Expert Insight On Mortgage Refinancing
To help answer all your questions, MoneyGeek spoke with industry leaders on refinancing and home lending. This panel will help you identify what to look for, when you should consider refinancing and how to avoid scams in the process.
The Pros And Cons Of Refinancing
|Pros of refinancing||Cons of refinancing|
|Access the equity youve built up in your home.||Increasing the amount you are borrowing may lengthen the time it takes to pay off your mortgage.|
|Consolidate your debts and lower your overall interest rate.||Your overall interest rate might be lower but the amount owing on your mortgage may be higher.|
|Possibly get a lower interest rate and pay less for your mortgage over time.||There may be additional costs, including a prepayment charge.|
Requires Good Credit To Get A Lower Rate
Each lender has its own requirements for refinancing, but to get the best rate that makes refinancing an intelligent strategy, youll need good credit. According to FICO, credit scores of 670 or higher are considered good, very good, or excellent. If you have fair or poor credit, you could end up with a higher interest rate.
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Is Refinancing Worth It
In many cases, refinancing is definitely worthwhile. If you weigh the pros of the money you can free up to use towards a certain purpose be it to finance your kids schooling or ease your cashflow versus the cons of the penalty youll pay to break your mortgage early, youll be able to make an educated decision on whats best for you.
Sometimes waiting a little longer say, closer to the end of your current mortgage term makes the most sense for your situation. If thats the case, you know where you stand and can make future plans accordingly.
Tip: Sometimes waiting closer to the end of your current mortgage term to refinance makes the most sense for your situation.
How We Calculate Our Mortgage Rates
To get an idea of the current mortgage rate trends, we rely on information collected by Bankrate, which is owned by the same parent company as NextAdvisor. The daily rates survey focuses on mortgages where the borrower has a FICO score of 740 or more, a LTV of 80% or lower, and the home is a primary residence.
The table below compares todays average rates to what they were a week ago, and is based on information provided to Bankrate by lenders nationwide:Average mortgage interest rates
Also Check: What Is The Current Trend In Mortgage Rates
When Is A Good Time To Refinance Your Home
The best time to refinance depends on the person. Factors like your individual circumstances, financial situation, and current mortgage rates should inform your decision.
But ultimately, refinancing is worthwhile when it will save you money. And there are a few ways a refinance can help you accomplish that.
If interest rates are lower now than when you originally borrowed your home loan, you could pay at the newer rate. In another case, you may have private mortgage insurance on your current loan. But if you have over 20% equity in your home, you can refinance and cancel your PMI.
In addition, a refinance can be financially helpful. If you have a large expense or emergency cost to cover, you can apply for a cash-out refinance. This essentially allows you to tap into your propertys equity to cover said costly expense. For instance, you may have a home improvement project to complete or education costs for your child.
Some homeowners use their refinancing as an opportunity to consolidate their debt as well.
Again, circumstances vary. The best time to refinance a home will depend on your situation. If you want to find a good time to refinance, look for a time with the most financial benefits. Refinancing can be the right move when it provides you with savings in the present and long run. Furthermore, it should accommodate your financial situation in the near future and maintain the ability to comfortably cover closing costs or repayment.
To Save Money For A New Home
As a homeowner, you need to make an important calculation to determine how much a refinance will cost and how much you will save each month. If it will take three years to recoup the expenses of a refinance and you plan to move within two years, that means you are not saving any money at alldespite the lower monthly payments. Using a mortgage calculator is a good resource to see what a different monthly payment might look like.
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How Can You Lower Your Mortgage Payment Without Refinancing
There are a few ways to potentially reduce your monthly housing costs without spending a lot of money refinancing, such as:
- Recasting your mortgage. In this situation, your lender can recalculate your payments based on what you currently owe. To be eligible for recasting, youll typically need to pay a large amount toward your principal and pay a feeusually a few hundred dollars.
- Getting rid of mortgage insurance. If you put down less than 20% of your loan amount on a conventional loan, youre required to get private mortgage insurance . But if youre able to pay down your principal to 80% of your homes original price, you can request for your lender to remove your PMI.
Monthly Principal And Interest On 30
|30-Year Vs. 15-Year|
- Attorney fees
Keep in mind that in some cases, a lender might be willing to waive certain fees , so be sure to ask if any of your closing costs are negotiable or if any discounts are available.
There are also several lenders that offer no-closing-cost refinance options, which allow you to roll your closing costs into your loan amount. However, this often results in a higher interest rate and higher monthly payments. If you plan to stay in your home for a long period of time, its generally better to cover your closing costs upfront to avoid paying more over time.
Additionally, getting your financial profile in the best shape possible with a good credit score, stable income and low amount of debt can help you qualify for a competitive rate on your mortgage, which will reduce your costs over the life of your loan.
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Fees And Other Costs Would Offset The Savings
There are closing costs associated with refinancing. In 2021, the average cost to refinance was just under $2,400, according to data compiled by CoreLogic, though it varies by location and lender. According to the Federal Reserve, it can sometimes cost as much as 6% of the loan amount.
For refinancing to be worthwhile, you’d want to make sure the savings would outweigh those initial costs in the long run. As Dallal explains: “Closing costs can be high, so it may not always be worth the time and effort to refinance a mortgage.”
You can use Personal Finance Insider’s mortgage calculator to get an idea of how much a refinance could save you over time. Then, compare that to average closing costs in your state to see if the move is worth it.
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
Can You Refinance Into A Shorter Term
If you have 20 years left on your mortgage and you refinance into a new 30-year mortgage, you may not save money over the long run .
However, if you can afford to refinance that 20-year mortgage into a 15-year mortgage, the combination of a lower interest rate and a shorter term will substantially reduce the total amount of interest youll pay before you own the house free and clear.
Negatively impacting your long-term net worth
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How Much Will It Cost To Refinance Your Home
The overall cost to refinance your home loan will depend on several factors. For example, your homes present value and the type of lender you work with can both contribute to the cost.
Generally, though, you should expect to pay around 2% 6% of your loans total value when refinancing. This amount will cover your overall closing costs, such as:
- Application fee: Your lender may charge you for your application even if you are ultimately denied.
- Appraisal fee: Its common for lenders to require appraisals when you refinance. Appraisers usually charge $300 $500 for the service.
- Attorney fees: Depending on your state, an attorney may have to review and file paperwork for your refinancing loan. These fees will vary based on location.
- Title and insurance: Your lender will likely require a title search during the refinancing process.
Some homeowners may be able to roll these closing costs into their overall loan balance. But that depends on the lender, the loan type and how much equity you have. By doing so you may accept a higher mortgage rate in exchange.
The type of refinancing terms you look for should depend on your financial situation. You want to make sure you can handle the monthly payments it would require. As a result, it may be wise to check out our refinance calculator. It can help you estimate those recurring costs and thus help you focus your loan options.
/1 Arm Interest Rates
A 5/1 ARM has an average rate of 4.31%, which is an increase of 9 basis points compared to last week.
An ARM is ideal for individuals who will refinance or sell before the rate changes. If thats not the case, their interest rates could end up being significantly higher after a rate adjusts.
For the first five years, a 5/1 ARM will typically have a lower interest rate compared to a 30-year fixed mortgage. Keep in mind that your payment could end up being hundreds of dollars higher after a rate adjustment, depending on the terms of your loan.
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When Is It A Good Idea To Refinance Your Mortgage
There are several reasons why you may consider refinancing your mortgage. The most popular ones include taking equity out of your home to consolidate debt, fund renovations, or purchase another property.
Regardless of why youd like to tap into your home equity, however, youll likely face penalties to refinance before your current mortgage term has expired. And, the more time you have remaining on your current term, the stiffer the fees for breaking your mortgage. Thats why its important to look at your payout penalty on your current mortgage and weigh it against the benefits of gaining access to your homes equity before making a decision.
- There are several reasons why you may consider refinancing your mortgage. The most popular ones include taking equity out of your home to consolidate debt, fund renovations or purchase another property
- Weigh the pros of the money you can free up through a refinance versus the cons of the penalty youll pay to break your mortgage early to make an educated decision on whats best for you
- A cash-out refinance is when youre taking out a new mortgage in a larger amount than the existing loan in order to use some of your home equity
Is Refinancing Worth It Right Now
Refinancing is usually worth it if you can lower your interest rate enough to save money month-to-month and in the long term. Depending on your current loan, dropping your rate by 1%, 0.5%, or even 0.25% could be enough to make refinancing worth it.
This means that even in a rising-rate environment, a refinance is still worthwhile for some homeowners.
If you think you could get even a slightly lower rate, check to see if a refinance is worth it based on your new rate and savings.
In this article
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Find The Best Refinance Rates
To find the best refinance rates, youll have to do some work, but it wont take much time. Look at banks, credit unions and online comparison sites. You also can work with a mortgage broker if you want someone to do the legwork for you and potentially get you access to lenders you wouldnt find on your ownlenders that might offer you better terms.
Submit three to five applications to secure formal loan estimates. The government requires the loan estimate to show your estimated interest rate, monthly payment and closing costs on a standard form that makes it easy to compare information across lenders.
On page 3 of the loan estimate, youll see the annual percentage rate, and on page 1, youll see the interest rate. When youre buying a car, it usually makes sense to pick the loan with the lowest APR, because APR includes a loans fees.
With mortgages, its different. The APR assumes that you will keep the loan for its full term. As weve already seen, that doesnt usually happen with home loans. You might be better off with a loan that has a higher APR and a higher monthly payment but no fees.
Instead of putting cash toward closing costs, you could keep that money in your emergency fund or use it to pay down debt with a higher interest rate than your mortgage.
Another problem is that if youre comparing the APRs on a 30-year and a 15-year loan, the 15-year loan might have the higher APR despite being much less expensive in the long run.
Federal Housing Administration Streamline
A Federal Housing Administration Streamline refinance is designed for homeowners who already have an FHA mortgage. Its goal is to provide a new FHA mortgage with better terms that will lower the homeowners monthly payment. The process is supposed to be quick and easy, requiring no new documentation of your financial situation and no new income qualification.
This type of refinancing does not require a home appraisal, termite inspection, or credit report. One possible drawback for some homeowners is that an FHA streamline refinance does not allow cash out.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development .
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If Your Home Value Hasnt Increased
Some people refinance their reverse mortgage if their home equity has gone up and they want to be able to access more of it. If that doesnt apply to your situation, and youve already received a good amount of reverse mortgage payments, you may not have sufficient equity to qualify for a refinance.
How Long Does It Take To Refinance
While a mortgage refinance usually takes 30 to 45 days to complete, the process might be longer or shorter, depending on your property, the complexity of your finances, and the current market. To make sure you dont miss out on a good mortgage rate, you can lock in your rate for a given period, around 30 to 60 days.
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Your Credit Has Improved
Your credit is a significant factor in determining your mortgage rate. Generally speaking, the better your credit is, the lower the interest rate youll receive.
Lets look at an example based on recent interest rates. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO® credit score is within the 660 to 679 range, the myFICO Loan Savings Calculator estimates you could pay 3.375% APR .
With this interest rate, your monthly payment would be $663 and your total interest paid across 30 years would amount to $88,732.
In comparison, if your credit score was in the 700 to 759 range, the calculator estimates your monthly payment would drop to $631 . And over the life of the loan, you could save more than $11,500 in interest.
You’re Facing Big Expenses Or Want To Pay Off Debt
Cash-out refinancing can help you pay for renovations, big medical bills, college tuition, or other expenses. It can also help you eliminate higher-interest debts like credit cards, which currently carry rates over 14%, according to the Federal Reserve.
“With the average mortgage refinance rate just a fraction of the average credit card interest rate, cashing out to be able to pay down your credit card or other higher-interest-rate debts may be a smart financial move,” says Al Murad, executive vice president of sales at AmeriSave Mortgage.
When you use a cash-out refinance to pay off higher-interest debts, you essentially roll those debts into your mortgage loan and then pay them off over time.
How Much Lower Are Rates Than The One You Currently Have
How much should interest rates drop to refinance? Thats not the right question. Instead of listening to rules about how much of a percentage change in interest rates you should look for before you refinance, look at how much money youll stand to save. A 1% rate reduction is a lot more meaningful if you have a $500,000 mortgage than if you have one thats $100,000.