When Should You Stick With Your Current Mortgage
If you’ve considered the factors above and don’t immediately see a benefit to refinancing, you should most likely stick with your current mortgage. Again, refinancing is not something you should do just for the sake of doing it. You should be able to clearly see the benefitwhether it’s monetary savings, a reduced repayment period or something else.
Usda Is Streamlining Refinancing
Homeowners with a USDA mortgage loan are eligible for USDA Streamline Refinance.
Similar to other government-backed mortgage loans, this refinancing option requires fewer fees than standard underwriting.
No appraisal is required for homeowners who are not in receipt of a grant. But your mortgage lender needs to check your creditworthiness and income.
Current guidelines include:
You must meet USDA credit score requirementsYou can pay the principal, interest, closing costs, escrow fees, and upfront guarantee fee into the new loan balance of 12 monthsYour home must be your primary residenceYour household income must be within the USDA income limits
How Many Types Of Refinancing Are There
Homeowners can choose to refinance for a variety of reasons including:
Cash Out Home Equity
Homeowners can extract equity from the homes. The extracted equity can be used as a low-cost source of business funding, to pay off other higher-interest debts, of fund home renovations. If the equity is extracted to pay for home repairs or major home improvements the interest expense may be tax deductible.
Change Loan Duration
Homeowners can shorten duration to pay less interest over the life of the loan & own the home outright quicker lengthen the duration to lower monthly payments.
Lower Interest Rates
If mortgage rates decline homeowners can refinance to lower their monthly loan payments. A one to two percent fall in interest rates can save homeowners tens of thousands of dollars in interest expense over a 30-year loan term.
Change Loan Structure
Borrowers who used an ARM to make initial payments more afforadable could shift to a fixed-rate loan after they built up equity & have progressed along their career path to increase their earnings.
Remove Mortgage Insurance Requirements
The following graphic explores examples of why a home owner may choose to refinance.
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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.
How To Shop For Refinance Rates
When looking for refinance rates, know that your specific rate may differ from those advertised online. Though current market conditions will be a factor, your particular interest rate will depend largely on your application and credit history. To get the best interest rates, you’ll typically need a high credit score, low credit utilization ratio, and a history of making consistent and on-time payments. Researching interest rates online is always a good idea, but you’ll need to connect with a mortgage professional to get your exact refinance rate. Also remember to account for potential fees and closing costs. You should also know that many lenders have had stricter requirements when it comes to approving loans in the past few months. This means that if you don’t have great credit ratings, you might not be able to take advantage of lowered interest rates — or qualify for a refinance in the first place. Before applying for a refinance, you should make your application as strong as possible in order to get the best rates available. The best way to improve your credit ratings is to get your finances in order, use credit responsibly, and monitor your credit regularly. Don’t forget to speak with multiple lenders and shop around to find the best rate.
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What To Watch Out For
Reducing the interest rate on your mortgage and in turn your monthly payment may seem like a no-brainer, but there a few additional things to consider before refinancing. If you are replacing a 30-year mortgage with another 30-year mortgage, you may see a reduced monthly payment, but you may actually pay more over the life of the loan. Refinancing a 30-year mortgage with another 30-year mortgage can add extra years to the amount of time you will repaying the debt. This means you will pay more in interest over the combined lives of both loans than what you expected to pay for the original loan.
A great way to avoid paying this extra interest is to refinance a 30-year mortgage to a 15-year mortgage. By taking on a loan with a shorter term you will pay off your mortgage in fewer payments, reducing the amount of interest you will pay over the life of the loan. However, it is important to note that this strategy will increase your monthly payment, since larger payments will be required to pay off your balance in a shorter amount of time. This can be a terrific strategy for people who have lived in their homes for several years and have strong enough incomes to handle an increase in the monthly payments.
How Will You Know If Refinancing Is Worth It
Since refinancing can change your overall cost or how long it takes to repay your loan, you need to understand exactly what your mortgage will look like once the process is done.
- If it’s money savings you’re after, find out how long it’ll take you to break even on your refinancing fees that could cost 2% to 6% of the loan amount.
- If you’re refinancing to reduce the repayment term, calculate how much your new monthly payment will be and how long you’ll be paying it.
- If you’re doing a cash-out refinance so you can make a purchase or pay off debt, do the math to see if a refinance makes more sense than the alternatives such a credit card or debt consolidation loan.
Taking the time to determine your costs or savings will help you see if refinancing is worth it. When you lay it all out, you may ultimately find that a refinance isn’t worth the effort.
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Refinancing To Convert To An Arm Or Fixed
While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.
Conversely, converting from a fixed-rate loan to an ARMwhich often has a lower monthly payment than a fixed-term mortgagecan be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.
These homeowners can reduce their loan’s interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future.
If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop. When mortgage interest rates rise, on the other hand, this would be an unwise strategy.
Know Your Homes Equity
The first qualification you will need to refinance is the equity in your home. At the end of the first quarter of 2020, home values were still on the rise in the U.S. according to the Federal Reserve Bank of St. Louis. However, as of the third quarter of 2020, the median sales price of homes sold in the U.S. was slightly down as a result of the economic recession caused by the global COVID-19 pandemic.
Furthermore, according to data reported by CoreLogic at the end of the third quarter of 2020, U.S. homeowners with mortgages saw their equity increase by a total of $1 trillion since the third quarter of 2019, an increase of 10.8%, year over year.
Still, some homes have not regained their value, and some homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders. However, some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 20% equity will have an easier time qualifying for a new loan.
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Types Of Refinance Loans
The following are the minimum credit scores and maximum loan-to-value ratios for mainstream refinancing programs. Note that these are only used to refinance a primary residence The refinancing rules for vacation homes and investment properties are different.
A loan-to-value ratio is the loan amount compared to the value of the home.
For example, a loan with an LTV of 85% will often carry higher interest rates than a loan with an LTV of 75%.
Type of financingMinimum Credit ScoreMaximum LTVConventional refinancing loan, interest and term refinancing and cash-in refinancing620 to 670, depending on LTV97% LTV on fixed-rate mortgages and 95% LTV on variable-rate mortgages required * No specific maximumVA Streamline RefinanceNo specific minimum * No specific maximumUSDA Streamline RefinanceNo specific Minimum * No specific maximum
* Technically, most streamlined refinancing does not require a credit check. But some mortgage lenders pull a credit score and come back anyway
How To Know If Its A Good Time To Refinance Your Mortgage
When interest rates are low, it might seem like a good idea to refinance your home, but is it the best thing for you to do or a money mistake? When you refinance, you need to look at more than just the monthly payment to determine whether or not its a good deal. You have to look at the fees and terms of your new mortgage.
Learn how to tell whether you should refinance your mortgage.
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Ok So Should I Refinance
To see if refinancing makes sense for you, try out a refinance calculator. You enter some specific information and the refinance calculator determines what makes the most sense for your particular situation. Then you can even play around a little bit to see what factors would change the recommendations.
The main number you are looking out for is the point when the monthly savings of the new mortgage become greater than the up-front costs of refinancing. In other words, how long will it take you to recoup the fees you paid to do the refinance? If that number is within the timeframe you plan on staying in the house, you may want to refinance. If you’re planning on selling in the near future, refinancing might not be worth it.
A good refinance calculator will show you the two scenarios keeping your current mortgage and getting a new one. Then you can see how your monthly payment will be affected and how much you can expect to pay in closing costs. This also shows that very important timeframe for how long you have to maintain the new mortgage to save enough money to cover the up-front costs. Basically, this is the point when you start actually saving money.
A Lower Interest Rate Is Possible
Mortgage interest rates fluctuate constantly. Several factors impact interest rates, such as the monetary policy of the U.S. Federal Reserve, inflation, the economy and market. If the rates are currently lower than what you are paying, you may want to consider refinancing.
Replacing your mortgage for one that comes with a lower interest rate at the same remaining term is called rate-and-term financing. What decrease in rate is enough to consider refinancing? Generally, if you can get a rate that is at least one to two percent less than your existing rate, you can consider refinancing your mortgage. No rule of thumb can apply to all individuals and circumstances, however. While a one percent rate of interest may result in a large amount of savings for someone with a million-dollar mortgage, the same may not be true for someone with a mortgage thats only $100,000.
You may even consider refinancing when the percentage saved is less than one percent. Though conventional advice calls for at least a one percent reduction, this rule of thumb is a holdover from the 50s, when loans were smaller, and homeowners continued to live in their homes until death. Today, with much larger loan sizes, a smaller percentage reduction can still result in significant savings.
Take the time to check the updated interest rate and compare it to your initial rate. Remember, your credit score determines your individual interest rate, meaning a lower rate isnt always promised.
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Are Mortgage Refinance Rates Still Low
When the COVID-19 pandemic first hit in March of last year, the Federal Reserve devised a monetary policy to help stabilize financial markets and soften the economic impact of the virus. Part of that policy included reducing the federal funds rate the interest rate banks charge each other for short-term loans to near zero.
The Fed also pledged to purchase $40 billion worth of mortgage-backed securities, and $80 billion in Treasury notes and other financial instruments per month to inject money into the economy and encourage investing and lending.
As a result, yields on the 10-year Treasury notes dropped below 1%, placing more downward pressure on interest rates and mortgage rates in particular. Mortgage rates are tied to the 10-year Treasuries, with loan rates averaging around 1.8 percentage points higher than yields. The lower the yield, the lower the interest rate.
The net effect of these policies was to drive mortgage rates down, with the average rate for a 30-year dropping below 3% for the first time in history on July 16, 2020. Rates reached a record low of 2.65% on January 7 of this year.
Since then, rates have climbed, briefly rising above 3% in March and April before diving back under 3% until September 30th, when rates climbed back above 3%. The current mortgage rate is averaging 3.05%.
What Are The Alternatives To Refinancing Your Home
Rather than refinancing their home in whole, some homeowners who have built up significant equity & currently enjoy a low-rate loan can use a home equity loan or line of credit to tap their equity without resetting the rate on the remainder of their existing debt. A home equity loan is a second mortgage which operates similarly to the first mortgage, but usually charges a slightly higher rate. A home equity line of credit operates more like a credit card, as a revolving form of debt which can be drawn upon & paid off as convenient.
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You’ve Crunched The Numbers
Dust off your math hat the best way to determine if refinancing puts cash back in your pocket is to utilize all the free online tools available to you.
Credible can help you crunch the numbers. In just three minutes, you can get prequalified rates from multiple home mortgage lenders without impacting your credit score. See how much refinancing could save you now.
Using a refinance calculator with your own numbers — loan balance, interest rates, closing costs — allows you to see how much you can save, how long it will take to pay off closing costs, and how much interest youll now pay over the life of the loan. With powerful calculations in your hand, you can decide if now is the best time to refinance in addition to finding out how much refinancing can lower your monthly payment.
Will You And Your Home Qualify To Refinance
Even if a refinance makes sense in your situation, youll still need to qualify. And just because you have a home and are making timely payments does not mean youll be able to refinance your loan. Your ability to refinance depends on several factors, especially:
- The amount of equity you have in your house
- Your income
- Your credit
Applying to refinance requires an entirely new underwriting process. The bank needs to see that the home is worth more than the loan value, that you earn enough to afford the monthly payments, and that you are creditworthy. Check your credit score online for free here. Unfortunately, if you are underwater on your current mortgage, it may be difficult to qualify for traditional mortgage refinancing.
Are Interest Rates Low
One of the best reasons to refinance is to take advantage of low-interest rates. Homeowners who buy property when interest rates are high usually do so with the understanding that they can always refinance at a later time.
Refinancing to a lower interest rate can dramatically lower monthly mortgage payments. Getting a better interest rate also means paying less money to buy your home in the long run.
Be sure to run numbers with your mortgage broker to determine how much youll stand to save with a refinance. The number could be much higher or lower than you think after factoring in closing costs.
Refinancing Costs To Consider
Saving $50 or more per month on monthly mortgage payments can be enticing, but there are other factors to consider. Refinancing comes with closing costs, which Freddie Mac claims average $5,000, although the figure could be higher based on the size of the loan.
You could roll the closing costs into the refinance or pay them upfront. It’s less expensive to pay for closing costs out of pocket if you have the savings, or you’ll end up paying interest over the life of the mortgage on the closing costs, as well.
Can you afford the thousands of dollars you’ll pay to lock in a lower interest rate? You’ll need to decide how long you plan on staying in the home and whether the expense is worth it.
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