Refinancing To Access Your Homes 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. Heres an example.
Example Of A Mortgage Refinance
Lets say you took out a 30-year mortgage for $320,000 at a fixed interest rate of 6.23 percent. Your monthly payment would be $1,966. Over the life of that loan, youd pay approximately $707,901, which includes $387,901 in interest.
Now say about 15 years into the loan, youve paid $86,551 toward the principal and $257,499 in interest and you want to refinance the remaining $233,449 of your principal balance with a new 15-year fixed-rate loan at 5.11 percent.
The new loan would trim your monthly mortgage payment to $1,859 per month, giving you an additional $107 of wiggle room in your monthly budget. Over the life of the loan, youd pay $334,756, of which $101,307 would be interest. Add in the $344,050 in principal and interest you paid on the previous mortgage, and your total cost will be $678,806.
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How To Refinance Your Mortgage
Take these five steps to secure your mortgage refinance loan:
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How Often Can You Refinance
You can refinance your home as many times as you want. Or at least, as many times as it makes financial sense to do so keeping in mind that youll typically extend the loan term and pay closing costs on each refinance loan.
Some lenders and loan types enforce a six-month waiting period before you can refinance. But in some cases, you can get around those rules by refinancing with a different lender. So if youre ready to refinance but your current lender says no, ask a few other lenders about your options.
In this article
Refinancing A Mortgage Can Significantly Curb Your Total Loan Cost If You Do The Job Right
Mortgage refinancing is a proven way to cut total home loan costs. Learn the ins and outs of the process, including when to refinance your mortgage.
Historically, homeowners are more tempted to refinance when interest rates are low and thats understandable. After all, if you can refinance into a home loan with a lower interest rate, your monthly mortgage payments will decline, putting more cash in your pocket.
While timing is a huge factor in a mortgage refinancing deal, it isnt everything. You should consider a number of other factors, and some might be unique to your situation. Whether or not you should refinance is ultimately something only you can decide.
With that said, if youre currently mulling over a mortgage refinance, heres when it might make sense to go through with it and when it might not.
Credible makes it easy to research your mortgage refinance options and compare rates from multiple lenders.
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Ways To Speed Up Your Refinance Timeline
If refinancing your loan benefits your budget, you may be eager to get your new loan. Luckily, there are a few tricks to speed up this process:
- Round up your paperwork ahead of time: Just like you would gather your paperwork before heading to get a new drivers license, do the same for your lender. Look up your states refinancing loan requirements and create a checklist of required documents.
- Double-check your credit: As most lenders require a , it may be the right time to check in on your score. Use our app to see your , your credit history, and helpful tips to boost your ranking.
- Avoid taking on more debt: Your credit score is impacted by your debt. Maxing out your credit card could negatively impact your credit score and cost more in the long run. Focus on paying off debts and only spending your readily available money to improve .
- Dont apply for new credit: Inquiring about new debt opportunities could drop your credit score up to eight points. Next time youre offered a new or a deal on a car loan, take a few days to analyze the potential credit changes that could impact your refinanced mortgage.
- Do what you can to accommodate your appraiser and lender: You may run into a couple issues during this process, such as needing different paperwork or extra signatures. While life can get busy, do your best to make your appraisers and lenders jobs easy. Doing so could speed up the process and earn you a better home loan in no time!
Is Refinancing Right For Me
If you havent refinanced your mortgage during this time of record-low interest rates, its worth exploring whether youre eligible and whether its the right choice for you.
Anyone who has debt owes it to themselves to explore if that debt can be cheaper, says Lauren Anastasio, CFP at SoFi. It doesnt matter what your age, income level, property value, etc. If you owe someone money and you think theres a chance you could borrow that money cheaper, anyone should look into it.
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What Are The Main Refinance Requirements
First things firstare you even qualified to refinance? Just like when you originally worked with a lender to buy your home, youll need to go through an approval process to refinance the terms of your mortgage. This involves many of the same steps as your original financing experience like sharing financial documentation with your lender.
Youll also need to meet some basic minimum requirements to be eligible for refinancing. For conventional loans this typically means a credit score of at least 620 and a DTI ratio no higher than 43%. On top of that, youll likely need at least 5% equity in your home. If your LTV ratio is less than 20%, you may not be able to qualify for quite as competitive interest rates, and you may have to pay mortgage insurance to offset the additional risk of your refinance. To get a more detailed breakdown of documentation and refinance requirements, review this checklist.
Va Loan Refinance Rules
A VA loan is either originated by or guaranteed by the U.S. Department of Veterans Affairs to enable military service members or veterans to buy a home with no down payment. These loans often come with better terms and interest rates than conventional mortgages and, despite the no down payment, dont require mortgage insurance.
The VA offers two different types of refinance loans:
- Interest rate reduction refinancing loan
- Cash-out refinance.
For both types of refinances, the homeowner must be up-to-date with their mortgage payments, and at least 210 days must have passed since the first mortgage payment.
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Can I Avoid Closing Costs
When you refinance, part of your consideration should be if you’ll have to pay closing costs. If the answer is yes, it may negate your reasons for the refi .
If you want to avoid closing costs on a refinance, you’ll likely need to wait until you have more equity in your home. You can also try asking your lender if they offer any programs to help cover these costs.
There is also such thing as a “no-closing-cost refinance” This means the lender will cover the closing costs, but they may raise your interest rate or add points to the loan to make up for it.
How Soon Can You Refinance A Home After Purchase
We would say as early as possible, depending on the refinance program youre looking for, the loan type, or whether any penalties apply.
Refinancing quickly after going through the procedure and paying closing costs for your initial mortgage may seem silly.
Still, it could save you significant money for the loan in some circumstances.
Even though you can potentially refinance right away, certain lenders may insist that you wait several months before doing so. Here are some guidelines and deadlines for mortgage refinancing.
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Consider Your Credit Report
Taking out a mortgage can impact your credit report, and if you havent had your home for very long, youve probably not made enough monthly payments to boost your score yet. Applying for a refinance loan shortly afterward pings your credit report once again and could affect your eligibility. This could make it challenging to get a new loan to replace the old one or negatively impact the rate youre offered.
Should I Refinance My Home Before Selling It
Whether you should refinance your home before selling it depends on your financial situation and your motives for wanting to refinance.
Refinancing to take advantage of lower interest rates before selling might seem like a good idea if youâre waiting for the market to bounce back to get more for your home and you want to take advantage of lower interest rates. Maybe youârethinking about doing some renovations to try to get more for your house when you sell it and are considering a cash-out refinance to fund them.
But look at the bigger picture first. Depending upon how old your original mortgage is, it may not make financial sense to pay the closing costs of a refinance and reset the amount of money that is being allocated to the principal balanceeach time you make a payment.
When you refinance with a new mortgage, the first few years of your payments primarily go toward interest. So while at first glance, a refinance might seem like a way to save money with a lower interest rate or lower monthly payments, you may end up payingthousands more in interest in the long run. If you stay with the older mortgage, your payments are being allocated more towards the principal which is lowering the total amount you owe in interest.
Consult with an expert agent about refinancing before selling!
Get in touch, sell your home, save thousands.
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Is Now The Right Time To Refinance Again
General wisdom says you shouldnt base your home financing decisions on timing the marketthere are tons of external factors that can influence rates, and theres no realistic way to effectively anticipate all the variables at play. The primary factor in determining whether you should refinance your home should always be your present financial needs. Common scenarios may include:
Close Your Loan To Lock In Your Interest Rate
Once your loan is approved and youve agreed upon your terms, its time to lock in your rate. This stage is commonly known to stretch your timeline as well. It can take your lawyer anywhere from one day to two months to settle your current loan and redeem your property. Keep in mind that this is typically where you pay the majority of your fees whether youre approved or denied. These fees may include closing costs and application fees.
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How To Know When To Refinance Your Mortgage
Here are some key points you should consider when deciding whether to refinance your mortgage:
- Your credit score. With most mortgage lenders, youll need a of at least 620 to qualify for a mortgage refinance. To get the lowest mortgage rate, youll need a 740. Also keep in mind that, if your credit is lower than it was when you took out your current mortgage, you may not qualify for as favorable a rate as you did before.
- Your debt-to-income ratio . For conventional loans, some lenders will work with a DTI as high as 43%. FHA loans will go a little higher, usually accepting DTIs of 50%. Lower, however, is generally better.
- How long youre staying. When you refinance, youll need to pay closing costs. If you plan to move out in the near future, you may not break even.
- How much equity you have in your home. In order to qualify for a mortgage refinance you generally need at least 20% equity in your home.
Dont try to time the market. Waiting on rate swings is as troublesome as timing the stock market. Dont wait to see what happens with mortgage rates tomorrow if you can save money or move closer to your financial goals by refinancing today.
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.
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How Can Refinancing Help
Refinancing is helpful for homeowners who want to manage their debt and make the most of their biggest assets. Here are a few advantages of refinancing:
Lower your interest rate: By committing to a lower interest rate, you might be able to reduce your monthly mortgage payments. Historically, lenders have advised refinancing to homeowners who can drop their interest rates by at least 2%, but others advocate it even if you can do so by just 1%. Use a mortgage calculator to see whether the current interest rates are advantageous.
Use your home equity: Homeowners can use the equity in their property to obtain a cash advance from their lender with a cash-out refinance. For an estimate of the amount of equity that may be trapped in your home, use a home sale calculator.
Shorten your loans term: Some homeowners may be able to convert their 30-year mortgage to a 15-year one through refinancing. Reduce the term of your loan if interest rates have fallen significantly or if you can afford a greater monthly payment to hasten your journey to a debt-free ownership.
How Long You Want To Stay In Your Home
Remember, you must pay closing costs when you refinance just like you did when you bought your home. Though the specific closing costs youll pay depend on where you live, you can expect the total expense to equal around 2% 6% of your total loan amount.
Only want to stay in your home for a few more years? You might lose money when you refinance. Do the math and check your loan estimate to see if refinancing makes financial sense for your situation.
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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.
You Could Face A Prepayment Penalty
Although uncommon, there might also be a prepayment penalty, or a fee youre charged if you pay the loan before the term is up, which can add to your costs. Make sure to read the fine print of your loan to see if there is a penalty, and, if so, consider whether paying it is worth it in the long run.
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