Your Current Income And Employment Status
Just as you did when you applied for your first mortgage, youll most likely be expected to provide proof of income and employment when you apply to refinance your mortgage. If your work or income status has changed in the time since then, the change can affect your ability to refinance. If your income is higher than before, you might find that you get a better rate offered or other more favorable terms on the refinance loan. But if youve had a drop in income or recently changed jobs, you might have more difficulty during the refinancing process, depending on how long youve been at your new job or how much of a drop in income youve experienced. If youve just started a job, it can be helpful to wait a bit before you try to refinance.
Its worth noting that government-backed loans, such as FHA and VA refinance loans, typically dont require as much documentation as conventional refinance loans. If youve changed jobs or have had a drop in income, they might be an option worth pursuing, if youre eligible.
Get Rid Of Private Mortgage Insurance
Private mortgage insurance protects a lender if you default on your loan. Most lenders private mortgage insurance if your down payment is less than 20% at closing. If a new appraisal indicates an increase in property value, you may refinance and remote the PMI.
FHA loanswhich are backed by the governmentprotect a lender in the event that you default. However, youll pay mortgage insurance throughout the loans life if your down was less than 10%. Luckily, you can refinance to a conventional loan after reaching 20% equity and ditch the monthly insurance requirement.
Lock Your Refinance Rate
Rate locks last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender.
You may also get a better rate by opting to lock for a shorter period of time because the lender doesnt have to hedge against the market for as long. Be warned, though: If your loan doesnt close before the lock period ends, you may be required to extend the rate lock, which may cost money.
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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 various loan 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.
Bankrates refinance rate table allows you to comparison-shop loans, to help you find the best fit for your financial needs.
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.
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The Costs Of Refinancing
Refinancing a home usually costs 3% to 6% of the total loan amount, but borrowers can find several ways to reduce the costs . If you have enough equity, you can roll the costs into your new loan . Some lenders offer a no-cost refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Dont forget to negotiate and shop around, because some refinancing fees can be paid by the lender or even reduced.
When Is The Best Time To Refinance Your Mortgage
There’s no set rule for when you should refinance. It depends on your budget, plans as a homeowner and goals. Are you looking to lower your rate or payment? Do you want to pay off your loan faster? A mortgage refinance could allow you to do both.
Here are some guidelines for when refinancing might be smart:
By answering a few simple questions you can determine if a mortgage refinance makes sense for you. Or use the table below to crunch the numbers.
If you do opt to refinance, consider doing it toward the end of the month. This will reduce your closing costs since you will only need to pre-pay interest for a couple of days. You might also consider refinancing toward the end of a quarter, when mortgage lenders may be looking to meet quota .
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Reasons To Refinance A Mortgage
There are several reasons homeowners choose to refinance their mortgage loans. Here are some of the top ones to think about:
What Is Your Break
Since refinancing your home means replacing your old loan with a new one, youll have to pay loan fees that could include loan origination, appraisal and filing costs. Typically, a lender can charge up to 1.5% for a loan origination fee. Additional fees increase your total loan cost.
For example: If you refinance a $300,000 loan, your fees could include:
- .5% adverse market fee: $1,500
- 1.5% loan origination fee: $4,500
- Appraisal fee: $400
- Title insurance: $1,000
For this sample, the total cost is $7,400.
Lets assume an original loan of $450,000 with a monthly payment of $2,135 and a 3.9% interest rate. If our sample homeowner only owes $300,000 on the home and refinances into a 15-year loan at 2.9%, their new monthly payment would be $2,057. That is a savings of $80 per month. The owner would need to stay in the property for 7.7 years to break even.
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Shopping Around For Lenders
Take the time to get estimates from multiple lenders. Potential lenders should be able to tell you estimated fees and an estimated monthly payment before you agree to work with them. Dont just assume your current lender will offer you the best rates. A company is often willing to offer better rates or repayment terms to snag your business.
Learn The Refinance Strategies
Cash-out refinance: One reason people refinance is to use the equity in their home. Owning a house is kind of like having a forced savings plan. Its possible to turn saved-up equity into cash by refinancing a home. With a cash-out refi, you replace an existing mortgage with a new one for more than what you owe. You get the overage in cash.
Rate Refinance: You can change the interest rate on your loan when you refinance. If you can get a lower rate now than when you first took out the mortgage, you might wish to refinance.
Term Refinance: If you want to lower your mortgage payments, you can refinance for a longer term. Lets say you have 25 years left on your mortgage. By refinancing to a new 30-year loan, your can lower your payments.
ARM to Fixed: You can change an adjustable-rate mortgage to a fixed-rate mortgage when you refinance. Why? A fixed-rate mortgage is a safer mortgage product, says Jason Huffman, the regional Carolinas manager at Silverton Mortgage. Unlike with the ARM, the interest rate for a fixed-rate mortgage never changes.
FHA to Conventional: FHA loans come with mortgage insurance premiums. Refinancing to a conventional loan when you have 20 percent equity in the home gets rid of those premium payments.
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To Obtain A Lower Interest Rate
What is the interest rate on your mortgage? If it is higher than the current rates available, refinancing is the only way to take advantage of the lower rates.
When you refinance, you get a new loan with a new interest rate. A lower rate will result in having lower mortgage payments and will help you pay less money in interest.
If you want lower mortgage payments and can get a lower interest rate through refinancing, then you should consider going through with it.
Always work with a mortgage professional. There are many factors to rate such as credit, loan to value, and lender credits vs discount points. Finding the right solution to meet your specific goals is why mortgage brokers like Choice Home Mortgage exist.
Assessing Refinancing As An Option For You
In any situation, not every buyer will be quoted the same mortgage loan rates. Buyers considered to be larger risks to lendersthose with low credit scores, smaller incomes, or higher debt-to-income ratios, will be quoted higher rates. Buyers with excellent credit, high incomes, and minimal debt, meanwhile, will be offered lower rates. These same rules apply for refinancing, which means the current state of the market is not the only factor you need to consider if you want to attempt refinancing to lower your monthly mortgage payment.
Another factor is closing costs. Just as you needed to pay closing costs on your mortgage loan when you bought your house, you will need to pay them again to close out your refinanced mortgage. This factor means that homeowners will need to chat with their lenders to assess their actual savings from a potential refinancing strategy. Your lender will be able to advise you on how much your refinancing will cost you, how much you will save each month if you change your loan terms, and how long it would take you to break even based on that equation. You can then weigh these numbers against your plansspecifically how long you intend to live in your current houseto decide if mortgage refinancing is right for you.
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When It Makes Sense To Refinance
- Your credit has improved. You might be eligible for a better rate if your credit score has improved significantly since you initially took out the loan. If your credit score is still less than stellar, however, you can refinance using a co-signer with a strong credit history to potentially receive a better rate.
- You want a lower monthly payment. If youre struggling to keep up with debt payments, and need some extra room in your budget, refinancing to get a lower payment can be a good option. Just keep in mind that if you choose a longer term to get that lower payment, it will cause you to pay more in interest over the length of the loan.
- Interest rates are lower. Another reason to refinance would be if you have a high interest rate on your current car loan and interest rates are now lower.
How Long Do You Want To Be Paying Your Mortgage
Refinancing a home is like pressing reset on your mortgage. Even if youve been paying off your current home loan for years or decades, refinancing starts the process all over again. If you refinance your existing 30-year loan into a new 30-year loan, you start back at day one when you close on the loan. That means youll have a new mortgage to pay for the next 30 years.
If having a mortgage for 30 more years doesnt appeal to you, you can consider switching to a shorter term, such as 10 or 15 years. You might get a lower interest rate with a shorter-term mortgage, but the monthly payments are likely going to be higher. The trade-off is that youll be out of debt more quickly and might end up saving money in the long run.
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What Are The Risks
One of the major risks of refinancing your home comes from possible penalties you may incur as a result of paying down your existing mortgage with your line of home equity credit. In most mortgage agreements there is a provision that allows the mortgage company to charge you a fee for doing this, and these fees can amount to thousands of dollars. Before finalizing the agreement for refinancing, make sure it covers the penalty and is still worthwhile.
Along these same lines, there are additional fees to be aware of before refinancing. These costs include paying for an attorney to ensure you are getting the most beneficial deal possible and handle paperwork you might not feel comfortable filling out, and bank fees. To counteract or avoid entirely these bank fees, it is best to shop around or wait for low fee or free refinancing. Compared to the amount of money you may be getting from your new line of credit, but saving thousands of dollars in the long run is always worth considering.
- Refinancing Risks Have Not Become Smaller There have been reports that risks are diminishing when refinancing. This article argues against that idea.
- Refinancing Won’t Fix the Housing Market How massive amounts of refinancing is affecting the country as a whole.
This Is The Best Time To Refinance Your Mortgage
As interest rates remain higher than they were just a year ago, you may be wondering if now is still a good time to refinance. Good question.
The purpose of a refinance is to replace your existing mortgage loan with a new one. There are many benefits of a refinance and it doesn’t only involve reducing your interest rate. It’s also helpful for homeowners who want to drop their private mortgage insurance , change their loan term or other factors.
Refinancing isn’t beneficial for everyone. It depends on your specific financial situation. If you believe you’d benefit from a mortgage refinance, then start by answering a few simple questions to see how much you could potentially save.
Here’s what you need to know in order to plan your mortgage refinance just right.
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What Is A Recast Mortgage An Easy Budget
What is a recast mortgage? While it sounds more like a fishing trip than a financing tool, its actually where you pay off a lump sum of your principal , then have your lender recast or reamortize the rest so you can lower your monthly payments.
Recast mortgages are rare, at least compared with the more typical way homeowners reduce their mortgage payments by refinancing. Nonetheless, its well worth considering in certain circumstancesparticularly when interest rates rise. If you considered refinancing but are reluctant to take on the higher interest rates available today, a recast may be the more budget-friendly alternative.
But a recast does come with pros and cons that mean it only makes sense for certain homeowners. Heres everything you need to know to decide whether a recast or refinance is right for you.
What You Need To Know
- Theres no perfect time to refinance, but if interest rates drop or your credit score increases, you may be able to get more favorable terms
- Though a small change in interest rates might seem insignificant, it can save you tens of thousands of dollars over the course of a 30-year loan
- Typically, refinancing can cost you anywhere between 3% 6% of the new loan amount
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Things To Consider When Refinancing Your Mortgage
Refinancing your mortgage can be a way to lower your monthly payments and save money over the life of your home loan. However, refinancing a home isnt the right choice for every homeowner, as it doesnt always lead to lower interest rates or reduced housing expenses. If youre wondering, Should I refinance my mortgage?, several considerations will help you decide whether getting a new mortgage on your home is the best choice for you.
Heres what to think about before refinancing.
