Getting A Lower Interest Rate
Refinancing to get a lower interest rate can save you a lot of money over time, depending on the prepayment penalty and the size of your outstanding mortgage. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest, and if you hold a fixed rate mortgage, then you will pay the greater of three months interest or interest rate differential penalty . Donât let penalties deter you – understanding the numbers helps you calculate whether a refinance will save you money.
Escrow Accounts Are Tied To Only One Account
Unfortunately, you cannot reassign your escrow account from one loan to another. If you pay off your current mortgage with a new loan, the original lender will refund you the remaining funds in your account. The lender is unable to transfer the funds to your new mortgage account. This means you will receive a check in the mail within 30-45 days for the amount left over.
Should You Refinance With Your Current Mortgage Lender
If you want to save the most money, talk to multiple lenders.
Millions of buyers are rushing to take advantage of the historically low-interest rates brought on by the coronavirus pandemic. In fact, the increasing numbers are causing some delays in closing mortgage refinances. While most refinances take about 30 days, you may now have to wait six to eight weeks for your application to process and complete.
While its essential to move quickly if you want to take advantage of the lowest possible rates, its even more important to make sure youre getting the best rate possible. Further, since all mortgage refinances filed after Dec. 1, 2020, will be subject to an adverse market fee, theres no need to rush to submit your application before a specific date.
If you need additional motivation to take your time and do a bit of homework, keep in mind that the Federal Reserve announced that they would likely keep interest rates near 0% until at least the end of 2023. While rates could go up before then, you have sufficient time to talk to multiple lenders or review multiple offers before moving forward.
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Why You Might Want To Refinance With A Different Lender
When saving money is your main reason to refinance, switching lenders may be a good idea if theyre offering much lower rates and better terms.
If you want to maximize your savings and dont mind jumping through the paperwork hoops to prove your creditworthiness to a new lender, then choosing a new lender for your refinance may be your best bet, Pierce says.
However, the process could take a little longer, possibly 45 days, since youll have to fill out a loan application and provide supporting documents, like pay stubs and tax forms. The new mortgage company also checks your credit and may require a home appraisal.
Refinancing with a new lender doesnt mean youll have to deal with two mortgage companies. When you refinance, your new home loan replaces the old one, and the new bank pays off the original loan, Anastasio says.
You will only need to correspond with your current lender, as they will handle communications with your previous lender, she says. In addition, youll make only one payment to your new mortgage company.
Failing To Do Your Real Estate Homework
You should get a general idea of your home’s worth by checking home-valuation sites and speaking to a local real estate expert.
According to Allison Barnett of the Barnett Realty Group in Marietta, GA, “You should always strive to get a real-time market analysis from a local real estate professional.” While home-valuation sites like Zillow can give you a very broad range, says Barnett, they also state that ‘Zestimates’ may carry a margin of error that’s nearly 8% depending on your location. For a quick review, you can also get a working reckoning of your home’s value by using HSH.com’s Home Value Estimator.
You’ll also want to do some local mortgage market research. You can get an reasonable idea of your potential mortgage rate, closing costs and new monthly payment without having anybody pull your credit or starting an application. It just takes a little bit of effort and some time.
Armed with the information you gather, you can visit HSH.com to view advertised mortgage rates from various lenders. Then, use a refinance calculator to estimate your new monthly mortgage payment.
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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.
When Is It A Good Time To Refinance My Mortgage
Homeowners refinanced $2.6 trillion in mortgage debt last year thanks to record-low mortgage rates, according to Freddie Mac, a quasi-government agency that helps support the mortgage market. Rates remain exceptionally low, so its worth running the numbers and seeing how much you could save by refinancing now. Here are some signs the time might be right.
- You can lower your rate by at least 0.5%. Theres no hard-and-fast rule that determines what interest rate drop makes refinancing worthwhile. You have to calculate how much youd save based on each lenders offer. But if the current rates are lower than your existing rate, its a good time to do the math and seek options. The typical homeowner who refinanced in 2020 lowered their rate by 1.2 percentage points, according to Freddie Mac. Borrowers with very good to excellent credit to get the best rates.
- You can pay off your mortgage faster. Refinancing into a shorter mortgage term can potentially save you more by combining a lower interest rate with fewer years of payments.
For example, if youve borrowed $300,000 and your rate on a 30-year mortgage is 3.5%, your monthly payment is $1,350 and youll pay $185,000 in interest over 30 years.
If you refinance that amount into a 15-year loan at 2.1%, your new monthly payment will be $1,900, and youll pay $49,000 in interest over the next 15 years . Youll save $126,000 in the long run, minus closing costs of around $3,000.
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When Should I Lock In My Mortgage Rate
Its impossible to know what direction mortgage rates will go from day to day. Thats why a mortgage rate lock is such a useful tool because it protects you if rates go up. And with interest rates so low right now, you should lock in your rate as soon as you can.
A rate lock will only last for a set amount of time, typically 30-60 days. If you hit a snag during closing and it looks like your rate lock will expire you should contact your lender. It may offer an extension of the lock, however, you might have to pay a fee for that privilege.
At NextAdvisor were firm believers in transparency and editorial independence. Editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by our partners. We do not cover every offer on the market. Editorial content from NextAdvisor is separate from TIME editorial content and is created by a different team of writers and editors.
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These Are The Basic Factors To Consider:
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Use A Mortgage Refinance Calculator
Once youve decided to refinance, its time to crunch the numbers. Using a mortgage refinance calculator can help you shop for the best mortgage.
Youll need to know your new interest rate and your new loan amount.
Once youve decided to refinance, its time to work the numbers.
After you input the data, the tool will calculate your monthly savings, new payment, and lifetime savings, taking into account the estimated costs of refinancing your home.
It also will show your refinance break-even point. Getting a mortgage generally requires paying fees, often amounting to thousands of dollars. It takes a while for a refinance to break even that is, for the accumulated monthly savings to exceed the refinance closing costs.
Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can enter the terms they offer you into the calculator to help determine which one offers the best deal.
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Will Refinancing With My Original Lender Save Me Money
In some cases, you may save money with a refinance loan from your current lender. If you’re a borrower with an account in good standing , your lender is more likely to offer you an attractive new mortgage with a low interest rate.
You may also be able to use offers from other lenders to negotiate with your current lender. For example, if your current lender offers you a great interest rate for refinancing but higher closing costs than you can get elsewhere, you can ask for lower lender fees to seal the deal. Because your lender knows you and may be motivated to keep you on as a borrower, your lender may come down on refinance closing costs.
Refinancing a mortgage could help you lower your monthly payments and save money on interest in paying off your home. And in many cases, using your current lender for your refinance makes sense. Ultimately, gathering offers is the best way to know if you’re getting a good deal on a refinance.
Either way, before you agree to a refinance offer, use a mortgage calculator to see how much savings you get compared to your original loan. Make sure you’re lowering your monthly payment enough to compensate for the closing costs you’re charged up front.
With today’s refinance rates sitting near record lows, now might be the right time to replace your existing mortgage with a new one
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Closing Costs On A Refinance With The Same Lender
Youll pay closing costs on a refinance, just as you did when you first took out your existing mortgage. Refinance closing costs can range from 2% to 6% of your loan amount, depending on the size of your loan.
You could see lower closing fees, though, if you refinance with the same lender, according to Barry Zigas, a senior fellow and former housing policy director with the Consumer Federation of America . The CFA is a nonprofit consumer advocacy organization.
A current lender has the ability to negotiate with you on the total package, because theres an advantage to them to keeping the loan with them, Zigas said.
Examples might include:
- No title insurance fee
- No additional mortgage insurance fee
- No loan origination fee
Having A Low Credit Score
Most lenders have minimum credit score guidelines. Even though you may heard that you can get an FHA loan with a credit score as low as 500, most lenders have their own set of “overlays” or add-ons on top of minimum underwriting requirements. These overlays can be whatever that particular lender or bank chooses.
Before you start a refinance, order your credit reports from Equifax, TransUnion and Experian. Consumers, by law, are entitled to one free credit report per year from each major bureau you can get yours from AnnualCreditReport.com, the official government-authorized site.
This is important because, according to the Federal Trade Commission , 20 percent of credit reports contain wrong information. Five percent of those errors may result in the consumer receiving a higher mortgage interest rate.
Immediately report any errors. The bureau is required to remove any error or trade line it can’t prove is yours.
How much does your credit score impact your ability to refinance? A lot, actually.
Let’s say you have a 620 credit score and you’re applying for a conventional loan. The difference between someone with a 620 score vs a 740 score could impact the interest rate by a full three-quarters of a percentage point, possibly more.
As an illustration, here’s how a 0.75% interest rate difference could look based on a loan amount of $250,000 on a 30-year fixed mortgage.
- 740 score at 3.75% = $1,158
- 620 score at 4.5% = $1,267
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Can You Refinance With Your Current Mortgage Lender Pros And Cons
See Mortgage Rate Quotes for Your Home
If youre looking to lower your monthly mortgage payment, refinancing with your current lender could save you the hassle of switching financial institutions, filling out extra paperwork and learning a new payment system.
But before you sign on the dotted line, its smart to shop with multiple mortgage companies to get the best refinance rate. After all, hefty savings may make it worth it to change lenders.
When Should I Refinance
The best time to start considering refinance is when you notice mortgage rates are falling below your current loan rate.
With a good credit score and proof of steady income and your equity in your home is good enough to give you a competitive rate.
So when your credit score is good enough and when the interest rates are lower than your current rate by at least 1%.
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Wait The Minimum Amount Of Time To Refinance Your Home
Depending on the type of mortgage you want and the lender you go through, you might have to wait a certain amount of time after you close on your original mortgage to refinance.
Here are some typical wait times you might experience:
- Cash-out refinance: If youre planning on a cash-out refinance, you typically have to wait six months after your original mortgage closes.
- FHA loan: To refinance an FHA loan with an FHA Streamline Refinance loan, you have to wait 210 days.
- Loan modification: If you modified your original loan to make your loan payments more affordable, you might have to wait as long as 24 months to refinance.
Keep in mind:
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Work On Your Credit Score
Borrowers with high and a healthy credit history qualify for the best interest rates. You can bump up your credit score by reducing consumer debt, paying all your bills on time, and removing errors from your credit report.
If youve recently paid off debt, you could opt to include monthly payments like utilities and your cell phone bill on your credit report. As you make these additional payments on time every month, you can get a boost in your credit score.
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Look At Fees As Well As Mortgage Rates
One common mistake homeowners make when they shop for a refinance loan is only looking at interest rates.
Your interest rate is important, but its not the only thing that matters.
You need to compare the other items listed on your Loan Estimates too, including:
- Annual percentage rate : Your effective interest rate when all loan costs are combined
- Closing costs: Refinance loans have closing costs, just like home purchase loans. When youre shopping around, pay special attention to origination fees and discount points
- Short-term and long-term savings: Dont just look at the amount youll save on your monthly mortgage payment. Also look at your total interest over the loan term to see which lender is more expensive in the long run
- Loan terms: Make sure all your estimates are for the same type of loan so youre comparing apples to apples. For example, if one quote is for a 30year mortgage and one is for a 15year mortgage, theyre going to have very different interest rates and payments. Or if you compare a cashout refinance against a nocashout refi, the cashout loan will have a higher rate
You can ignore lenders estimates for things like property taxes and homeowners insurance, since youll have to pay the same amount regardless of which lender you choose.
