Why Would Refinancing Be A Bad Idea
Refinancing is a bad idea if it doesnt represent some sort of gain, be it in the form of lower monthly payments or saving on interest by reducing the term of your loan. If the interest rate being offered isnt at least 0.5% lower than your current rate, its probably not worth the cost of a refi. Another reason not to refinance is if you plan on selling the house before you reach your breakeven point or if the new monthly payment is more than you can comfortably afford.
Refinance To Access Home Equity As Cash
As you pay off your mortgage, you’ll gradually build up equity in your home. Your home equity is calculated by taking the current value of your home, then subtracting from that your outstanding mortgage amount. Many lenders will allow you to borrow from them, using your home equity as security for the loan – this is what accessing your equity is all about.
If youâre considering a refinance to access your home equity, youâre not alone. According to the Canadian Association of Mortgage Professionals, last year 10% of Canadian mortgage holders accessed an average $49,000 of equity from their homes. The large majority of this equity was used for debt consolidation or home renovation.
If refinancing for equity, the first thing you want to determine is the maximum amount of equity you can access. In Canada, mortgage holders can access a maximum of 80% of their home’s value, less any outstanding mortgage balance. Unfortunately, accessing this equity comes at a cost â your lender will change you a penalty for breaking your mortgage early. Use Ratehub.caâs refinance calculator to determine your maximum equity and the corresponding penalty. If youâre refinancing in a falling interest rate environment, you may be able to take advantage of interest savings as a bonus.
Why Do You Need To Refinance Your Mortgage Right Away
- Interest rates went down considerably
- Your borrower profile improved dramatically
- You want a different loan product
- A life event such as divorce occurred
- You paid cash and want your money back
First lets talk about why someone would want to refinance their mortgage shortly after taking it out.
The most common and topical reason is because mortgage rates fell, substantially.
Its impossible to time the market and buy a home at exactly the right time when it comes to mortgage rates.
Ultimately, they might be low or high when you buy, and theres not much you can do about it if you need/want a home at a certain time.
The good news is you can always refinance your mortgage after the fact if rates improve enough to justify the move, assuming you qualify.
Another common reason to refinance rapidly is if your borrower profile improved dramatically.
Say you had marginal credit, but after six months of paying your mortgage and cleaning up your debt and other things, your scores jumped.
You now qualify for a lower rate and/or an entirely new loan product, such as a conventional loan as opposed to an FHA loan.
To that same end, you may have had a change of heart and want a product change, say from an ARM to a fixed-rate mortgage.
Perhaps you thought the 5/1 ARM was a good idea, then discovered you couldnt sleep at night. Maybe the 30-year fixed is the only loan program for you.
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Don’t Rush To Refinance
Tempting as it may be to refinance soon after closing on your mortgage, make sure you’re doing it for the right reasons. Don’t chase small interest rate drops — if refinancing means going from a rate of 3.755% to 3.50%, it’s probably not worth it. Rather, wait until you have a chance to capitalize on a substantial rate reduction before applying to refinance.
How Long Till I Can Refinance My Mortgage
Asked by: Mafalda Bogisich
You’re required to wait at least seven months before refinancing long enough to make six monthly payments. Any mortgage payments due in the last six months must have been paid on time, and you can have a maximum of one late payment in the six months before that.
There’s no legal limit on the number of times you can refinance your home loanyou may need to wait up to 24 months in some casesthree to five days afterthe possibility that an individual or company would not be able to replace a debt obligation with new debt at a critical time for the borrower29 related questions found
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What Are The Risks Of Refinancing
Although there are many benefits to refinancing, it isnt right for everyone. As with any financial transaction, youll want to make sure the math works in your favor.
Normally, youll be charged closing costs to refinance. These costs can often be folded into your new mortgage, but doing so will add to your monthly payments. Therefore, youll want to fully understand these charges and take them into account to ensure that your monthly savings from a refinance will more than offset the costs.
To calculate how long it will take before the monthly savings from your new mortgage outweighs its closing costs , use a refinance calculator and enter the basic information about your current mortgage and the new mortgage.
If you find that the break-even point on your new mortgage is 7 years, but you only plan on staying in your house for another 5 years, then refinancing might actually be more costly than just keeping your current mortgage, even if its interest rate is higher.
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Youll also want to keep the length of your new mortgage in mind. All mortgages are designed so that youre paying more interest than principal in the first half of the mortgage. That means if youre starting a new mortgage with a refinance, youll be paying the bulk of the interest again at the top after previously paying the bulk of the interest in the first years of your old mortgage.
Change Your Loan Type
Sometimes you need a change of pace in life. If youre interested in getting out of your fixed-rate loan, you may be interested in an adjustable-rate mortgage , which provides a lower interest rate than a fixed-rate loan. After a period of time, though, this rate adjusts based on market conditions.
Converting between adjustable and fixed can be a great way for you to save money while taking advantage of the lower rate during the fixed period. On the other hand, switching to a fixed rate provides the certainty of always knowing how much your monthly mortgage payment will be, making budgeting much easier.
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Eliminate Mortgage Insurance Premiums
Conventional mortgages let you stop paying for mortgage insurance when your mortgage balance falls below 80% of your homes market value. For some, that happens quickly because they live in areas where home prices are rising fast.
But government-backed loans from the FHA and USDA dont let you do that. Youre on the hook for mortgage insurance premiums throughout the life of your loan. Well, nearly always: If you initially make a 10% down payment on your FHA loan, you can stop paying MIPs after 11 years.
But most borrowers with this type of mortgage have to keep paying until they sell the home or finish paying off their loan. Unless they refinance to a different sort of mortgage.
And thats why so many of those with FHA and USDA loans refinance to conventional loans as soon as their mortgage balances reach 80% of their homes values. With MIP costing 0.85% annually of the mortgage value on FHA loans and 0.35% for USDA loans, they get to save a small fortune.
How To Refinance Your Mortgage
Refinancing a mortgage shouldnt be a quick decision. After weighing the pros and cons, you can determine your goals and take the necessary steps toward lowering your payment or taking cash out to achieve your financial goals.
Set a Goal for Your Mortgage Refinance
Before starting toward refinancing, its important to set a goal for starting a new mortgage. Are you interested in saving money on your monthly payment? Or is taking out cash to consolidate debt or fund a big project more important? By setting a clear-cut goal, you can decide the best way to move forward with a refinance.
Check Your Credit Score
As with any transaction involving credit, you should know your credit score before talking to lenders. Checking your credit report can help you understand how lenders perceive your risk, and it allows you to fix any erroneous information before requesting rates. Although you can refinance with bad credit, you may not qualify for the best rates.
Shop for Mortgage Refinance Rates With Multiple Lenders
Once you understand your credit, you can now shop for mortgage refinance rates with several lenders to see which gives you the best options. You can request multiple quotes from lenders within 14 days of your first request without negatively impacting your credit. If you qualify for a VA mortgage refinance or FHA mortgage refinance, you will want to work with lenders who can help you explore those options.
Select a Mortgage Refinance Lender and Lock Your Refinance Rate
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Is Now A Good Time To Refinance Your Mortgage
The average rate for a 30-year fixed-rate mortgage had been hovering between 2.86% and 2.88% for more than a month before jumping up to 3.05% on October 14. With current rates hovering so close to historic lows, it may be a good time to refinance.
Mortgage lenders refinanced a record $2.8 trillion worth of loans in 2020 as mortgage rates hit repeated record lows. Homeowner interest has remained strong in 2021, with refis representing 65% of all mortgage loan applications, according to the Mortgage Bankers Association.
While many borrowers have already refinanced, mortgage analytics firm Black Knight estimates 11.8 million homeowners could benefit from refinancing at current rates, reducing their interest rate by at least 0.75%. Those borrowers could save an aggregate of $3.4 billion per month for an average monthly savings of $284 per borrower. Nearly 1.4 million could save at least $500 per month by refinancing at today’s lower rates.
With numbers like these, it makes sense to take a good long look at mortgage refinancing to decide whether it’s the right move for your current situation. Refinancing a mortgage can be a great way to improve your financial position. By reducing your monthly payments, you can use the extra cash to pay off debts, ramp up your savings or splurge on a well-earned treat.
Here are steps to determine if now is a good time to refinance your mortgage.
What To Consider Before Refinancing
Even if you can refinance right now, it doesnt always mean you should so make sure you consider the drawbacks.
For one, the costs to refinance a home average $5,000, which eat into the money you save on the deal. Once you know the costs and your savings potential, calculate your break-even point to see if its a good move for you.
For example:
Its worth also seeing if your lender offers a no-closing-cost refinance. While this makes refinancing more affordable upfront, dont let the name fool you. The lender may wrap the closing costs into the mortgage principal or hike up the interest rate but you still could save money compared to the loan terms you have now.
Youll need to check whether your mortgage comes with a prepayment penalty as well, which is a fee for paying off the home loan early. Check your mortgage documents for details, or ask your lender if your loan comes with this penalty.
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Interest Rates Changed Dramatically
The economy can change in the blink of an eye, and if mortgage interest rates in your area have plummeted since you bought your home, you may consider refinancing. Unless interest rates drop more than 0.5%, refinancing for lower payments does not make sense.
A study done in December 2010 showed that households eligible for refinancing could save $160 monthly on their mortgage payments thanks to lower interest rates. Unfortunately, at the time, 20% of families that could have refinanced to take advantages of the savings did not, leaving behind an average of $11,500 on their homes they could have saved.
If the interest rates decline significantly, you will save more money the sooner you refinance. However, dont forget about closing costs. The amount you save should cover the closing costs for refinancing, which could be 3% to 6% of your homes value. If you cannot justify the closing costs in monthly savings from the lower interest rate, you may not need to refinance.
How Soon Can I Refinance
Technically, you can switch home loans whenever you like. But, generally, thereâs little incentive to actually refinance your mortgage until youâve had it for at least 12 or even 24 months.
Thatâs because refinancing involves ending one home loan and starting a new one. As youâre probably already aware, taking out a new mortgage comes with costs. Unless you secure a significantly lower interest rate, these costs may outweigh any savings you make early in your loan.
You may have to pay fees for ending your existing mortgage too. If youâre on a fixed rate home loan that could even include break costs. These can be expensive, especially if youâre early in your fixed-rate period.
For this reason, you may only be more likely to find it cheaper to refinance early in your loan term if youâre on a variable rate home loan.
How quickly you choose to refinance after taking out your home loan really depends on why youâre refinancing in the first place. For instance, if youâre suffering financial hardship as a result of COVID-19 and want to reduce your mortgage repayments, you may find that it makes sense to refinance by switching to a longer loan term with lower repayments.
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How Soon Can You Refinance A Mortgage After Buying A Home
There are no restrictions dictating when you can refinance a mortgage theoretically, you could refinance the same day you close on your original loan. Appropriate timing, when it comes to refinancing, is about money, and strategy. Just because you can refinance soon after closing doesnt necessarily mean its right for you. So how soon can I refinance?
How Long After You Buy A Home Can You Sell It
If you bought a house with cash, you can sell it any time you want, though there will be tax implications. However, if you financed the house, your lender may have clauses in your mortgage note that require you to live in the house for a certain time before you sell it or rent it out. This can be expressed in your mortgage documents as an owner-occupancy requirement clause. You may also be on the hook for a prepayment penaltyif you sell the house too soon after taking out a mortgage to buy it.
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How To Use A Refinance Calculator
There are many free refinance calculators readily available online which can help you determine if refinancing will save you money. With a refinance calculator, you can enter your current mortgage terms, the new proposed mortgage terms and any fees for refinancing. You can try this refinance calculator at LendingTree to see how it works.
A refinance calculator will help you figure out how much money youll save on a monthly basis and over the life of your loan, and whether its worth the costs of acquiring a new mortgage.
When Can I Refinance
Before you can refinance, theres sometimes a waiting period, and some lenders will say that your mortgage has to be seasoned for a certain amount of time.
Seasoning simply refers to the age of your mortgage. Age requirements most often apply in cash-out transactions, like delayed financing loans, but they may also apply in other areas, such as when you can have your equity recalculated based on a new appraisal.
In the following sections, well go over how your options to refinance are impacted by how long youve had your current loan.
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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.
How Soon Can You Refinance An Fha Loan
FHA loans are backed by the federal government and they have more rules concerning refinances.
You cant get a cash-out refinance until youve been in the home for at least a year.
But if you want a lower mortgage rate or monthly payment without a cash-out, then you only have to wait seven months between refinancings. That applies whether you want a normal refinance or a streamline one.
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