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When To Refinance Home Mortgage

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Refinancing To Convert To An Arm Or Fixed

How To Know When To Refinance Your Mortgage

While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARMwhich often has a lower monthly payment than a fixed-term mortgagecan be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.

These homeowners can reduce their loan’s interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future.

If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop. When mortgage interest rates rise, on the other hand, this would be an unwise strategy.

How Much Can You Borrow Loan To Value Ratio

Lenders will generally only lend up to 80% of the value of your home. This is known as the loan-to-value ratio or LVR. If the property had to be sold to repay the loan the other 20% helps cover the costs of selling and any reduction in the market value.

To find out your LVR, add your total secured loans, divide by current property value and multiply by 100.

Example: Daniel and Lucy have a total secured loan amount of $500,000. Their property is currently valued at $625,000. $500,000 divided by $625,000 equals 0.80. Multiply 0.80 by 100 to arrive at an LVR of 80%.

Insuring your loan

If your LVR is 80% or higher, you may need to pay for Lenders Mortgage Insurance . This protects the lender if their loan isnt repaid.

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.

The information in this article was obtained from various sources not associated with State Farm® . While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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What’s My Credit Score

Your credit score directly determines your interest rate for a new mortgage. A 100-point difference in your credit score could result in thousands of dollars extra in interest payments for a 30-year mortgage, depending on the amount of the loan, according to FICO .

If your credit score has taken a hit since you took out your current mortgage, you may want to work on improving your credit score before refinancing. Your credit score is a reflection of your credit history at only one moment in time, and it changes as new information is added to your credit report.

Remember, mortgage lenders typically check your credit score from all three reporting bureaus, so you should, too. The myFICOTM website has a wealth of information about the connection between credit scores and mortgage rates.

To Change To A Different Loan Type

Refinancing Your Mortgage

Homeowners can also refinance from an adjustable-rate mortgage to a fixed-rate loan or vice versa.

What you should know:

Conversely, shifting from a fixed-rate loan to an ARM can be a good financial strategy if interest rates are falling and you dont plan to stay in your home for long.

Learn more: 5/1 ARM: Your Guide to 5-Year Adjustable-Rate Mortgages

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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.

What Are The Biggest Obstacles To Refinancing

Loss of income due to lack of work, a credit score that has dropped or is too low, and a high debt-to-income ratio can prevent you from refinancing.

Debt-to-income ratio is your total debts each month compared to your monthly income. An optimum debt-to-income ratio is below 36 percent, says McBride. That means that your debts including your monthly mortgage payment, monthly maintenance fees or common charges, taxes, property insurance, credit cards and vehicle loans should not exceed 36 percent of your gross pay.

Certain business owners can face difficulties getting refinancing. It can be harder to qualify for a mortgage if you have 1099 tax income from a sole proprietorship, for example, rather than W-2 income as an employee.

Yet you can have good credit without traditional sources of income, says Kan. There are credit models that reflect nontraditional incomes.

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Your Home Value Has Increased

If the value of your home has gone up, you might also get some benefit from refinancing, especially if you have other high-interest debt to pay off or another financial goal.

A cash-out refinance lets you take out a new mortgage thats larger than what you previously owed on your original mortgage, and you receive the difference in cash. A cash-out refi is an alternative to a home equity loan.

You also might consider a cash-out refi for home improvements or to pay for a childs education.

But youll want to make sure you dont end up paying more in mortgage interest than the interest you would pay on any debt youre using the cash to pay off.

If Your Mortgage Rate Is Above 412% Now Is Probably A Good Time To Refinance

When to refinance a mortgage

Mortgage rates for well-qualified borrowers have been hovering around 3% for the past four months. The current average for a 30-year fixed-rate loan is 3.12%.

One of the indications that a refinance is a good idea is if you can reduce your current interest rate by at least 0.5% to 1%.

If you have a $300,000 balance on your mortgage and you refinance to a new 30-year loan, lowering your interest rate from 3.75% to 3.25% will save around $84 per month or $1,008 per year. If you can reduce the rate by 1%, from 3.75% to 2.75%, your monthly savings would be $165 per month or $1,980 per year.

Of course, you dont have to refinance into another 30-year loan. If your finances have improved and you can afford higher monthly payments you can refinance your 30-year loan into a 15-year fixed-rate mortgage, which will allow you to pay the loan off faster and also pay less interest.

Taking a look at your monthly savings is just one part of the refi equation, however. You also need to factor in the cost of switching out your loan and how long it will take you to recover those costs, or break even.

Just as with a purchase loan, youll have to pay closing costs on a refinance. These costs can include origination and applications fees, appraisal and inspection costs and title search fees. In all, closing costs can run between 3% and 6% of the total loan amount being refinanced.

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Refinance At A Lower Mortgage

Let help you calculate your new monthly payment and refinance penalty.

Potential to get a lower interest rate and save money. Penalties may be higher than the savings.
Can consolidate debt with a lower overall rate. Consolidating debt removes an incentive to pay it down faster.
Access to equity in your home. Accessing equity puts you into more debt.
Allows you to swap to a variable or fixed rate. Switching rate type is not always in your best interests.

Jumbo Loan Refinance Rules

A jumbo loan is a mortgage that is greater than the lending limits set by Fannie Mae and Freddie Mac. In 2021, the maximum loan amount for a single-family home is $548,250 for most areas and up to $822,375 for high-cost-of-living areas.

Jumbo loan refinancing has similar refinance rules as conventional mortgages. Theres no set amount of time you must wait before you can refinance. Because they arent backed by Fannie Mae or Freddie Mac, these loans are subject to each lenders requirements and may have stricter underwriting requirements than conventional mortgages.

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S To Refinancing A Mortgage

  • Do the math to see if refinancing makes sense.
  • Get loan estimates from three to five lenders.
  • Apply with the lender that offers the best price.
  • Gather and submit the required financial documents.
  • Lock your interest rate .
  • Three days before closing, make sure your closing cost statement is in line with your loan estimate.
  • Sign the closing paperwork.
  • The Pros And Cons Of Refinancing

    Mortgage Refinancing
    Pros of refinancing Cons of refinancing
    Access the equity youve built up in your home. Increasing the amount you are borrowing may lengthen the time it takes to pay off your mortgage.
    Consolidate your debts and lower your overall interest rate. Your overall interest rate might be lower but the amount owing on your mortgage may be higher.
    Possibly get a lower interest rate and pay less for your mortgage over time. There may be additional costs, including a prepayment charge.

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    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.

    Blend And Extend Your Existing Mortgage

    Your existing mortgage lender may offer you a âblended rateâ essentially, a âblendâ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.

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    Interest Rates Down What To Look Into Before Deciding To Refinance Your Home Mortgage

    By Ilona Bray, J.D.

    Some people never think about their mortgage after getting it, except to write a monthly check and claim the tax deductions. Others watch the mortgage interest rates like hawks and refinance every time rates dip. The safest course is somewhere in the middle.

    Done wisely, refinancing can be one of those, “Whoa, I just earned tens of thousands of dollars for a few hours of work!” tasks. But done blindlywithout paying attention to the fact that every new mortgage costs upfront fees and possibly points, and stretches your loan back to a full 30 years of interest paymentsrefinancing can actually cause you to lose money.

    Ask Us What Refinance Rate We Can Offer You

    How to Refinance Your Mortgage

    The mortgage refinance rate we may be able to offer is personal to you. Your interest rate is affected by the type of refinance loan you want, your credit score, your income and finances, as well as the current mortgage market environment. Freedom Mortgage may be able to offer you a refinance rate that is lower – or higher – than the rate you see advertised by other lenders. Ask us today what refinance rate we can offer you.

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    Mortgage Rate Forecast: Where Are Refinance Rates Headed In 2021

    With refinance and mortgage rates, there is a high potential for significant volatility. Overall, however, rates should trend higher in 2022. Strong economic conditions and higher inflation have contributed to this predicted rate hike. However, there is uncertainty surrounding the COVID-19 Omicron strain and the potential impact of other Coronavirus variants on the economy. The trend of rising rates is probably going to continue going forward, but weekly or daily rate movement is not likely to be consistent.

    Types Of Mortgage Refinancing

    The three most common types of mortgage refinance options are: rate-and-term refinance, cash-out refinance and cash-in refinance.

    The rate-and-term refinance allows homeowners to lower their interest rate and/or change the term, which is the length of time borrowers must pay on their loan. For example, you might want to refinance your 30-year mortgage with a 3.5% interest rate into a 15-year mortgage with a 3% rate. This will help you lower the amount you pay in interest and pay off the mortgage faster.

    A cash-out refinance gives homeowners the opportunity to access the equity in their home, with the option to also lower their interest rate.

    A cash-in refinance is when homeowners apply cash to the principal, which can help them lower their loan balance, eliminate private mortgage insurance, get a better interest rate or qualify for a refinance.

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    Choose The Mortgage Refinance Thats Right For You

    At Freedom Mortgage, we offer refinancing on conventional home loans, which are the mortgages many homeowners have across the United States. We also offer refinancing for VA, FHA, and USDA loans.

    Your refinancing choices depend on the mortgage you have and the mortgage you want. You can refinance any type of mortgage with a conventional loan. Streamline refinances are only available for VA, FHA, and USDA loans. Our loan comparison can help you decide.

    Set A Clear Financial Goal

    Mortgage Refinance in Fairfax

    There should be a good reason why youre refinancing, whether its to reduce your monthly payment, shorten the term of your loan or pull out equity for home repairs or debt repayment.

    Every situation is unique, says Ann Thompson, a specialty lending executive at Bank of America. Everyone has different priorities.

    What to consider: If youre reducing your interest rate but restarting the clock on a 30-year mortgage, you may end up paying less every month, but more over the life of your loan. Thats because the bulk of your interest charges are in the early years of a mortgage.

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    Is Now A Good Time To Refinance Your Mortgage

    When determining whether it’s the right time to refinance, homeowners need to weigh the costs of refinance against the benefits. While this can seem daunting, it does not have to be a difficult task.

    The truth is that millions of homeowners can still benefit from a mortgage refinance.

    Current mortgage rates are hovering around 3%, higher than at the start of 2021 but still close to historic lows. At current rates, there are around 11.2 million well-qualified homeowners who could lower their mortgage interest rate by at least 0.75 percentage if they decided to refinance today, according to mortgage data company Black Knight.

    Together, these homeowners could save an aggregate of $3.1 billion per month, or about $279 per owner per month. That’s a potential savings of $3,348 per year. About 1.2 million of these owners could save up to $500 per month, for yearly savings of $6,000.

    These borrowers as well as those who can reduce their interest rate by less will need to decide if these savings justify closing costs.

    With the potential savings, it’s worth taking the time to review your options and see if a refi is the right move. We’ve covered the basics to help you decide.

    Td Offers A Range Of Mortgage Choices

    If mortgage interest rates have gone down or you want to tap some of the equity in your home, TD Mortgages offer you a range of options. Open or closed, fixed rate or variable interest rate, with a range of amortization choices, a TD Mortgage Specialist will be happy to help you choose the mortgage thats right for you.

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