Tuesday, July 16, 2024

How Should I Refinance My Mortgage

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Calculate Your Mortgage Refinancing Savings

Should I Refinance my Home Mortgage? (Excel Walk-through + DIY Example)

To calculate your monthly savings from refinancing, use a mortgage calculator to enter these numbers and get your new monthly payment:

  • Amount to refinance
  • New interest rate

Compare your new monthly payment to your old monthly payment. The table below shows how grabbing a lower interest rate could save you $204 per month, or $2,448 per year.

Check Your Credit Score And History

Youll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you and the better your chances of underwriters approving your loan. For a conventional refinance you will need a credit score of 620 or higher to be approved in some cases, lenders will accept 580 for an FHA or VA refi mortgage. They wont let you borrow as much, though.

What to consider: While there are ways to refinance your mortgage with bad credit, spend a few months boosting your score, if you can, before you start the process.

Refinancing Your Home Loan: What Is It And Why Should I Do It

Understanding When to Refinance

You see that dog? You deserve to sleep as peacefully as that. One way of doing that? Understanding how refinancing works for your mortgage and if it makes sense for you to do it.

Refinance this, refinance that, what does refinance even mean? Before diving into other explanations of what refinancing is and why people refinance, in simple terms, refinancing your home loan means you are getting a new loan to pay off your old one. Sounds simple enough, right? Refinancing your home loan can be a smart financial decision for various reasons. However, for those who bought a home during the historically low interest rates around the time of Covid-19, you most likely will never need to refinance again unless you plan to purchase a new home or have some other capital allocation purpose. Before you start the process, ask yourself why you want to refinance, as this will guide the entire refinancing process from start to finish. Here are some of the most common reasons for refinancing: tapping into equity, reducing your monthly payment, paying off the loan faster, getting rid of FHA mortgage insurance, or switching from an adjustable-rate mortgage to a fixed-rate loan.

Tap Into Equity When you have built up enough equity in your home , you may be able to borrow more than you owe on the current loan by refinancing. This allows you access to funds that can be used for anything from home renovations or repairs to investing in other projects or businesses.

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How Did Forbes Advisor Estimate Your New Monthly Mortgage Payment

Forbes Advisorâs mortgage refinance calculator lets you estimate your new monthly mortgage payment using the terms of your current and refinanced loan. Based on that information, it also calculates how much youâll save in monthly payments and interest over the life of the loan. You can use the calculator to total the costs of refinancing and how many months it will take to recover those costs .

To make these calculations, our tool evaluates this data:

  • Current loan details. The first portion of the mortgage refinance calculator requires input of current numbers like monthly payment, loan interest rate and remaining balance and term.
  • New loan terms. Use this section of the calculator to estimate your new mortgage payment based on a new interest rate and loan term. Play with interest rates and loan terms to find a target payment that works for you.
  • Points. A mortgage point is prepaid interest, each of which is equal to 1% of your remaining mortgage balanceâor new loan value. This type of payment increases the upfront cost of refinancing a mortgage, but each point reduces your interest rate by 0.25%.
  • Refinancing fees. The final portion of the calculator adds up the costs of refinancing, including application fees, a credit check, title search and insurance, document preparation and local fees.

What Is A Good Mortgage Refinance Rate

Should I Refinance My Mortgage? Beginner

Theres no set standard for a good refinance rate. Generally, a refinance rate should be at least 1% lower than your current mortgage rate for a refinancing to make sense, but youll need to crunch the numbers to truly understand whether a refinance makes sense for you.

One way to do this is to calculate the break-even point. Since closing costs and fees can require a hefty amount upfront, you want to make sure that the money youre saving with a lower interest rate is greater than the amount youre paying to refinance. By calculating the break-even point, you can see how long itll take to recoup the upfront costs for a refinance.

If you decide to refinance, make sure to shop around with multiple lenders to find the best refinance rates. And keep in mind that even though average interest rates are low right now, the specific rates you may get will depend on personal factors like your credit score and debt-to-income ratio.

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When Your Credit Score Increases

Waiting for interest rates to drop isnt the only way you can qualify for a lower rate. You may also qualify if your is now higher than it was when you applied for a loan.

The Importance Of Your Credit Score

Why do mortgage lenders care about your credit score? Your credit score is a numerical representation of how well you manage debt. If your score is high, its probably because you always make your loan payments on schedule and you dont borrow too much money. On the other hand, if your score is low, its likely because you have trouble managing debt.

A mortgage is a form of debt. Lenders look at your credit score before they offer you an interest rate because they need to know how reliable you are as a borrower. If you have a higher score, youre statistically less likely to miss a payment or fall into foreclosure. This means that your lender takes less of a risk when they loan you money and can give you a lower interest rate. If your score is low, it means theres a higher chance that you might not pay back what you borrow. Your lender needs to manage the risk they accept by giving you a higher interest rate on your loan.

Why You Should Refinance Your Home

  • Disentangle you financially from a relationship, like an ex-partner
  • Provide the cash you need to make repairs

On the other hand, if you’ve already been paying down your mortgage for a long time and want to start a new 30-year mortgage to lower your monthly payment you might want to think twice. You’ll pay a lot more in interest charges overall if you start the loan term over.

No matter what reason you have for refinancing, it’s important to look at the pros and cons of the new loan compared to staying with your old loan.

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Tapping Your Home Equity Could Negatively Affect Your Score

If youve built up equity in your home, you might want to tap into it to complete some much-needed repairs or tackle a large-scale renovation. But by getting a home equity loan or a home equity line of credit, youll be increasing your debt load.

Thirty percent of your FICO credit score depends on how much debt you owe. If you take on more debt, youll increase your credit utilization ratio. Having a high debt-to-credit ratio can hurt your credit score and make you look like a risky borrower.

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When Is Refinancing A Bad Idea

Should I Refinance Or Pay Extra On My Mortgage?

Okay, so weve covered four times you probably should refinance. But the truth about refinancing your mortgage is that there are definitely times when you shouldnt do it. Well give you some examples.

It would be a bad idea to refinance because you want to:

  • Pay off credit card bills
  • Remodel your kitchen
  • Roll up other debt into a refinanced mortgage

Wiping out your home equity to buy new stuff you dont need puts your home at riskespecially if you lose your job or have other money issues. And as much as you may not like your cramped kitchen or your old, out-of-style car, you dont need a new one!

You shouldnt consolidate or roll up other debt into one gigantic refinanced mortgage because its best to pay off your smaller debts first. Winning with money is 80% behavior and 20% head knowledge. So you get in the habit of paying off those small debts, get energized from those wins, and then youre ready to tackle the mortgage!

Oh, and a word to all you student loan holders out there: Lumping your student loan debt into your mortgage means its going to take a lot more time to pay off those loans and your mortgage too. It puts you even further away from completing either of those goals. No thanks!

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Switch From An Adjustable

With an ARM, you might start off the first few years at a fixed interest rate. But after that, your rate can change based on a lot of factors, like the mortgage market and the rate that banks themselves use to lend each other money.

That way, the mortgage lender doesnt feel the effects of those changing interest ratesyou do. Oh and when we say changing,most of the time that means increasing. So if the interest rate goes up, your monthly mortgage payments go up too.

The bottom line is, ARMs transfer the risk of rising interest rates to youthe homeowner.

So, in the long run, an ARM can cost you an arm and a leg! Thats when refinancing into a fixed-rate mortgage could be a good financial move. Its worth it to avoid the risk of your payments going up when the rate adjusts.

Reasons To Refinance A Mortgage

There are several reasons homeowners choose to refinance their mortgage loans. Here are some of the top ones to think about:

  • Lower interest rate and payment: If your credit has improved or market rates have dropped since you got your first loan, you may be able to save money on interest with a lower rate and monthly payment. You can do this through what’s called a rate-and-term refinance loan.
  • Change rate type: Another option with a rate-and-term refinance is to switch your loan from an adjustable rate to a fixed rate, which can help you avoid the impact of market fluctuations.
  • Change the loan term: You can typically qualify for a lower interest rate if you shorten your loan term from, say, 30 years to 20 or 15 years with a rate-and-term refinance. Doing so can also save you money on interest over the life of the loan but will often mean higher monthly payments. If you lengthen your loan term, on the other hand, you can potentially lower your monthly payment.
  • Get cash out of your home: If you have significant equity in your home, you may be able to use a cash-out refinance to tap some of your equity. Homeowners may do this to consolidate debt, finance a large purchase, invest or buy out an ex-spouse in a divorce.
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    Grabbing A Lower Interest Rate

    When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both.

    Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly over more years.

    In the first quarter of 2020, which mostly includes pre-pandemic refinance activity, 55% of borrowers who refinanced maintained their current principal balance or increased their balance by less than 5% , according to Freddie Mac data. This is the most common choice: a rate-and-term refinance.

    A higher credit score will help you get a better interest rate on your mortgage. To get the best rates, youll need a credit score of 760 or higher. Almost 3 in 4 homeowners who refinanced in April 2020 had a credit score of 750 or higher, according to mortgage processor Ellie Mae. The average FICO score was 763.

    Bringing cash to closing might also get you a slightly lower interest rate or allow you to avoid private mortgage insurance . Three percent of borrowers did this during the first quarter of 2020.

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    One downside to refinancing is that if you sign up for a new 30-year mortgage, youre restarting the clock until youre mortgage free. If youre already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean youre carrying debt into your 60s when youre likely going to be thinking about retiring.

    Its possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.

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    How To Get The Best Mortgage Refinancing Rate

    Because every mortgage lender has its own methods for evaluating borrowers, getting the best mortgage rate requires that you do a little shopping around which sometimes can be quite the chore. Heres what you should do:

    • Get loan estimates from multiple lenders
    • Compare rates, fees, and other costs of the loan
    • Use Credible to save time and compare lenders all in one place

    Luckily, Credible does a lot of the legwork for you, so you dont have to feel lost or overwhelmed. You can request prequalified rates from multiple mortgage lenders without affecting your credit score.

    Credible makes refinancing easy

    Take Advantage Of A Lower Interest Rate

    Suppose you are three years into a 5-year fixed term mortgage and interest rates have plunged since you first got your mortgage. New homebuyers will be paying a much lower rate for the same term that you did.

    A lower interest rate helps pay off loan principal faster, building your equity quicker and ultimately reducing the length of your mortgage.

    That begs the question: Should you honour your initial mortgage obligation and pay the higher rate for another two years, or take advantage of the lower rate by refinancing now?

    While the urge to refinance immediately is understandable, doing so prior to your mortgage renewal often results in a penalty. Penalties range from as little as three months interest to well into five-figure penalties. Your decision hinges on whether the savings from the lower rate outweighs the penalty and closing costs youll incur. Penalties vary across institutions and depend on the mortgage type , term length and your existing rate, among other things.

    Tip: If you want to refinance your mortgage and take advantage of a lower rate, first use our Mortgage Penalty Calculator to get a rough idea of your prepayment charge. Note: Always verify the exact amount with your lender as lenders penalty formulas can differ.

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    You Want To Take Out Cash To Pay Off Debts

    If youre carrying oppressive balances on your credit cards, have medical debt or need to pay for the kids college costs and dont have the cash flow to cover it, consider a cash-out refinance. This type of refi lets you use the equity in your home to get money for other expenses.

    With a cash-out refinance, you get a new home loan for the amount you currently owe on your house, plus the amount of cash you want to take out from the equity you have in your home. The difference between the new mortgage amount and the old one goes to you when the loan closes, in cash.

    Heres an example of how a cash-out refi works: Lets say you own a $400,000 house and still owe $150,000 on the mortgage. You have $250,000 in equity, which is a way of saying how much of an ownership stake you have in your home. Now lets say you need $75,000 to pay for your kids college education. You could do a cash-out refinance to get the money. To do so, youd get a new mortgage worth $225,000. Thats the $150,000 you owe on the house plus the $75,000 youre going to take out in cash to pay that tuition for junior .

    Is It Ever A Bad Idea To Avoid Refinancing A Loan

    Mortgage Refinance Explained – When Should You REFINANCE?

    There are two situations where you may not want to refinance. Its important to remember that everyones financial situation is unique, what works for one person may not work for another. Be sure to exercise judgment as a part of your decision-making process, foregoing something small now for an immense benefit in the future could be worth the risk.

    Upcoming New Loan

    If you are applying for a new loan, in addition to the current one you have that youd like to refinance, you should think twice before refinancing your current loan. You dont want to put your new loan at risk for a higher interest rate or even getting denied in exchange for refinancing your current loan. This doesnt mean you cant refinance at all, just hold off until you get your new loan and then move forward with refinancing.

    Need to know how to refinance a second mortgage? for the answer.

    Also, if you are planning to refinance multiple loans, make sure to refinance the loan that will give you the most benefits first. For example, you should refinance your mortgage before your car loan because you will get much more out of it. From there, you can work your way down your list of loans.

    Poor Refinancing Offers

    Before moving forward with a refinancing option, deep dive into the offers youve been given to determine if theyll really make you better off or not. Its likely that youll get a lower interest rate or monthly payment, but be sure to consider what the tradeoff is.

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