How To Calculate Refinance Savings
To calculate the value of refinancing your home, compare the monthly payment of your current loan to the proposed payment on the new loan. Then use anamortization scheduleto compare the principal balance on your proposed loan after making the same number of payments youve currently made on your existing loan. Both the monthly payment and principal balance of the new loan should be lower. Enter your specific details into therefinance calculator abovefor a detailed savings breakdown.
How Much Does It Cost To Refinance
Average refinance closing costs range between 2%-6% of the loan amount. Closing fees vary depending on your location, loan type, loan size and mortgage lender.
Most lenders allow you to roll the closing costs of the refinance into the balance of your new loan, increasing the total amount borrowed.Apply with at least three lenders and obtain official Loan Estimates to compare loan costs and savings. Work with lenders to complete a cost-benefit analysis and determine whether refinancing makes sense for you.
How To Know When To Refinance Your Mortgage
Here are some key points you should consider when deciding whether to refinance your mortgage:
- Your credit score. With most mortgage lenders, youll need a of at least 620 to qualify for a mortgage refinance. To get the lowest mortgage rate, youll need a 740. Also keep in mind that, if your credit is lower than it was when you took out your current mortgage, you may not qualify for as favorable a rate as you did before.
- Your debt-to-income ratio . For conventional loans, some lenders will work with a DTI as high as 43%. FHA loans will go a little higher, usually accepting DTIs of 50%. Lower, however, is generally better.
- How long youre staying. When you refinance, youll need to pay closing costs. If you plan to move out in the near future, you may not break even.
- How much equity you have in your home. In order to qualify for a mortgage refinance you generally need at least 20% equity in your home.
Dont try to time the market. Waiting on rate swings is as troublesome as timing the stock market. Dont wait to see what happens with mortgage rates tomorrow if you can save money or move closer to your financial goals by refinancing today.
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When To Refinance A Mortgage
A mortgage refinance could be worthwhile if your credit score is good enough to reduce your interest rate by a half-point or more. The exact interest rate reduction that will result in savings on your mortgage will depend on factors such as how long you plan to live in your home to break even on closing costs. A refinance could also make sense when youve amassed enough home equity to get rid of your PMI. If you plan to stay in your home for years to come, and have years left on your mortgage, any of the following factors could be indicators of a good time to refinance:
- Has your credit score improved?
- Have rates dropped below your current interest rate?
- Did you reach 20% equity?
- Do you have cash to apply?
- Do you have an adjustable rate mortgage that is near the end of a fixed-rate period?
Refinance timing also depends on your financial needs. You may want to tap into your homes equity with a refi to pay other expenses. Ultimately, your unique circumstances determine the right time to refinance. Regardless of your circumstances, you should always factor in the originations fees and costs lenders will charge to refinance a mortgage.
You Have Had Your Current Mortgage For A Long Time
Homeowners who are a decade or more into their mortgages are less likely to see savings with a small rate decrease, because theyll be extending the full payoff period to 40 years or more and paying interest on all that extra time.
One solution is refinancing into a shorter loan term like a 20- ,15-, or 10-year mortgage instead of beginning all over again with a new 30-year loan.
Shorter terms typically have lower rates. And youll likely save even more in interest because you pay off the loan sooner.
But keep in mind: The shorter your loan term is, the higher your monthly payments will be. So a shorter loan term is not always an affordable option.
That said, if your original loan is, say, around $500,000 at 4%, and youve made 11 years of payments you could refi into a 15-year term at 3% and only pay a couple hundred extra each month and shave 4 years of monthly payments off of your loan, says Meyer.
In situations where a homeowner is nearly done paying off their home loan, a refinance rarely makes sense.
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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.
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If Your Mortgage Rate Is Above 689% Now Is Probably A Good Time To Refinance
The current average mortgage rate for a 30-year fixed-rate loan is 5.89%, according to Freddie Mac. It is probably worth considering a mortgage refinance if you can reduce your current interest rate by at least 0.5%.
If you have a $300,000 balance on your mortgage and you refinance to a new 30-year loan, lowering your interest rate from 6% to 5.50% will save around $95 per month or $1,140 per year. If you can reduce the rate from 6% to 5%, your monthly savings would be $188 per month or $2,256 per year.
You also dont have to refinance into a 30-year loan. If your finances have improved and you can afford higher monthly payments you can refinance a 30-year loan into a 15-year fixed-rate mortgage, which will allow you to pay the loan off faster and also pay less interest.
Taking a look at your monthly savings is just one part of the refi equation, however. You also need to factor in the cost of switching out your loan and how long it will take you to recover those costs, or break even.
Just as with a purchase loan, youll have to pay closing costs on a refinance. These costs can include origination and application fees, appraisal and inspection costs and title search fees. In all, closing costs can run between 3% and 6% of the total loan amount being refinanced.
Come To The Closing With Cash If Needed
The closing disclosure, as well as the loan estimate, will list how much money you need to pay out of pocket to close the mortgage.
What to consider: You might be able to finance those costs, which typically amount to a few thousand dollars, but youll likely pay more for it through a higher rate or total loan amount, which also means more interest in the long run. In most cases, it makes more financial sense to pay the costs upfront if you can afford to.
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Your Home Value Has Increased
If the value of your home has gone up, you might also get some benefit from refinancing, especially if you have other high-interest debt to pay off or another financial goal.
A cash-out refinance lets you take out a new mortgage thats larger than what you previously owed on your original mortgage, and you receive the difference in cash. A cash-out refi is an alternative to a home equity loan.
You also might consider a cash-out refi for home improvements or to pay for a childs education.
But youll want to make sure you dont end up paying more in mortgage interest than the interest you would pay on any debt youre using the cash to pay off.
When Does It Make Sense To Refinance
In general, mortgage refinancing will likely make sense when it makes sense for your finances. But part of that depends on your financial goals. For instance, do you want a lower monthly payment? Are you trying to save in total interest paid? Do you need to extract cash from your home with equity youve built? You can use Credit Karmas loan amortization calculator to explore how different loan terms affect your payments and the amount youll owe in interest.
Here are five situations to think about before you refinance.
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Are You In Need Of More Room For Monthly Cash Flow
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If youre in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what youll be doing with those new freed up dollars each month.
Is Refinancing The Right Move Or You
Before you make any decisions, itâs wise to take the time to understand if refinancing is the best option for you. Here are some tips for you to consider before choosing to refinance:
Tip #1: Consider additional fees
Penalty fees can get expensive â weâre talking tens of thousands of dollars in some cases. For example, prepayment penalties for refinancing can be quite costly if you arenât very far into your current mortgage term. On top of that, if you choose to refinance, youâll also have to pay for closing costs such as lawyer and appraisal fees. If these additional expenses donât fit into your budget, you may want to reconsider refinancing until you can afford it.
Tip #2: Check your credit score
You’ll need to qualify for approval just like you did for your initial mortgage, which means your credit score will be reviewed. Having strong credit will increase your chances for approval because it shows lenders that you can manage your monthly mortgage payments.
Tip #3: Determine your home equity
To calculate this, take the current market value of your home and subtract your mortgage balance. If your goal is to refinance to borrow money, the amount you can borrow will be based on the amount of equity you have in your home.
Tip #4: Shop around different lenders
Tip #5: This is a long-term decision
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Change Your Loan Type
If you have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate loan. That way, you won’t have to worry about rates and payments rising in the future. Or if you have an FHA loan and are paying mortgage insurance, you may refinance to a conventional loan to eliminate mortgage insurance costs.
Introduction To Heloc Loans
A home equity line of credit, also known as a HELOC, is an open-end revolving line of credit in which the borrower uses their home equity as collateral. HELOC lenders create a lien against the borrowers home until the full amount is paid off, similar to a first mortgage.
HELOC loans are often used to finance major expenses such as home improvement, medical expenses, or college tuition fees. Borrowers may draw funds at any time, provided they dont exceed the approved credit limit. Borrowers only pay principal and interest on the funds drawn. Like a home equity loan, a HELOC may involve closing fees at the start of the loan.
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What Is A Mortgage Loan
A mortgage is a loan used to purchase real estate, often a primary residence. When you sign a mortgage loan, you agree to repay a certain amount each month plus interest for the term of the mortgage. Most mortgages last 15 or 30 years, but some lenders offer other mortgage terms.
With a mortgage, the home or property acts as collateral for the loan. If you do not make payments, the lender can eventually repossess the home. If you want to change the terms of your mortgage, you can apply to refinance for a lower interest rate or shorter loan term.
Conventional mortgages require a 3% down payment. They allow you to finance a home worth up to an annual maximum established by Fannie Mae, a federally-based mortgage company. Government-backed mortgages, such as FHA, VA, and USDA loans, have less strict approval requirements. Jumbo mortgages exceed the threshold for conventional mortgages.
Shop Multiple Mortgage Lenders
Getting quotes from at least three mortgage lenders can save you thousands. Once youve chosen a lender, discuss when its best to lock in your rate so you wont have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether theyll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
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The Value Of Your Home Has Increased
Since 2011, the values of homes has risen from an average of $250,000 to an average of $394,000. Yet many homeowners dont refinance their mortgages when the value of their home increases. If your homes value has increased, refinancing may be a beneficial option for you. If youre looking quickly to pay off other high-interest debts or fund major purchases, this avenue may be even more appealing.
Cash-out refinancing is a financing option that allows you to acquire a new, larger mortgage so you can receive the difference in cash between your new mortgage and your previous mortgage. For example, maybe your house was originally valued at $250,000. You put 20 percent toward a downpayment $50,000.
Your mortgage of $200,000 is now $140,000 after a few years of payments, but now your house has increased in value from $250,000 to $300,000. You may now opt to refinance your mortgage for more than your remaining balance of $140,000. If you refinance for $165,000, you can use that $25,000 difference to pay off high-interest debt, make home improvements or fund major purchases.
Be sure to check the value of your property so you can have an accurate estimate before refinancing your mortgage. Over or underestimating your homes value may result in you overpaying and saving less.
If any of these five signs apply to you, it may be time to consider refinancing your mortgage.
Refinance Rates For Oct 14 202: Rates Tick Higher
Multiple key refinance rates floated higher over the last week. See how the Fed’s interest rate hikes could affect refinancing your home this year.
Both 15-year fixed and 30-year fixed refinances saw their mean rates rise. The average rates for 10-year fixed refinances also made gains.
Like mortgage rates, refinance rates fluctuate on a daily basis. With inflation at a 40-year high, the Federal Reserve has hiked the federal funds rate five times in 2022 to try to slow it down. Though mortgage rates are not set by the central bank, its rate hikes increase the cost of borrowing money and eventually impact mortgage and refinance rates and the broader housing market. Whether refinance rates will continue to rise or fall will depend largely on how things play out with inflation. If inflation cools, rates will likely follow suit. But if inflation remains high, we could see refinance rates maintain their upward trajectory.
If rates for a refi are currently lower than your existing mortgage rate, you could save money by locking in a rate now. As always, consider your goals and circumstances, and compare rates and fees to find a mortgage lender who can meet your needs.
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What Is The Refinancing Process
Whether youre refinancing to lower your monthly payments, to lower your interest rate or to free up some cash to pay off high-interest debt or build equity in your home, youll probably want to know what you can expect from the process of refinancing a mortgage before jumping right in. To refinance, youll likely go through these nine steps:
1. Make Sure Refinancing Will Benefit You
Your first step in refinancing your mortgage is making sure that refinancing will be beneficial for you. Know what your goal is and determine whether you can attain it. Are current rates low enough for you? Will you ultimately be saving money? If you cash out, make sure having that money right now will outweigh the extra years spent in debt. Everyones financial situation and priorities are different, so only you can decide what the best decision is for you.
2. Contact a Lender
With Assurance Financial, we want to make your refinancing process as quick and painless as possible. We offer the chance to get pre-qualified in just 15 minutes, with a no obligation quote and a free rate quote. You can apply online or with one of our experts licensed across the country. We have every type of loan available, and because were an independent lender, we wont pass around your loan or data to anyone else like other mortgage brokers. With no obligation, we can check your credit, provide you with a rate quote and send you the numbers.
3. Fill out Your Application
4. Sign Your Disclosures
