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Super: TD presents Asking for a FriendWhy Would You Refinance?
Welcome to Asking for a Friend. Lets see who could use some financial advice today.
Dear Asking for a Friend,My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wondering…what exactly IS refinancing and why do people refinance?Sincerely,Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Let’s say the value of your home is $500,000.
Super: $500,000
80% of home value 0.8 x $500,000 $400,000Outstanding balance of your mortgage $300,000How much you can borrow $100,000
Subject to the bank’s approval, you could borrow up to 80% of the value of your home less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 .
So WHY do people refinance?
Super: To consolidate debts.
Super: Provide flexibility to pay for big ticket items.
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Check Your Credit Score And Credit Report
Before making any loan decisions, its important to check your credit score, as well as your credit report.
Your credit score will in large part determine how favorable a rate a lender will offer. The higher your score, the lower the rate youll qualify for and the lower your monthly payments will be. If you have a low score, look for ways to improve your credit score well before applying for a loan.
Your credit report shows the information your score is based upon. Its where you can check if there are any errors that may be negatively affecting your credit score. If you find mistakes in your report, you can contact the credit bureaus to have these items removed. Be prepared to provide documentation proving the mistake.
As part of the consumer protections put in place by the CARES Act, you can get a free weekly credit report from any of the major reporting bureaus through April 2022.
You should also be aware of what factors could cause a temporary hit to your credit score. Applying for credit cards, personal or auto loans just before, at the same time, or just after applying for a refi will lower your score, albeit temporarily.
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You Might Reset Your Term
Finally, pay close attention to the new term of your loan. Are you taking the same term you had originally? How long has it been since youve taken out the original loan? If youve paid on your loan for several years already, you may not want to start back at square one. Instead, you might want to take a shorter term that allows you to keep making progress on your debt rather than adding years back onto it.
Before you refinance your home, think long and hard about your objective in doing so. Are you trying to save money? Do you need to tap into your homes equity? Are you trying to eliminate PMI? Keep this goal in mind as you figure out which loan will work the best for you.
Your Credit Score Has Improved
If youâve been working on rebuilding your credit, refinancing could benefit you. Generally, the higher your credit score, the lower your interest rate. Keep in mind, individual lenders determine the worth of your credit score, so individuals with a score that falls above 700 typically receive the lowest rates, but it is possible for you to get a great deal even if your score is between 600 and 700.
With a loan savings calculator, you can determine your APR, monthly payment and total interest depending on your credit score, type of loan, principal loan amount and your state of residence. A 30-year fixed loan for a principal amount of $100,000 at a credit score of 620 to 639 would give you an approximate APR of 5.006 percent. This adds up to a monthly payment of $537 and a total interest amount of a whopping $93,388.
What would happen if you increased your credit score to the 760 to 850 range? Your APR would drop to 3.417 percent, your monthly payment would drop to $444, and your total interest paid would be only $59,993. Thats a difference of $33,395 simply based on credit score.
One of the most important factors that mortgage lenders take into consideration is your credit history. Even a mere one point increase in your credit score can reduce mortgage fees. Fortunately, there are plenty of methods to increase your credit score to ensure you get a great mortgage interest rate:
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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.
Shop Around For A Mortgage Lender
Don’t just take the first interest rate you’re offered. You should compare rates and terms from at least three different refinance lenders to see which one offers the best package for your needs.
You should also consider different types of lenders. Compare rates from big banks as well as online lenders and local credit unions. If you have a long-standing relationship with a financial institution that also offers home refinancing, check with them as well. You may be able to negotiate a better rate if you already have other financial dealings with the lender but not always. Don’t assume your current lender is giving you the best deal.
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Rate Shop With Multiple Lenders
The best way to spot a good deal is to comparison shop with a few refinance lenders. There’s no way to know what loan terms you’ll be offered unless you apply. For a true apples-to-apples comparison, it’s best to make all of your loan applications on the same day, because interest rates can and do change often.
You’ll need to provide mortgage application documentation. This usually includes proof of employment, recent pay stubs, bank account and asset account statements, your homeowners insurance policy details, and recent tax returns.
It won’t hurt your to apply with several lenders. Even though every application for new credit has the potential to ding your credit score, most scoring models recognize rate shopping. As a result, all mortgage lender inquiries made within 14 to 45 days will be counted as just one inquiry .
Reducing Your Monthly Payment
One of the most popular reasons for refinancing your mortgage is to reduce your monthly payment by lowering your interest rate. Many homeowners took advantage of historically low interest rates in 2020 and 2021 to refinance. Mortgage rates have risen sharply since then and are projected to continue to rise, making refinancing less advantageous in the current rate environment.
Despite higher market interest rates, refinancing can still be viable for some homeowners. If you didnt refinance during the pandemic and your current interest rate is higher than the market rate, its still worth checking your rate and crunching the numbers to see how much you can save.
And, since the interest rate you get depends on your individual credit and financial profile, if your credit score has increased significantly since you first took out your mortgage, you could get a lower interest rate than what you currently have even if average mortgage rates have increased.
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Why Consider Refinancing
Refinancing a mortgage is when you end your current mortgage and start a new one. You can do this with your current mortgage provider or a new one. If you’re refinancing your mortgage while you’re in the middle of an exiting mortgage term, you’re likely to be hit with a prepayment penalty – more on that below.
There are two main reasons youâd consider doing a refinance: To lower your existing mortgage rate, or to access the equity youâve built in your home as cash.
Shop And Compare Rates
You can shop and compare refinance rates online without stepping foot into a bank, or you can inquire in person at a local branch. Whether you use a new lender or a mortgage broker youve worked with before, choose one you trust. Shop around and compare offers from multiple lenders to ensure youre getting the best deal. The Federal Reserve Board provides this handy mortgage refinance shopping checklist with 13 questions to ask each lender.
Its worth it to do the research, McBride advises, but beware of low advertised rates. Depending on your credit history, you may not qualify for what you see. In addition, sometimes advertised rates may have hidden terms attached or mortgage points factored into the calculation.
Some consumers prefer using a mortgage broker. A mortgage broker acts as a liaison between lenders and clients. Most brokers work on commission usually paid by the mortgage lender and will shop for lenders and rates on your behalf.
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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.
Refinancing To Shorten The Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5% for 30 years , getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.
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Evaluate If Refinancing Mortgage Is Your Best Option
Mortgage refinancing may offer lower interests rates but entering into this type of agreement is only beneficial or advantageous to the borrower under certain circumstances. Therefore, you must research about the current value of your property as well as the market rates in your region.
If the present situation is close to ideal and the projected state of the market in the foreseeable future is relatively stable, then its the right time to apply for a loan.
However, you may not be able to correctly reach this conclusion on your own, so it is best that you speak with a mortgage professional who can give you an honest evaluation of market conditions and whether mortgage refinancing is your best option.
Think Long And Hard Before Using Your Equity
When you refinance, you may have the option to tap into your homes equity. If you owe less than 80% of the homes value, the lender may let you borrow up to 80%. Just because you can doesnt mean you should, though.
Before you take equity out of your home, figure out why you are doing so. Are you trying to consolidate debt? Are you paying for a large purchase or event, such as college or a wedding? Are you taking the funds to use as an emergency fund? You need to think long and hard about why you want the money. You should also consider if there are other ways you can get the money you need, while leaving your homes equity alone.
Unless you are using the money to reinvest in your home, such as with home remodeling or major repairs, its best to leave the money where it is. Youll appreciate the notion when you own the home free and clear and are able to take the entire profit in your pocket rather than paying off your old debts.
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Free Up Money Each Month
A rate-and-term refinance replaces your mortgage with a new loan that has a lower rate, meaning you have to pay less to your lender each month.
Theres a significant opportunity to reduce your monthly cash requirements, says Glenn Brunker, president of Ally Home. Depending on the size of your mortgage, it could be $75 or $100 per month, or even several hundred dollars a month.
Your Reason For Refinancing
Refinancing a home loan can be expensive, so its crucial to know why you want to do it. For example, maybe you want a lower interest rate or monthly payment, or you want to do a cash-out refinance to pay off high-interest debt or make some home improvements.
Whatever your reason, make sure its worth the costs and work associated with refinancing your existing mortgage. Online marketplace Credible allows you to find out what rates you qualify for right now. Check it out.
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When And Why You Should Refinance A Home
There are many reasons you might want to refinance a mortgage, and many factors to take into account when you make that decision.
For example, now may be a good time to refinance because mortgage refinance rates are very low. If you lower the rate on your loan, it could save you money. Be aware, the rate you get will depend on your loan, location, credit score, income, and other factors. Not everyone will qualify for the lowest advertised rates.
You’ll also need to be sure you will stay in your home for long enough to cover your mortgage refinancing costs. In order for it to be a true money-saving move, you’ll break even on your closing costs before you sell or refinance again.
Closing On Your New Loan
Once underwriting and home appraisal are complete, its time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. Thats where youll see all the final numbers for your loan.
The closing for a refinance is faster than the closing for a home purchase. The closing is attended by the people on the loan and title, and a representative from the lender or title company.
At closing, youll go over the details of the loan and sign your loan documents. This is when youll pay any closing costs that arent rolled into your loan. If your lender owes you money , youll receive the funds after closing.
Once you’ve closed on your loan, you have a few days before you’re locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.
Get approved to refinance.
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