Refinancing 25 Years After Buying A House
Last year at this time, about two and a half years after wed bought The Treehouse, we started talking about refinancing. Mortgage rates were dropping, and our mailbox was full of refinance offers. We had a 30-year fixed mortgage, and wondered if we could refinance at a better rate, and lower our monthly payment. We were also curious about using some of the equity of our house to get funds for home improvement projects.
But we didnt know anything about refinancing, or what the numbers would really look like for us. These are the 10 things we learned:
Things To Consider Before You Refinance Your Mortgage
With mortgage rates hovering near all-time lows, refinancing is on many homeowners minds right now. Are you a good candidate?
Refinancing your mortgage simply means you are taking out a new home loan to replace your current mortgage. There are several reasons why someone may want to refinance their mortgage, but most commonly, it is when mortgage interest rates have fallen. By refinancing to a new mortgage with a lower rate, there can be significant savings on your monthly payment.
A good rule of thumb is to start considering refinancing when interest rates have dropped at least a half a percentage point from what you are currently paying.
Once you decide now might be a good time for you to refinance your mortgage, you will want to keep these things in mind as you go through the process.
Considering Refinance Things A Loan Officer Will Ask You
When refinancing, you must consider how long you plan to be in the home. Depending on that answer you will need to evaluate if the interest rate break-even period will make sense for your family. Dont worry, our loan officers will go through these things with you. Typically there are closing costs associated with refinancing, and if you are not going to be in the home for an extended amount of time , refinancing might not be for you.
This all depends on the interest rate you choose and how high your current mortgage interest rate is currently. If your rate is on the higher end, the break-even period will be less. Your credit score is also important when refinancing shortly after your home purchase. If your score is still recovering from the previous loan, it may be best for you to wait. Check with our helpful staff and they can easily list out the pros and cons of refinancing.
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You Want To Convert From An Adjustable Rate To Fixed
If mortgage rates are increasing and you currently have an ARM or adjustable rate-mortgage you may want to consider refinancing and converting to a fixed-rate mortgage. Thats because with an ARM, your rate may increase beyond what youd pay with a fixed-rate mortgage. If youre concerned over future interest rate hikes, a fixed-rate mortgage could provide some peace of mind.
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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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Apply For Certificate Of Eligibility
If youre applying for a VA-backed cash-out refinance loan and have never previously had a VA loan, then youll need to obtain a Certificate of Eligibility from the Department of Veterans Affairs. If you already have a VA loan but cant find your original COE, you can ask your lender to download it through the VA Home Loan program portal. A COE can be obtained from the VA e-Benefits website , by mail, or by filling out VA Form 26-1880. Some lenders offer free assistance with obtaining a COE.
You must meet one of the following conditions to obtain a COE:
- Veteran who has served at least 90 consecutive days of active service in wartime or 181 days of active service in peacetime
- Member of the National Guard and Reserve who has served at least 6 years or
- Spouse of a veteran who died in the line of duty or as a consequence of a service-related injury.
Lower Your Monthly Mortgage Payment
When you took out your existing mortgage to buy your home, you may have gotten a higher interest rate than you wanted. This could be because you had poor credit or a short credit history or just because rates were higher at the time.
If your credit and income have improved since then, you could potentially qualify for a lower rate than you have by refinancing your home loan. You can also change your loan term. With those two changes, you could significantly reduce your monthly payments.
According to Freddie Mac, those who refinanced their mortgages during the first half of 2021 saved an average of $2,800 annually in mortgage payments. Thats a lot of money youd save every month that you could put toward other goals, like your retirement fund.
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The Bottom Line: Your Home Is A Financial Resource That You Can Leverage To Meet Your Financial Needs
If it makes financial sense to do so, refinancing your home more than once can help you manage your monthly budget, take advantage of investment opportunities or pay a major life expense. If youre not sure, talk to your financial advisor to see if it makes sense for you.
Ready to refinance? See how much you’ll save with arefinance calculator, or you can review your options online by applying for your refinance now .
Get approved to refinance.
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How Soon Is Too Soon To Refinance Your Mortgage
by Hailey Ploski-Sarno | Aug 13, 2021
Refinancing a mortgage refers to the process of writing a new mortgage loan to replace the one you currently have on your home. There are many reasons homeowners choose to refinance a mortgage taking advantage of lower interest rates, lowering your monthly payments by getting a longer-term loan, or cashing out some of your homes equity to make improvements to the property.
How soon youll be able to do this depends on the type of mortgage you have and the type youre trying to refinance into. Some mortgage loans allow refinancing immediately, while others require whats called seasoning, a mandatory period of time between purchase and refinancing.
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.
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Take Cash Out To Consolidate Higher
With a cash-out refinance, you may be able to consolidate higher-interest debt using the equity in your home. You could also use this equity toward larger expenses such as home improvement projects and college expenses. Remember that cash-out refinancing also increases your overall level of mortgage debt,
You Can’t Afford The Closing Costs
In general, closing costs on a mortgage refinance can range from 2% to 6% of the loan amount. If you don’t have enough cash on hand to pay those costs, or you’d need to drain your savings account, leaving you without cash for emergencies, it may make sense to wait until you can better afford to refinance your home.
Many lenders will allow you to roll the closing costs into a refinance loan, but that ultimately increases your monthly payment and total interest costs over the life of the loan. Think carefully about the potential long-term ramifications of doing so before you proceed.
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What Is Quantitative Tightening
While you can be forgiven for not closely monitoring the day-to-day gyrations of the Treasury market, youâve surely noticed surging mortgage rates and a topsy-turvy stock market. For that you can, in part, thank the Fedâs quantitative tightening policy.
The Fedâs mission is to keep prices stable and maximize employment. With inflation sitting near 40-year highs, the Fed is focused primarily on returning price growth to its 2% target. Thatâs why the Fed has raised the federal funds rate so aggressively: Thatâs the most direct way it can control interest rates.
Additionally, the Fed will lower its balance sheet in the hopes that doing so will raise yields on longer-term bonds. This is what is meant by quantitative tightening.
With Mortgage Rates On The Rise Is It Too Late To Refinance Your Home
Amid signs the economy is beginning to bounce back, average mortgage rates have risen sharply in recent weeks and though ultra-low rates are still out there, theyve become harder to find.
So what does that mean if youre a homeowner and have been considering refinancing your mortgage? Has that boat sailed?
Hardly.
Its never too late to refinance, says Tendayi Kapfidze, chief economist for Lending Tree. Analysts say plenty of homeowners still stand to benefit from a refi, and that group may include you.
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Refinancing To Tap Equity Or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another justification is that the interest on mortgages is tax-deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision nor is spending a dollar on interest to get a 30-cent tax deduction. Also note that since the Tax Cut and Jobs Act went into effect, the size of the loan on which you can deduct interest has dropped from $1 million to $750,000 if you bought your house after Dec. 15, 2017.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
Mortgage Broker Vs Lender
Loan officers work for financial institutions and handle the lending process. On the other hand, brokers negotiate with lenders on your behalf to find a loan program with the best terms for you.
- Mortgage broker: A mortgage broker is the middleman between a borrower and a mortgage lender. Working with a broker can save time and money, especially if you want to compare multiple lenders.A broker can also help manage your paperwork and fees during the homebuying process. However, brokers typically aren’t able to guarantee cost estimates and may not have access to all the lenders in your area.
- Mortgage lender: A mortgage lender is the banking institution that finances the home loan for a fee. Mortgage lender origination and closing fees vary by lender and from state to state. Mortgage banks and portfolio lenders are types of direct mortgage lenders.Direct lenders process applications and originate and underwrite loans. A lender is different from a mortgage servicer, which processes loan payments, responds to borrower inquiries and manages escrow accounts.
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Not Putting Extra Payments Towards The Loan Principal
Throwing in an extra $500 or $1,000 every month wont necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money youre paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
If youre writing separate checks for extra principal payments, you can make a note of that on the memo line. If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.
How Often Can You Refinance A Mortgage
Technically, American law doesnt officially limit the number of times you can refinance your home. Since you have no legal restrictions, you could seek new loan terms as many times as you want. Certain factors will play into when and how often you should refinance, including when you can break even and how many properties you have.
Some people refinance more than once. One couple did it twice on the same property in the same year, but this may not make financial sense for you. If you need to know how soon you can refinance after refinancing, look at the numbers. The savings must make up for the payments and any penalties. When the figures show you can recoup your losses quickly, you can refinance as often as you like.
Decide your break-even time. This time will be when you recover the costs you paid from your refinance in savings youve made. Compare your current loan payments and subtract the amount after refinancing. Divide the closing costs and fees by this number to find out how many years it will take for your investment to pay for itself.
For instance, if you have a $200,000 mortgage and closing costs to refinance cost 4% of the total, you will pay $8000 in closing fees. If you reduce your payment by 1%, you will save $2000 each year. To recover the closing amount, you will need to make payments on your newly refinanced loan for four years.
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How Long Does A Refinance Take
First, lets go over the finer points of a refinance. When you refinance your mortgage, you replace your current loan with a different one. Your new loan may have different terms from your current mortgage.
Your interest rate, term length, monthly payment and more may change during a refinance. The funds from your refinance pay off your original mortgage after your closing. Then you make payments on your new loan.
There are a few major reasons why you might want to refinance your mortgage:
- Change your loan terms or your interest rate. If todays rates are lower than your current interest rate or if youre having trouble making your monthly mortgage payments, you may want to consider a rate-and-term refinance, which means that your principal balance remains the same. However, your interest rate or the amount you pay each month changes. You can refinance your loan into a longer term if you want to lower your payments or a shorter term if you want to pay off your loan faster. Also, consider a no cash-out refinance, which will allow you to refinance for less than or equal to your remaining balance. If youre putting more money toward your balance while refinancing, its referred to as a cash-in refinance.
Keep in mind that a refinance might affect your credit score. You may have 14 to 45 days to apply for a refinance before a hard inquiry appears on your credit report.
Get approved to refinance.
