15 months to pay off. If you plan to sell your home in a year, you will lose money due to refinancing.
  • You don’t have a good plan for how you will use the returnable cash for cashing out… Just because you can refinance with cash out does not mean you should. If your goal is to become mortgage free someday, and if refinancing with cash payments does not significantly improve your finances or quality of life, you can simply skip it.
  • You are out of work… In most cases, you will not be able to refinance if you are unemployed. If you have an FHA or VA loan, you can still qualify for simplified refinancing. If you are having trouble making payments on a regular loan, you can qualify for a loan change. However, without a steady source of income, you probably won’t be able to refinance your regular loan.

How do I refinance my mortgage?

Refinancing is likely to be easy as this is not your first time applying for a mortgage. You already know how the process will unfold.

However, you don’t have to stick with your current lender. You can and should look closely and get at least three offers. It makes sense to choose the option that saves you the most money.

Also, since you last applied for a mortgage, it may change that many lenders have moved most of their processes online. You can avoid paperwork by uploading the information requested by the lender through a secure online portal. You can even sign your closing papers online and have them certified by a remote notary, depending on where you live and how your lender does his business.

What to expect when refinancing

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

According to ICE Mortgage Technology, the average time to close a refinancing deal in June was 48 days.

Interest rates

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

You want to make sure that your bet lock lasts long enough for you to complete the close. You will likely want to lock your rate early in the application process to eliminate the risk of a rate spike affecting your refinancing decision.

additional fee

Refinancing typically costs less than 1.3% of the loan amount, including taxes, according to ClosingCorp, a real estate closing analyst firm. The average closing cost for refinancing a single-family home in 2020 was $ 3,398 including taxes.

When refinancing, you can count on the following fees:

  • Application fee
  • Loan disbursement fee
  • Credit report fee
  • Points to redeem your bet (optional)
  • House appraisal fee
  • Pest inspection fee
  • Real estate transfer taxes (if applicable in your jurisdiction)
  • Title Search Fee and Lender Title Insurance
  • Survey (sometimes)
  • Escrow / Close Fee
  • Notary fees

If the numbers are in your favor, refinancing can be a great way to save money. While this process can have its own administrative problems, in the end it is worth the wait (and work).

Connected: Review your individual refinancing rates with better mortgages

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