Want To Refinance Your Mortgage Do These 7 Things Now
- Leslie Cook
Despite average mortgage rates recently rising above 3%, a meaningful number of homeowners still to stand save enough money to make refinancing worthwhile.
At the current rate, just under 10 million borrowers could reduce the interest rate on their home loans by at least 0.75 percentage points with a mortgage refi and are qualified to do so, according to mortgage data firm Black Knight. Most experts agree that refinancing pays off if you can lower your rate by at least that much.
On average, qualified borrowers could reduce their monthly mortgage payments by $280. However, about 1.1 million homeowners could actually save more than $500 per month by refinancing.
If you think refinancing is the right choice, the sooner you get started the better. Refinancing takes time. In August, it took an average of 43 days to close a refi loan, according to ICE Mortgage Technology.
These seven steps can help you get started.
Your Needs May Outweigh The Costs
Of course, your needs may outweigh your answers to the above questions and justify refinancing your mortgage. After all, you may need a lower monthly payment or to get out of an adjustable rate mortgage before it readjusts, or want to consolidate high-interest debt, make home improvements, or pay for education or medical expenses.
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The Interest Rate On The New Mortgage
One common reason for refinancing a mortgage is to qualify for a lower rate. It could be that interest rates have dropped since you got your first mortgage or your financial situation has improved enough that you qualify for a lower interest rate.
Interest rates change frequently based on the market. In July of 2017, the average interest rate on a 30-year fixed loan was 4.25 percent. By July 2018, the average interest rate on a 30-year fixed loan had climbed to 4.91 percent. If interest rates are currently higher than they were when you first got your loan, it most likely doesnt make sense to refinance.
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Solid For 18 Days: 20
Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders, all opinions are our own.
Check out the mortgage refinancing rates for Oct. 29, 2021, which are mostly up from yesterday.
Based on data compiled by Credible, current mortgage refinance rates rose for three key terms since yesterday. Only 20-year rates remained unchanged.
- 30-year fixed-rate refinance: 3.125%, up from 2.940%, +0.185
- 20-year fixed-rate refinance: 2.750%, unchanged
- 15-year fixed-rate refinance: 2.375%, up from 2.250%, +0.125
- 10-year fixed-rate refinance: 2.250%, up from 2.125%, +0.125
here. Actual rates may vary.
For 18 straight days, 20-year mortgage refinance rates have held at or just above 2.750%. At that rate, homeowners who choose a 20-year refinance term can reduce their total interest costs while holding on to a relatively low monthly payment. Todays rise in 30-year, 15-year and 10-year refinance rates are in line with experts predictions that rates will increase slowly and steadily through the final months of 2021.
How Old Will You Be When The Mortgage Is Repaid In Full
One downside to refinancing is that if you sign up for a new 30-year mortgage, youre restarting the clock until youre mortgage free. If youre already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean youre carrying debt into your 60s when youre likely going to be thinking about retiring.
Its possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.
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How To Refinance Your Mortgage
Refinancing a mortgage shouldnt be a quick decision. After weighing the pros and cons, you can determine your goals and take the necessary steps toward lowering your payment or taking cash out to achieve your financial goals.
Set a Goal for Your Mortgage Refinance
Before starting toward refinancing, its important to set a goal for starting a new mortgage. Are you interested in saving money on your monthly payment? Or is taking out cash to consolidate debt or fund a big project more important? By setting a clear-cut goal, you can decide the best way to move forward with a refinance.
Check Your Credit Score
As with any transaction involving credit, you should know your credit score before talking to lenders. Checking your credit report can help you understand how lenders perceive your risk, and it allows you to fix any erroneous information before requesting rates. Although you can refinance with bad credit, you may not qualify for the best rates.
Shop for Mortgage Refinance Rates With Multiple Lenders
Once you understand your credit, you can now shop for mortgage refinance rates with several lenders to see which gives you the best options. You can request multiple quotes from lenders within 14 days of your first request without negatively impacting your credit. If you qualify for a VA mortgage refinance or FHA mortgage refinance, you will want to work with lenders who can help you explore those options.
Select a Mortgage Refinance Lender and Lock Your Refinance Rate
The Process May Seem Intimidating But Doing Your Homework Can Pay Off
Maybe youre like thousands of homeowners who cant resist those rock-bottom mortgage rates. And youve become enamored with the idea of shortening your term or lowering your monthly payments potentially saving tens of thousands of dollars over time by refinancing your loan.
Yet enduring all the research, paperwork and scrutiny may seem daunting and overwhelming. Youre not alone.
Experts say many homeowners want to refinance but talk themselves out of it because they dont understand the process.
I think some people are initially intimidated by the refinancing process because they remember all the steps they had to go through to finance their home, that big pile of paper they needed to sign, and are reticent to do that again, said Jonathan Lee, senior director at Zillow Home Loans. Really, refinancing is much more simple than the purchasing process.
Heres a look at how to navigate the process and some smart ways to get the best deal:
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Lower Your Interest Rate
Your interest payments make up a large portion of your monthly payment, especially in the first 10 years of your mortgage. The higher your interest rate, the larger your monthly payment and the more youll pay over the life of the loan.
When you refinance your mortgage to a lower interest rate and APR, youll pay less in interest over the life of the loan. When rates drop below your current rate, it may be a great time for you to swoop in and get a lower one. Its always good to keep track of interest rates so you know when you can save the most money!
Costs To Refinance A Mortgage
The numerous costs of refinancing a home loan can sometimes set you back thousands, leaving you wondering whether it was worth it.
To avoid any ugly surprises, look at the terms and conditions of both your existing home loan and the loan youre looking to refinance with, to discover what the change costs will be e.g. discharge fees, valuation fees, break costs etc.
If youre refinancing to get a lower interest rate, you should first calculate how much less youll pay in interest at that rate and compare this saving to the total cost of refinancing. That should give you an idea of whether the refinance is worth it.
You may find that through the interest savings, youll make back the refinancing costs within months.
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Whats The Difference Between Interest Rate And Apr
The terms interest rate and APR are often used interchangeably. However, the truth is that these rates arent actually the same thing.
Your interest rate is the base percentage that you pay on your loan. Your annual percentage rate is your interest rate plus any applicable fees and closing costs associated with the loan. When you see two percentages listed side by side, the APR will always be the higher number. This means you should focus on finding the lenders that offer the lowest APRs on comparable rates for the same loan programs.
How To Determine If Making Move Is Beneficial To Your Financial Goals
The Federal Reserve announced last week that it plans in the next few months to hike interest rates and ease up on buying bonds, measures it put in place to prop up the economy during the pandemic. And, in fact, the average mortgage rate for the popular 30-year fixed-loan ticked up this week perhaps signaling that the days of historically low home financing costs are numbered.
So, does that mean you should rush out and refinance your mortgage by the end of the year?
First, lets look at why rates fell so much this year, fueling the refinancing craze.
The rates can rise and fall for a number of reasons including yields on 10-year Treasury notes, the stock market and the jobs report. But the main factor in the low rates is the Federal Reserve, which has been investing trillions of dollars into mortgage-backed security bonds to keep the housing market strong during the pandemic.
Over the years, the 30-year fixed rate has varied dramatically. It was at its highest level in 1981 an annual rate of 16.63 percent when the Federal Reserve raised it to ease hyperinflation. It was 6.97 percent 20 years ago and 4.45 percent 10 years ago.
Like other homeowners, youve probably been inundated with promos from lenders offering to save you hundreds of dollars a month by refinancing your mortgage at a lower rate. You may be wondering whether youre a good candidate for refinancing and if so whether its the right time to do it.
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Consider The Term Of Your New Loan
Before you decide to refinance, calculate your break-even point and how the overall costs including total interest of your current mortgage and your new loan would compare.
Take note that refinancing usually makes more sense earlier into your mortgage term.
In the early years of your mortgage term, your payments are primarily going toward paying off interest. In the later years, you begin to pay off more principal than interest, meaning you start to build up equity the amount of your home that you actually own.
Once you refinance, its like youre starting over. Say youve been paying off your old mortgage for 10 years, and you have 20 years to go. If you refinance into a new 30-year mortgage, youre now starting at 30 years again.
What Are The Risks Of Refinancing
Although there are many benefits to refinancing, it isnt right for everyone. As with any financial transaction, youll want to make sure the math works in your favor.
Normally, youll be charged closing costs to refinance. These costs can often be folded into your new mortgage, but doing so will add to your monthly payments. Therefore, youll want to fully understand these charges and take them into account to ensure that your monthly savings from a refinance will more than offset the costs.
To calculate how long it will take before the monthly savings from your new mortgage outweighs its closing costs , use a refinance calculator and enter the basic information about your current mortgage and the new mortgage.
If you find that the break-even point on your new mortgage is 7 years, but you only plan on staying in your house for another 5 years, then refinancing might actually be more costly than just keeping your current mortgage, even if its interest rate is higher.
Related: Why you should get a 15-year mortgage and why you shouldnt.
Youll also want to keep the length of your new mortgage in mind. All mortgages are designed so that youre paying more interest than principal in the first half of the mortgage. That means if youre starting a new mortgage with a refinance, youll be paying the bulk of the interest again at the top after previously paying the bulk of the interest in the first years of your old mortgage.
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How Much Money Will I Save By Refinancing
The most common reason to refinance is to save money. Naturally, one of the most common questions, then, is how much youll save by refinancing.
Every situation is different, but lets run through a couple of scenarios just so you have things to think about. You can put in your own numbers with our refinance calculator.
Lets say you wanted to pay off your mortgage faster and had $200,000 left on a home worth $250,000. You have 20 years left on your term and want to pay off your home faster. You have excellent credit.
You could refinance into a 15-year conventional fixed mortgage at an interest rate of 3.75% and have a monthly payment of $1,454.45. There are $7,057 in closing costs. However, by paying those closing costs and getting that rate, youll save over $40,000 in interest.
On the other hand, if you were to lengthen your term to lower your payment, you would save every month, but you would end up paying more in interest. It doesnt work this way in the real world, but lets keep everything the same except the term.
If you had a 3.75% interest rate on a $200,000 loan, because the term is longer, youll pay about $30,000 more in interest. In reality, this number is higher because a longer-term loan also means a higher interest rate.
Refinancing With Your Current Lender Without Mortgage Rate Shopping
It can be convenient to simply refinance with your current lender. After all, they already have most of your information, and you might only need to provide updates to your documentation.
Why should you shop around for your mortgage refinance? Failing to compare rates can be costly over the long run.
For example, a common misconception is that your current lender is automatically going to give you a special deal or discount. That’s not certain to be the case, so be sure to compare your existing lender’s quote with others. You may or may not find other lenders who can offer a considerably lower rate as compared to what your current lender offers for a refinance, but you won’t know unless you shop around.
Important note: Be sure to check with various lenders on the same day because mortgage rates can vary from day to day. Get all quotes in writing.
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How Long Does It Take To Recoup The Costs Of Refinancing
The interest rate is not the only cost to weigh when youre considering whether refinancing is worth it. There are costs to close the new loan, and they can be steep. Expect closing costs to total 2 percent to 5 percent of the principal amount of the loan. If you borrow $250,000 and closing costs are 4 percent, for example, you would owe $10,000 at closing.
Rather than require all that money upfront, many lenders let you roll the closing costs into your principal balance and finance them as part of the loan. Keep in mind, though, that adding those costs to the loan only increases the total amount that will accrue interest, ultimately costing you more.
You Want To Pay Off Your Home Early
If you decide to shorten your repayment term , youll have a higher monthly payment but you also might be able to pay off your loan faster. With a shorter loan term, youll be paying much less in interest charges, which will bring the overall cost of your mortgage down.
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How To Get The Best Mortgage Rate With Your Current Lender
A refinance requires time, effort and money, so you want to make sure youre getting the best return on your investment. Here are some steps to follow to shop around for a mortgage refinance when you want to include your current lender in the mix.
Make sure refinancing is right for you
Refinancing can be a great way for homeowners to save money on a mortgage. However, refinancing may not be the best choice for you if youve been in your home a long time, youve got a prepayment penalty on your current mortgage, youre planning to move in the next few years or your credit score has plummeted since you got your current mortgage.
Get multiple quotes from other lenders
Getting other estimates first will give you more leverage and show your current lender that youre serious about getting the best deal not just a better deal than what you have now. You should get a Loan Estimate from each mortgage company.
This document will lay out all the costs involved in the refinance, including the interest rate, monthly payment and closing costs such as application fee, origination charge and underwriting cost, allowing you to easily compare loan offers. Note that multiple credit inquiries for a mortgage refinance will likely be treated as a single request.
Compare Loan Estimates to your current mortgage rate
Visit your current lender with quotes in hand
Compare other quotes to the refinance offer from your current lender
