What Does It Mean To Refinance A Mortgage
To refinance a mortgage essentially means taking out a new loan to pay off your old one. Although this can be a great way to lower your mortgage payment and interest rate, change your terms, or consolidate your debt, refinancing does come with some costs and risks.
|DID YOU KNOW: In 2020, 87% of Americans purchased their new home with a mortgage.|
How Soon Can You Refinance A Mortgage
If you have a conventional mortgage, you can typically refinance into a lower interest rate as soon as you want. However, youll have to wait six months if you want cashback.
- Conventional refinance No waiting period
- Cash-out refinance 6month waiting period
- FHA or VA Streamline Refinance 210day waiting period
- USDA refinance 612 month waiting period
Heres a closer look at the rules for each type of refinance loan.
Can I Refinance With The Same Bank
The short answer is yes, though it might not be the best option. Refinancing with your current mortgage lender has some advantages: They already have your information on file, and they may offer you a good deal to stick with them. On the other hand, if youre looking for the very best possible deal, then its worth shopping around.
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How Quickly Can I Refinance A Mortgage
In principle, there is no minimum amount of time that you must wait before refinancing your conventional mortgage. In theory, you could refinance immediately after purchasing your home. However, some lenders have rules that stop borrowers from immediately refinancing under the same lender.
Whether these rules apply to you will depend on the type of mortgage that you have and which lender you are with. Keep in mind that there is also a general requirement that you have a debt-to-income ratio of 36% or less, which will take the average homebuyer a few years to reach.
Bottom Line: Is It A Good Idea To Refinance More Than Once
Essentially, if rates have fallen since you got your first mortgage and you want to reduce your mortgage payment and interest, a rate-and-term refinance could help you out especially if youve improved your credit score. However, this wont work as well if your credit score has dropped or rates are up.
A cash-out refinance can be a great option if your homes value has appreciated significantly since you bought it and you want to turn some of your hard-earned equity into cash. You just have to be careful not to sign up for a rate or terms you cant afford.
All things considered, it can be a good idea to refinance multiple times throughout the life of your mortgage if the conditions are right. Make sure to review your credit score, income, expenses, debts and goals each time you plan on refinancing.
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- Freddie Mac, Understanding the costs of refinancing. Accessed January 19, 2022.
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No Need To Worry About Refinancing Too Soon
Refinancing is worth it if you discover that you can save monthly or over the life of the loan.
Most mortgage shoppers arent at risk of refinancing too soon and can apply even shortly after their previous loan closes.
Check your refinance savings and dont miss out on lower housing costs.
Refinance Mortgage To Lower Your Rate
- Dont settle for the first rate offered by your existing lender or any one bank.
- Use the services of a good mortgage broker, or shop between lenders yourself to get a better rate.
- Ensure the fine print includes good flexibility to allow for real estate and other life changes that may come up in the future.
- This flexibility more specifically will help you get ahead faster on your new mortgage, and save you from unexpected high penalties, high costs or high rates on your renewal date, and other high expenses that can hide in the fine print.
- Reconsider variable vs fixed rate one or the other may save you more at this point in time and point in the economic cycle.
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Compare Rate Quotes And Loan Terms
Once youve narrowed down refinance offers, evaluate them carefully. The interest rate is of course a major consideration, but also take the time to review the closing costs and other loan terms. If one of the offers includes an early repayment fee, for example, that means paying more if you decide to refinance again sometime in the future. If one of the offers lacks an origination fee, you could have significantly lower closing costs to cover.
You Want To Do Home Improvements Or Renovations
From fixing a broken HVAC system to replacing the pink linoleum in the bathroom, you might need to invest in your home at some point or another. Using the equity in your home can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have lower interest rates than most credit cards.
Cash-Out Refinance For Renovations
The average 30-year mortgage rate is currently under 4%, and the average low-interest credit card rate is more than 12%. If you choose a variable rate credit card or a store credit card, youll likely pay even more in interest. If you have enough equity in your home to do a cash-out refinance, you can complete your renovations or repairs without excessive interest charges.
Though you can do anything you want with the money you get from a cash-out refinance, its important to remember that your refinance is still a loan. Its a good idea to get estimates from contractors or repair professionals before you close on your refinance. This will lessen the chance that you take out too much money, or you take out too little and have another bill after the job is finished.
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When Is A Refinance Worth It
Whats most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings youll earn? says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says best candidates for refinancing are:
- Those with high mortgage rates relative to a new lower rate
- Those who intend to stay for a long time in their home
- Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you dont have to pay upfront.
That higher interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makesthe decision to refinance an easy one.
When To Refinance A Mortgage
Refinancing your mortgage can be a great way to save money, but its not always the right choice, so be sure to do your research before making a decision. The best time for mortgage refinancing is when you have equity in your home, there are low rates, and you can get a loan with favorable terms. You should also consider refinancing if youre looking to consolidate debt or get cash out of your home equity.
Refinance Your Mortgage to Pay off the Loan Quicker
To pay off the loan quickly, refinancing your mortgage is a good option for saving money in the long run. There are a few steps to refinance a mortgage, checking your credit score being the first one since youll need a good credit score to qualify for a lower interest rate. Also, make sure the mortgage rates are low and that you understand the fees before refinancingyou should refinance your mortgage when the interest rates drop by at least two percentage points.
Refinance Your Mortgage Gained Enough Equity
If youve been making on-time mortgage payments, you may have built up some equity, which means you can refinance your mortgage and get a lower interest rate. The amount of equity you need to refinance varies by lender, but most lenders ask for at least 20% equity. When deciding when to refinance a mortgage, make sure to research which equity loans are best for you.
Refinancing When Looking To Tap a Bit of Their Home Equity With a Cash-Out Refinance
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Usda Loan Refinance Rules
The U.S. Department of Agriculture has a loan program to help individuals in rural areas buy homes with no down payments and low interest rates. These come in the form of either direct loans or loans through private lenders guaranteed by the USDA.
The USDA offers three different types of refinances: non-streamlined, streamlined, and streamlined-assist.
- For a streamlined or non-streamlined loan, you must have made on-time loan payments for 180 days prior to your loan application.
- To be eligible for a streamlined-assist refinance, you must have made on-time loan payments for 12 consecutive months prior to your loan application.
It Depends On Your Current Loan
If you have a conventional mortgage, there are typically no restrictions between when that mortgage was closed and when you can refinance as long as youre not taking cash out.
Government-backed loans impose a refinance waiting period between six and seven months, depending on the loan issuer. Additionally, borrowers must make payments on time for at least three months, and there must be a demonstrated benefit to the refinance .
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If You Can Get A Lower Interest Rate Or Get Better Terms
Refinancing can be a great move if interest rates are significantly lower than they were when you first obtained your reverse mortgage. If you can qualify for a lower rate, that can help reduce your loan costs over time.
In addition, if you are currently in an adjustable-rate reverse mortgage, you might consider refinancing into a more predictable fixed-rate loan. Finally, there are three different types of reverse mortgages: the federally backed home equity conversion mortgage single-purpose reverse mortgages and private reverse mortgage loans. You could move from one type to another that better suits your needs.
Con: You Dont Know How A New Lender Treats Its Customers
If youve developed a good relationship with your lender, thats no small thing. Having someone you trust with your money is invaluable, and your home is probably the largest investment you have, so you want to make sure you have confidence in the lender that youre working with, says Todd Sheinin, chief operating officer at Homespire Mortgage in Gaithersburg, Md. Some lenders treat their clients better than others.
Reflect on your experience with your current lender. Sheinin recommends considering questions like: Were you kept informed of everything that was happening with your mortgage? Do you feel like you had your loan officers full attention? Did you get a great rate? Has your lender kept in touch?
Having a responsive lender is especially important when things go wrong say, if you need help applying for mortgage forbearance or need a loan modification.
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Current Market Interest Rates
You can almost always save money by refinancing if interest rates are lower now than when you got your loan. Compare your current APR with market rates and see if youre overpaying for your loan.
You may be able to save even more if your credit score has gone up since you first got your mortgage. If you arent sure how rates in your area have trended, contact a local real estate professional or a Home Loan Expert.
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How Do I Refinance My Mortgage
Refinancing will probably feel easy since its not your first time applying for a mortgage. You already know how the process will unfold.
However, you dont have to stick with your current lender. You can and should shop around and get at least three quotes. It makes sense to go with the option that will save you the most money.
Also, something that might be different since you last applied for a mortgage is that many lenders have moved more of their processes online. You may be able to avoid paper documents by uploading the information the lender requests through a secure online portal. You may even be able to sign your closing documents online and have them witnessed by a remote notary, depending on where you live and how your lender does things.
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Mortgage Rate Lock Option
Mortgage interest rates are extremely dynamic, and may change from day to day. After finalizing your application and getting approved for your loan, your lender may give you the option to lock your rates so they donât change before you close on the loan. Typically, youâll have the option to lock your rates for a period of 30, 45 or 60 days, with the option to extend the rate-lock period for additional fees. Alternatively, you may choose to âfloatâ your rate rather than locking it in, accepting whatever mortgage rates may be at the time of closing.
Get Your Paperwork In Order
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.
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Its Better To Refinance Sooner Rather Than Later
Its never too early to think about refinancing your home loan.
There is no minimum time wait. A mortgage is a contract. As soon as you can get a better deal, you should terminate the contract and take that better deal, says Realtor and real estate attorney Bruce Ailion.
Closing attorney Chuck Biskobing says there are no major risks to refinancing within a year or so of purchasing.
Ive seen people refinance three times in a year to follow falling interest rates, says Biskobing.
Say you want to apply the money saved each month back to the loan in the form of accelerated payments toward the principal, he says. If so, you will almost certainly pay off the new loan faster than the old loan. And youre not adding enough time on the loan to really matter.
In other words, youre not resetting your loan term by much if youre just six or eight months into the mortgage.
But if youre much further into your loan say five to 10 years resetting to a new 30year mortgage may not pay off.
To find out if a refi is worth it based on your remaining term, try this refinance calculator.
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 youre 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.
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Should I Refinance If I Only Plan On Living In My Home For A Few More Years
Similar to when you initially purchased your home, you will have to pay fees, taxes and closing costs on your refinance mortgage. It is important to determine how long it will take to reach your âbreak-even pointâ when refinancing a mortgage. The break-even point is the point at which the monthly savings created by a mortgage refinance offsets the cost of refinancing.
Per the Consumer Financial Protection Bureau, you should consider how long it will take for the monthly savings to pay for the cost of the refinance. Review the closing costs you paid for your original loan to purchase the home. Refinancing costs can be about the same amount. A common rule of thumb is to proceed only if the new interest rate saves you that amount over about two years .
So, make sure you do the math and understand how the new loan will affect you.
Does Refinancing Affect My Credit
Refinancing a mortgage can have some impact on your credit, but its usually minimal. This can occur for multiple reasons:
- Mortgage lenders conduct a credit check to see if you qualify for a refinance, and this appears on your credit report. A single inquiry can shave up to five points off your score.
- If you plan to apply for other types of debt, such as a car loan or credit card, in addition to refinancing, your credit score can also be affected.
- When you refinance, youre closing one loan and opening another. Your credit history makes up 15 percent of your score, so having one loan close and then taking on a new one shortens the duration, impacting your score.
In general, these effects will only be felt for a short period of time. If youre concerned about hurting your score while you compare refinance offers, try to shop for loans within a 45-day window. Any credit pulls related to your refinance in this timeframe will only be counted as one inquiry.
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