How Does Refinancing Work
When you refinance your mortgage, youre getting a new loan to replace your existing mortgage. Youll have to go through many of the same procedures of getting a new house: applying for a loan, underwriting, home appraisal, and closing. The difference is that instead of shopping for a new house, youll keep your current home.
Just like when you apply for a mortgage for a new house, youll need to submit an application and meet lender requirements in areas such as credit score, debt-to-income ratio, and employment history. When you refinance, you can choose to go with your original lender or find a new one. Youll also need to have enough equity in your home typically at least 20% to qualify for a refinance.
Keep in mind that youll also need to pay closing costs and fees, which can be 3%-6% of the loans value. This can add up to thousands of dollars, so crunch the numbers to ensure the money youll save in interest exceeds the closing costs.
Refinancing With Assurance Financial
Refinancing your mortgage may be a smart move if youre still in the early years of your mortgage and can get a lower interest rate by refinancing.
If you want to save money, refinancing your mortgage may be the right move for you.
You can refinance with us today at Assurance Financial. For most Americans, the American Dream includes homeownership. We want you to own the house of your dreams with the mortgage terms of your dreams. You can apply with us and get instant verification by signing into your bank accounts and payroll platforms, so theres no need to fax any statements.
To get a mortgage, you need a licensed loan officer on your side, and were here to help. We use the latest in application technology to make starting the loan process fast and simple, and we offer the service you need for end-to-end processing all under one roof.
Curious how we have an average 4.98 star-rating across thousands of reviews? Discover why were one of the best lenders for your mortgage refinance today. Find a loan officer near you with us at Assurance Financial for more information on refinancing.
Check Your Credit Before Refinancing
No matter what your reason for refinancing, you should check your credit reports and scores before applying. Lenders will base your interest rate, in part, on your , and making sure your credit is in a good place could help you lock in a low rate.
Having a good credit history and score could give you extra leverage when negotiating with lenders, ultimately helping you get the best terms for your new loan. If you’d like to check your credit, consider getting a free copy of your credit report and FICO® Score from Experian to see what lenders might consider when evaluating you for a loan.
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Should I Refinance To Consolidate Debt
If you have debts with high interest rates, there may be an option to refinance and withdraw some equity from your home to pay them off. Likewise, if you already have a home equity loan in addition to your first mortgage, refinancing to combine them into one fixed-rate mortgage loan could make sense.
You Want A Lower Monthly Payment
If youre considering refinancing to make your monthly mortgage payments more manageable, its a good idea to weigh that convenience against the costs, as well.
Add up your specific closing costs and make sure that, even with paying those, your lower monthly payment is still worth it. If the amount you would save each month ends up going toward closing costs anyway, it might not be the right decision for you.
For example:
However, if that takes some of the pressure off your budget, and the interest savings over time are still large enough, theres a good chance its worth it.
Carefully consider your situation and run the numbers to see if refinancing makes sense for you. In the end, its about finding a solution that works for you.
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Calculate The Breakeven Point
Use a mortgage refinance calculator to determine the breakeven point, which is the number of months it takes for the savings to outweigh the cost of refinancing. Divide the breakeven timeframe by 12 to calculate the number of years you need to make payments on the loan before realizing any savings from the refinance. If you plan to sell before the breakeven point, it is probably not financially worth it to refinance.
Are The Loan Types You Qualify For Now Better Than Your Existing Mortgage
Lower rates arent everything.
The type of loan you get is just as important. Remember, whether you sell and buy a new home, or refinance, you need to qualify for that new mortgage. This means that your lender will be looking at your existing financial data, including your current income, credit history, and outstanding debt.
If youre making more money, carrying less debt, and have a better credit score now, youll be able to strike a better deal. For example, you may be able to replace your 30-year variable rate mortgage for a 15-year fixed mortgage.
But if youre making less, carrying more debt, or having credit trouble, your chances for getting a good deal on a new loan are slim.
Case in point, refinancing could require you to give up your slightly higher fixed-rate mortgage for an only slightly lower variable rate one. Even though the new rate is technically lower, you may wind up paying more in the long run.
Before you decide if refinancing or selling is right for you, youll need to evaluate other costs that impact the savings over the lifetime of the loan.
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To Get Rid Of Private Mortgage Insurance
PMI doesn’t provide you with any insurance — it benefits the lender in case you fall through on your home payments. If you paid less than 20% when you bought your home, you’re probably paying for some form of mortgage insurance. Freddie Mac estimates PMI to be anywhere between $30 and $70 a month for every $100,000 borrowed.
You could eliminate the cost of PMI if your home’s value has increased at least 20% since you purchased the home. Refinancing when you have more equity can get the PMI condition removed, saving you money each month.
Read more:How PMI works: Everything you need to know about private mortgage insurance.
To Convert To A Different Loan Type
A lot can change over 30 years. You may decide you won’t be remaining in the home as long as you expected or you may plan to move in a couple of years. Refinancing to switch from a fixed loan to an adjustable-rate mortgage may make financial sense.
An ARM typically starts off with a lower interest rate than a fixed-rate mortgage and this rate is locked in for a certain period of time. For instance, a 5/1 ARM locks in your fixed interest rate for five years, after which your rate will fluctuate.
ARMs may be a good option if you’ve decided to only live in your home for five to seven years. However, caution is advised before refinancing from a fixed-rate loan to an ARM. Once the fixed-rate period is over, rates can adjust higher instead of lower depending on market conditions — which could significantly increase your monthly payment.
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When To Refinance Your Mortgage
To determine if you should refinance, crunch the numbers yourself. I think its a good time to refinance if its right for your financial situation, says Michael Chabot, SVP of residential lending at Draper & Kramer Mortgage Corp. Look for savings of at least a half percent and make sure you feel extremely confident youll be able to cover your new monthly payment for the life of the loan.
Also, make sure that youre planning to stay in your house long enough to recoup the refinance cost. It might not be worth spending thousands of dollars in closing costs to refinance a house youre planning to sell soon.
Ultimately, the best time to refinance is the time that works best for your personal financial circumstances and goals. If you can get a lower interest rate and afford the closing costs, a refinance could help you save on your monthly payment. But if youre not feeling certain about your finances or your plans for your house in the coming months, it could make sense to wait a bit to explore a refi.
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What If I Cant Pay My Current Mortgage
If youre out of work right now and finding it hard to pay your mortgage, theres good news for you. Depending on your specific situation, you may be able to have your mortgage payments lowered or put on hold.5
Doing that can really help to free up the burden you might be feeling right now if youre worried about when youll see your next paycheck.
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Reduce Your Interest Rate
A lower interest rate means more of your monthly payment goes toward paying off what you owe. Depending on the decisions you make on your repayment timeline, a lower rate can also reduce total interest costs, get you a lower monthly payment, or do both.
Refinancing rates are low right now, so it may be possible to qualify for a new mortgage at a lower interest rate than you’re currently paying. You may also be able to get a better mortgage rate if your credit has improved since you initially borrowed. It’s a good idea to shop around with refinance lenders to get the best rates.
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Reasons You Might Not Want To Refinance
Refinancing usually requires you to have a certain amount of equity in your home. If you dont have that, refinancing can be tough. The general refinancing rule of thumb is that lenders like you to have at least 20% equity in your home but there are exceptions.
Gone through some difficult financial times since you got your first mortgage? Say your credit has gotten worse since you first got your mortgage. You may not qualify for a refinance mortgage even if interest rates are available that are lower than what you have now.
Just like when you get a mortgage to first buy a home, there are some fees to refinancing your mortgage. The closing costs for a refinance cover things like application, loan origination and appraisal fees. If you dont have the money to pay for closing costs up front, there is an option to roll them into the new mortgage. But this isnt always the best decision. Sometimes adding those extra costs to your new monthly mortgage payments can negate any savings the refinance would otherwise get you.
Planning to move soon or have a job that uproots you regularly? Refinancing may not make sense because it generally takes some time to recoup those up-front closing costs.
And one more reason you might want to hold off on refinancing your mortgage: if you have to pay a penalty on your original mortgage. Some lenders will charge you a fee for paying off your mortgage early, even if youre refinancing. Again, this could totally negate the savings of the refinance.
Why Do People Refinance Mortgages
You may consider refinancing for several reasons:
- To get a lower interest rate: Interest rates are significantly lower now than they were just a few years ago. So refinancing to a lower rate could mean paying less in interest over the life of your new mortgage.
- To get a shorter loan term: Shortening your loan term can have multiple benefits. Switching to a 15-year term could mean you qualify for lower rates than a 30-year mortgage. While your monthly mortgage payments may be higher, youll be able to pay off your home sooner.
- Convert an adjustable-rate mortgage to a fixed-rate mortgage: While ARMs start off with a low rate, when the initial term ends and the rate resets, your loan costs could increase significantly. Refinancing into a fixed-rate mortgage could help you avoid a big spike in your interest costs.
- To tap equity or consolidate debt: People tap their home equity for a number of reasons, including funding home improvements or repairs, and consolidating debt. Proceed with caution, however, if youre thinking of refinancing a mortgage to pay off credit card debt. While youll likely get a lower interest rate, the lender can foreclose on your home if you cannot repay the balance.
If youre looking to secure a lower interest rate and better repayment terms, refinancing can be worth it.
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What Do I Do To Refinance
The first thing you must do when considering refinancing is to consider exactly how you will repay the loan. If the home equity line of credit is to be used for home renovations in order to increase the value of the house, you may consider this increased revenue upon the sale of the house to be the way in which you will repay the loan. On the other hand, if the credit is going to be used for something else, like a new car, education, or to pay down credit card debt, it is best to sit down and put to paper exactly how you will repay the loan.
Also, you will need to contact your mortgage company and discuss the options available to you, as well as discussing with other mortgage companies the options they would make available. It may be that there is not a current deal which can be met through refinancing that would benefit you at the moment. If that is the case, at least you now know exactly what you must do in order to let a refinancing opportunity best benefit you. When refinancing, it can also benefit you to hire an attorney to decipher the meaning of some of the more complicated paperwork.
Get A Lower Interest Rate
If mortgage rates have dropped since you received your loan, you’re in luck. You can take advantage of reduced interest ratesOpens a popup. and lower monthly payments by refinancing your mortgage. Refinancing your balance with a lower interest rate is called rate-and-term refinancing. Even a slight reduction in the interest rate can lower your monthly payments.
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What Is Mortgage Refinancing
Refinancing a mortgage is the process of replacing your existing loan by acquiring a new home loan in its place that suits your financial circumstances. The funds from your new mortgage pay off your existing mortgage.
Just like acquiring your purchase mortgage, youll need to gather your supporting documentation such as your recent pay stubs, W-2s, and bank statements. But youll also need details about your existing mortgage, including the remaining loan amount, the number of years left to pay and the interest rate. This information helps you and your lender calculate the best refinance loan option for your financial situation.
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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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.
