Your Credit Has Improved
Your credit is a significant factor in determining your mortgage rate. Generally speaking, the better your credit is, the lower the interest rate youll receive.
Lets look at an example based on recent interest rates. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO® credit score is within the 660 to 679 range, the myFICO Loan Savings Calculator estimates you could pay 3.375% APR .
With this interest rate, your monthly payment would be $663 and your total interest paid across 30 years would amount to $88,732.
In comparison, if your credit score was in the 700 to 759 range, the calculator estimates your monthly payment would drop to $631 . And over the life of the loan, you could save more than $11,500 in interest.
Wait To Find The Best Rate
Dealer financing can be competitive. When dealers make offers, theres nothing to stop them from recommending the financing options that work best for them.
Take some time to shop around for a good interest rate with another financial institution or lender. Your local credit union or an online lender may have competitive car loan refinancing rates.
Refinancing To Tap Equity Or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another justification is that the interest on mortgages is tax-deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision nor is spending a dollar on interest to get a 30-cent tax deduction. Also note that since the Tax Cut and Jobs Act went into effect, the size of the loan on which you can deduct interest has dropped from $1 million to $750,000 if you bought your house after Dec. 15, 2017.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
It takes years to recoup the 3% to 6% of principal that refinancing costs, so don’t do it unless you plan to stay in your current home for more than a few years.
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Keep The Status Quo During The Process
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Will applying for a travel rewards credit card before closing on your purchase or refinance disqualify you from obtaining the financing? he said. No, not necessarily.
However, Karetskiy says it could. And it will likely cause more work, time and stress for both you and your loan officer.
The lenders job is to make a yes-or-no decision on an applicants request for credit based on the applicants current and past two-year income, credit and asset history, he continued. It is in the best interest of anyone requesting credit to keep the status quo on everything related to their qualifications, most importantly, their credit.
Brian Rubenstein, senior director with Ally Home, says applying for a new credit card before you sign on the dotted line for your mortgage could place you under more scrutiny during the loan review and underwriting process.
Theyll need to be prepared to provide more documentation to help the lender fully understand the debt obligations associated with the card as part of the borrowers overall financial picture, he said about home buyers.
In short, opening a new credit card just adds an additional item that must be checked out during the home mortgage process, he said.
Your Interest Rate Is No Longer Competitive
Mortgage rates have repeatedly hit record lows in 2020, so its possible that a refinance could save you thousands in interest over the long term. Just be sure your mortgage refi rate is more than 0.5% lower than your current interest rate, otherwise, your monthly savings may not be significant enough to justify paying for a refi, and itll take longer to reach your break-even point.
Lets look at an example, using a 30-year fixed-rate mortgage on a $200,000 home with a 20% down payment, resulting in a $160,000 loan amount. The original mortgage rate is 3.75% and the borrower was able to lock in a 3.25% rate on a new, 30-year loan.
| Original Mortgage | |
| $106,754.58 | $90,678.84 |
The monthly payment savings are just about $45 when the rate drops by 0.5%, which may not move you enough to go through with a refinance. But a bigger rate reduction perhaps 0.75% or lower can shrink your monthly payments and interest expenses.
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Engaging The Services Of A Broker
It is highly recommended to use a mortgage broker who can suggest a suitable lender for refinancing your mortgage. You need to quickly settle the terms of engagement with the broker so that you can initiate the refinance process as soon as possible.
When you first consult with a broker about your refinance options, it is important that you have your priorities straight. Instead of focusing on rates, fees and other financial details, hone in on what a broker can offer you when it comes to providing the best service possible and the terms of the loan. Many borrowers get fixated on the interest rate, particularly in the rising interest rate environment we currently find ourselves, and neglect to understand the terms of a loan.
Its easy to pick out the lowest rate on the market for a loan, but what about penalties, fees, home equity options, amortization, and other factors? A professional mortgage advisor will walk through all these intricacies with you so that you are equipped to make the best decision possible based on your situation.
Working with a broker gives you the opportunity to gain professional insight about mortgage refinancing, so take advantage of it. Ask your broker about any questions that you have. The more you understand about refinancing, the better able you will be to navigate the process efficiently.
You Want A Shorter Loan Term
If youre keen to pay off debt, you may want to refinance your mortgage to a shorter loan term. You could add to your savings if you can secure a lower interest rate and shorten your term. A shorter loan term means youll pay less in total interest.
But one word of warning: Youll probably be increasing your monthly payment in exchange, so make sure it fits into your budget. You dont want to risk defaulting on your loan.
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If Interest Rates Have Dropped And You Can Save On Your Monthly Payments
Interest rates are influenced by things like economic uncertainty, recession, or changes in monetary policy by the Fed. That means they are constantly fluctuating and hard to predict. How are you supposed to know when a dip in rates is worth refinancing? The truth is that everyone will have a different threshold in what qualifies as worthwhilefor some a savings of even 1% might be enough. If youre refi-curious, ask yourself what your personal threshold is and be on the lookout for telltale signs that interest rates might be about to swing downwards. Being ready to pull the trigger can help you pounce on an opportunity.
Length Of Time You Plan To Stay In Your Home
Not only do you need to wait a certain amount of time before you can take cash out if you just took over the title, but you also need to consider how long you want to stay in your home and whether refinancing will make sense.
For example, do you really need to pay more for 15 years of rate certainty if you only plan on staying in the home for 5 years?
An adjustable rate mortgage offers a 30-year term with a low teaser rate that stays fixed for a period of time typically 5, 7 or 10 years before it adjusts up or down, depending on what the market is doing.
If you only plan on being in the home for 10 years, youll be able to get a lower rate with an ARM than you could have gotten with a fixed-rate mortgage and be ready to move before it ever adjusts.
If you plan to own your home for 2 years or less, its likely not worth refinancing unless its to a much lower rate.
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You Can Remove Mortgage Insurance
Private mortgage insurance is required for borrowers who make less than a 20% down payment at closing.
With a conventional loan, you can typically call your lender and request to have your PMI payment removed once you reach 20% equity. No refinance is needed in that situation.
The situation is different, however, if you have a loan backed by the Federal Housing Administration . Youll be stuck paying FHA mortgage insurance for the life of your loan unless you:
- Put at least 10% down at closing, in which case the mortgage insurance premiums can be canceled after 11 years.
- Refinance into a conventional loan after youve built at least 20% equity.
Does It Pay To Refinance Soon After Closing On A Mortgage
When you refinance, you’re subject to closing costs in the same way as when you sign an original mortgage. If you refinance too often, you’ll keep paying those closing costs. But in some cases, it may be worth it.
Imagine your credit score has improved in recent months, while mortgage rates have fallen simultaneously. If you’re able to lower your interest rate by a full percentage point or more, then it could easily pay to refinance — even once you’ve covered those closing costs.
It could also pay to refinance shortly after closing on a mortgage if your home value has climbed substantially since you finalized that loan, and refinancing allows you to get rid of your private mortgage insurance.
Ultimately, though, you’ll need to make sure you plan to stay in your home long enough to reap the benefits of a mortgage refinance. If your refinance costs you $4,000, but you’re able to lower your monthly mortgage payment by $200 a month, it will only take you 20 months to break even. If you’re confident you’ll be staying in your home for another 29 years until your mortgage is paid off, then refinancing clearly makes sense, because you’ll come out way ahead financially in the long run.
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You Might Be Able To Refinance Right After Closing
With mortgage rates at historic lows, many homeowners find themselves wondering, How soon can I refinance?
Maybe you just bought a house, or even refinanced recently. But it might not be too soon to refinance again.
Many homeowners can refinance into a lowerrate loan with no waiting period. And others need to wait as little as six months. So theres a good chance youre eligible to refinance at todays low rates.
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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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.
When Is It Advantageous To Refinance
If you can reduce your mortgage interest rate by ½ percent to ¾ percent and if you expect to be in the house more than three years, then it makes sense to look into refinancing, says Greg McBride, senior vice president and chief financial analyst for Bankrate.com.
There is a break-even period and it will vary depending on the loan. Typically, after three years you start to reap the benefits of refinancing. Ask yourself, Are you going to stay there or own the home long enough to take advantage of the refinancing? says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association.
Another key factor is the cost of refinancing. There are a number of entities that have their hand in your pocket, says McBride. There can be lender costs such as origination fees, application fees and also third-party fees such as appraisal fees, title work fees, local and state government taxes, and recording fees. See what else besides the rate is added to the mix, McBride says. Most often, borrowers roll these costs into the loan amount.
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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.
Fha Cash Out Refinance
Another option is the FHA cash out refinance. This program requires you to verify all aspects of your qualifying factors. Because you will borrow more than the original amount, the lender must verify your:
- Income
- Home value
Each of these factors determines how much you can borrow. For example, a higher credit score will likely help you borrow more. A lower credit score shows that you are risky. A lender may not even let you take cash out of the property. The same goes for your debt ratio, which is directly related to your income. The more you make and the fewer debts you have, the more likely you are to get approved for a cash-out loan.
In this instance, the FHA requires you to wait at least 6 months before applying for an FHA cash out refinance. This gives the lender time to make sure you can make your payments on time. If you do refinance before you are in the home for a year, you may not be able to take advantage of an increased home value. The lender must use the lower of the appraised value and the purchase price. Whichever value they use, you can only borrow 85% of that amount.
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Government Loan Refinance Rules
The rules are a little different if you have a governmentbacked mortgage. This includes FHA, USDA, and VA loans.
With a government loan, you have the benefit of being able to use a Streamline refinance. Streamline refinancing such as the FHA Streamline Refinance or VA IRRRL program cuts down the time and paperwork associated with a refi so you can get a lower rate faster.
However, you have to wait six to seven months before using a Streamline refinance to replace your original mortgage. And you must have a recent history of ontime mortgage payments.
Mortgage Rates Have Gone Down
Mortgage rates for homeowners can fluctuate since theyre affected by a variety of factors, including U.S. Federal Reserve monetary policy, market movements, inflation, the economy and global factors.
If mortgage rates fall, you may be able to save by securing a lower interest rate than you have on your existing loan.
So how much should mortgage rates fall before you consider whether refinancing is worth it? The traditional rule of thumb says to refinance if your rate is 1% to 2% below your current rate.
Make sure to factor in your current loan term when considering refinance though. For instance, if youre four years into a 30-year mortgage and refinance to a new 30-year term, it will have taken you 34 years total to pay off your home in the end. Plus, youll likely pay more interest over the extended term than if you had chosen a shorter term.
No matter what rates are doing, youll want to check that the math works out in your favor. Make sure to calculate your break-even point and how the overall costs including total interest of your current mortgage and your new mortgage would compare, says Andy Taylor, general manager for Home/Mortgage at Credit Karma.
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