You Can’t Afford The Closing Costs
In general, closing costs on a mortgage refinance can range from 2% to 6% of the loan amount. If you don’t have enough cash on hand to pay those costs, or you’d need to drain your savings account, leaving you without cash for emergencies, it may make sense to wait until you can better afford to refinance your home.
Many lenders will allow you to roll the closing costs into a refinance loan, but that ultimately increases your monthly payment and total interest costs over the life of the loan. Think carefully about the potential long-term ramifications of doing so before you proceed.
Your Credit Score Isn’t In Great Shape
Refinancing can make sense if your credit has improved since you took out your current home loan. But if your credit score hasn’t changed or it’s gone down, you may not be able to access the benefits that refinancing can provide.
Anytime you’re thinking about applying for credit, it’s a good idea to check your credit score and to see where you stand and to take steps to improve your credit, so you’ll have a better chance of securing favorable terms. You should also review how refinancing affects your credit.
Whats Moving Current Mortgage Rates
The biggest driver of changes in mortgage rates for some time to come is likely to be movements in general interest rates.
Yes, mortgage rates are largely determined by a specialist bond market in which mortgage-backed securities are traded. And, yes, the base for general interest rates is effectively set by the Federal Reserve. But Fed rate changes are hugely influential on the MBS market.
Thats why Ive been tracking what top Fed officials have been saying this week about the next general rate hike, which is due on Feb. 1. Ive counted public pronouncements by seven members of the Feds rate-setting body over the last three days. And five of those favored a small, 0.25% increase.
Of course, that doesnt guarantee a small hike come the day. A 0.5% one is still possible.
How come? Well, to start with, the FOMC has 12 members and Ive been counting only those whove spoken in public over the last three days. And, then, things might change during the committees next meeting, which begins Jan 31.
In particular, Fed Chair Jerome Powell has the most powerful and influential voice. And, the last I heard, he took a hawkish view on rate hikes. So, come the meeting, he might yet sway some of the five doves and others.
Still, theres clearly a large body of doveish opinion within the FOMC. And its presence persuaded me to change my rate lock recommendations today. Its so good to be able to be optimistic about mortgage rates again.
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Will I Come Out Ahead With Refinancing Costs
Refinancing your house costs money since you have to repay closing costs, typically somewhere between 2% and 6% of your refinancing value.
If the thousands you spend refinancing your house doesnt save you money or time in the long run, it might not be worth it. Refinancing should put you ahead on your mortgage, and if its not doing that, then you should hold off.
You Can Get A Lower Interest Rate
One of the best reasons to refinance is to reduce your interest rate, which could save you a lot of money in the long run.
Tassone recommends aiming for at least a quarter-point reduction, though the lower the rate you qualify for, the more you’ll stand to save.
Keep in mind that interest rates are determined both by the market and your credit profile. Borrowers with the highest credit scores will typically qualify for the lowest rates. If your credit score is on the lower end, you might want to take some time to improve it before applying to refinance.
Quick tip: Shopping around for a mortgage lender can help you find a lower rate too. You should get quotes from at least five different lenders and compare the rates, fees, and terms.
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Is Refinancing Right For Me
There is no clear right or wrong answer for everyone to this question. Like any big financial decision, whether or not you should pursue a mortgage refinance depends a lot on your personal financial situation and goals. If you can lower your rate, your credit is reasonably good, your household has steady income, and you still owe a considerable amount on your current mortgage, then a refi is worth exploring. If youre not sure, it costs nothing to call your local banker and ask for input to see whether you might benefit.
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Reasons Not To Refinance Your Home
Quick Answer
A mortgage refinance isnt always a good idea. Here are several scenarios when it doesnt make sense to refinance your mortgage:
Refinancing your home can provide a lot of benefits, but it’s not always the best decision. Whether you’re looking to refinance your mortgage to secure a lower interest rate, cash out some of your equity or switch from a variable rate to a fixed one, here are some situations where it might not make sense.
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Accomplishing Your Other Goals
If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage or borrow from a portion of your available home equity. Talk to your lender about what youd like to accomplish and see whats achievable for your situation.
Lengthening The Loan Term
Even when their rates are the same, some homeowners are able to lower their monthly payment by refinancing. They simply take out a new loan with a longer term.
Say, for instance, that you took out a 30-year mortgage for $250,000. Ten years later that loan balance is down to $200,000. By taking out a new 30-year loan for the remaining balance, youre lowering your monthly payment, but youre also tacking 10 additional years onto your loan.
Extending your loan term might make sense if youre having trouble keeping up with your payments. Still, make no mistakeby stretching out your mortgage, youll be paying more interest in the long run.
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Choosing A Refinance Lender
Whether youre looking for the reach of a traditional bank or the personalized service of a credit union, always shop multiple lenders and compare the interest rate and terms each lender offers. Even though it might be easy to refinance with your current mortgage lender, it may not offer the best deal.
Everything can be negotiated. Your lender is required to provide you with a Loan Estimate after you apply to refinance. Compare fees listed under the “origination charges” on the document. If you are not comfortable with a fee, negotiate for it to be removed or reduced.
What is the real cost of your new mortgage going to be? Look at the annual percentage rate, or APR. This number covers all the costs of the mortgage including the interest rate and fees.
Why Refinance A Mortgage
Depending on your financial circumstances or current interest rates, there are several ways refinancing could be beneficial to you.According to the Zillow Group Consumer Housing Trends Report 2018, 43% of homeowners refinanced to reduce the size of a monthly mortgage payment. The same report said that 19% of homeowners refinanced their mortgage because they wanted to reduce the length of time on their loan and 4% wanted to change their loan type.
Here are the common reasons to refinance:
- Reduce monthly payment
- Shorten the length of the loan
- Change rate type
- Draw cash out to pay for other expenses or debts
- Cancel mortgage insurance premiums
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Should You Refinance Your Mortgage
Understanding the basics will help you make the best decision on whether a refinance makes sense for you, and then move quickly if you decide to refinance. Youll want to not only look at the current interest rates and closing costs, but also think about your personal situation and your financial goals.
For instance, if youre planning to move in a few years, its likely that a refinance wont make sense, since you wont have enough time with the better terms of the new mortgage to offset the closing costs. But if youre staying put in your house for the long haul and can get an interest rate thats significantly lower than your current mortgage , then theres a good chance refinancing will ultimately save you money.
If after using a refinance calculator you find that a refinance makes sense for you, make sure you compare lenders and brokers to find the best mortgage refinance rates, as well as the lowest closing costs. Use an online comparison tool to quickly compare refinance terms across multiple lenders.
Once you decide that refinancing is the best move for you, knowing how to refinance your mortgage can make the process seem more straightforward, and youll be on your way to saving money and hitting your personal financial goals.
What Documents Do I Need To Refinance My Mortgage
To refinance your mortgage, youll need to supply identification, income verification and credit information. Be sure to ask your lender for a list of documents youll need. The faster you can give the lender everything they need to process your loan, the quicker youll be able to close.
Heres a general checklist:
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Calculate Your Mortgage Refinancing Savings
To calculate your monthly savings from refinancing, use a mortgage calculator to enter these numbers and get your new monthly payment:
- Amount to refinance
- New interest rate
Compare your new monthly payment to your old monthly payment. The table below shows how grabbing a lower interest rate could save you $204 per month, or $2,448 per year.
Get Your Paperwork In Order
Gather recent pay stubs, federal tax returns, bank/brokerage statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose all your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly and often more quickly.
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Tips For Managing A Home Loan
- The introduction of a large home loan into your financial life could make managing your money more difficult. So whether you have questions about taxes, retirement, investing or other long-term financial plans, a financial advisor can help you out. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- The key to staying on time with your mortgage payments is to maintain a good weekly and monthly budget. While small purchases seemingly dont have an effect on your overall financial situation, a series of them could put you and your family in a hole when your mortgage bill arrives. Stop by SmartAssets budget calculator to begin building a budget.
Work On Paying Off Your Debt
Paying down debt lowers your DTI ratio and may improve your credit score. Try to pay some of your bills off completely, whether that means eliminating a personal loan or paying off your auto loan. In the meantime, avoid taking on new debt. Remember that additional monthly obligations will skew your debt-to-income ratio and make it harder to refinance your mortgage.
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It Will Take Too Long To Break Even
While refinancing a mortgage could save you money in the long run, it’s costly upfront. As a result, it’s a good idea to run a quick break-even analysis to determine how long it’ll take for you to start realizing the savings of your new loan.
For example, let’s say your closing costs are $5,000, and refinancing would save you $100 per month. In this scenario, it’ll take you 50 months to break even on your refinance.
If that’s too long for your liking, or you don’t plan on staying in the home that long, it might make sense to shop around to see if you can find better terms with another lender. Otherwise, you may want to hold off and keep the money you would’ve spent on closing costs.
Your Credit Score Has Improved
If your score has improved considerably since taking out the initial loan, “You may be able to qualify for more favorable terms,” says Mayer Dallal, managing director of mortgage lender MBANC.
Quick tip: Getting your for free is easy. Credit card companies often provide it on your monthly statement or anytime you check your account online.
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What It Means To Refinance Your Mortgage
Homeownership
Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance .
When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one this is the reason for the term refinancing.
Most borrowers choose to refinance so they can lower their interest and shorten their payment term, or to take advantage of turning some of the equity they have earned on their home into cash.
There are two main types of refinancing: rate and term refinance and cash-out refinance.
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If You Are Moving Soon
If you are planning on moving in the next few years, a refinance is probably not your best option for saving money. You need to be in the home long enough to recoup the closing costs before you see the savings from refinancing, says Greg McBride, CFA, chief financial analyst for Bankrate.com. It may take years of lower payments to make back the amount you footed in closing costs. Refinancing is a long-term strategy, and its rewards are fully realized over years, not months.
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.
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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You Don’t Have Enough Equity
If you’re considering a cash-out refinance, many lenders only allow you to borrow up to 80% of your home’s value with the new loan. If you have less than 20% equity in your home, refinancing may not even be an option. And if you only have a little more than 20% equity, you may not get enough cash out to make the process and expense worth it.
Note that some lenders may be willing to allow you to borrow up to 90% of your home’s value, but going that high can increase the risk of you becoming upside down on your mortgage if home values decline in your area.
