The most common reason for refinancing a home is because of a decrease in interest rates, which results in lower financing costs with a new loan. If you took out a 30-year fixed mortgage when rates were a six percent, a reduction to 4.5 percent would reduce payments on a $300,000 loan by $270 dollars a month.
In circumstances such as these, refinancing your home might seem like the best option. However, taking out a new loan requires the payment of new closing costs. Whether this worth the savings on monthly payments or not will be dependent on how long you intend to live in your home. As a general guideline, the longer you live in one place, the more sense it makes to refinance and absorb the one-time closing costs.
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Reasons to Refinance
Improved credit score
One of the largest factors in decreasing the interest rates you are required to pay on your mortgage is your ability to pay back the loan in a reasonable amount of time. When lenders determine your eligibility for a loan, they collect information on your credit score, which contains your borrowing and payment history. If you took out a home loan with a low credit score, you will have an interest rate that is higher than average. However, if you have developed better financial habits and are able to reduce your balances and send in payments before the due date, you might be eligible for a better rate.
Taking cash out of your home
As one of the perks of refinancing your home with a larger loan, you will be able to tap into the equity of your home. This will enable you to obtain extra cash that you will be able to use for a wide variety of needs or wants. A cash-out refinancing will require that you stay within the loan-to-value threshold (LTV) for your banks loan program. The LTV is the amount of the mortgage on your home divided by the appraises value of the property.
Suppose you own a home that is worth $2,00,00 and owe $1230,000 on the mortgage. If you have a 38 percent LTV with your lender, you have the option to refinance into a loan of $160,000 and take out the $40,000 difference in cash. Again, you will need to take into account the closing costs needed to get this new loan. In the event that you sell, however, you will also have less equity gained. However, refinancing your home for cash could be worth it if you are using the money to pay down a credit card with high interest rates or doing renovations or on upgrades to increase the value of your home. It’s probably not the best idea to use this money to purchase a boat or to go on an exotic vacation, but if it will help make you more financially stable overall, this is a good option to consider.
Replacing an ARM
If you have an adjustable-rate mortgage, or an ARM, you will can refinance if you wish to convert to a fixed-rate loan. ARMs are loans that present low introductory rates that reset to standard rates after a set period of time. This can range from a year to five years or more from the closing date. When the interest rates increase after the introductory-rate time period, you will be in for an unpleasant surprise.
In instances like these, homeowners often try to refinance their homes in to fixed-rate loans before the reset date, especially when interest rates are at relatively low points on the market. One of the factors that led to mortgage difficulties around 10 years ago was the costly ARM reset. Homes with adjustable rates are not as common as they once were, but they appear to be coming back. If you have an ARM, you can help yourself stay out of potential trouble by replacing It with a fixed-rate loan today.
Lengthen your loan terms
If your rates remain the same, you may still be able to lower your monthly payment by refinancing and taking out a new loan with a longer term. For instance, you take out a 30-year mortgage for $250,000. After 10 years, that loan balance will decrease down to $200,000. Taking out a new 30 year loan vs a 15 year loan for the remainder, you will have the ability to lower your monthly payments. However, you will also be adding an additional 10 years onto your loan, which may or may not be worth it to you.
Questions to Ask Before You Refinance
What is the equity in your home?
The first qualification needed to refinance your home is sufficient equity. Recently, home values have been on the rise. The number of underwater home owners have dropped by a large margin, according the deputy chief economist of Freddie Mac. However, some homes have yet to regain their value, leaving their owners with low equity. It is not always possible to refinance your home with little or no equity. However, there are certain government programs available that will allow you to refinance you home even if you are have low equity. The best way to find out if you qualify is to visit a lender and discuss your needs. Those with at least 20 percent equity in their home will find it easier to qualify for a new loan.
What’s your credit score?
Credit scores are a huge factor when it comes to refinancing your home. Lenders have tightened standard for loan approvals. As a result, even consumers with good credit may not always qualify for low interest rates. Generally, lenders are looking for credit scores of 760 or more in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores might still be able to obtain a new loan, but interest rates or fees have the potential to be higher.
What’s your debt-to-income ratio?
If you have a mortgage loan, you might assume that you can get a new one with relative ease. However, lenders have not only raised the bar for credit scores, but they have also become stricter when it comes to debt-to-income ratios. Certain factors such as high income, a long and stable job history and substantial savings have the potential to help you be more eligible for a loan. However, lenders usually want the monthly housing payments be to under 28 percent of a gross monthly income. Overall debt-to income ratios should be 36 percent or less, although certain additional positive factors have to potential to allow you to go up a 43 percent debt-to-income ratio. You might also need to pay off a certain amount of debt before you qualify for a refinance.
Costs to refinance
Refinancing a home generally costs between three and five percent of the loan amount. However, borrowers have ways of reducing costs or wrapping them up into the loan. If you have enough equity in your home, you will have the ability to roll the costs into a new loan, thereby increasing the principle. Certain lenders offer “no-cost” refinancing. This means that you will pay a slightly higher interest rate to cover the closing costs. Be sure to negotiate and to shop around before making your final decision, as some refinancing fees can either be reduced or payed by the lender.
Interest rates and personal goals
While many people looking to refinance their homes are more focused on the interest rates, you will need to establish your own personal goals when determining whether or not to refinance. If you wish to reduce your monthly rates as much as possible, you will want to look for a loan with the lowest interest rates for the longest term. If you want to pay less interest overall during the length of the loan, you’ll want the lowest interest rate at the shortest possible term. If you want to pay off your loan as fast as possible, look for a mortgage with the shortest term at the highest payments you are able to afford.
When comparing various mortgage loan offers, take a look at both the interest rates and the points of the interest rate. Points, each of which are equal to one percent of the loan amount, often bring down the interest rate. Be sure to calculate how much you need to pay in points with each loan, as these will either be paid at closing or wrapped into your new loan.
Another important calculation you will want to make when deciding whether or not to refinance your home is the break-even point. You will be “breaking even” when the costs of refinancing have been covered by your monthly savings. At this point, the savings are all yours. As an example, if a refinance costs you $2,000 with a savings of $100 per month over a previous loan, you will be able to recoup your costs within 20 months. If you intend to either move or sell your home within the next two years or so, this scenario may not be the best.
Private mortgage insurance (PMI)
Homeowners with less than 20 percent equity in their homes will need to pay a private mortgage insurance rate. If you are already paying PMI with your current loan program, this will not mean a lot in cost differences. However, if your home has decreased in value since you purchased it, you might be required to pay PMI if you refinance your home. Reduced payments from a refinance may not be sufficient to offset the additional costs of PMI. You will need to contact a lender to determine whether you will need to pay PMI and how much these payments will impact your monthly mortgage payments.
Many consumers rely on mortgage interest rates to qualify for a deduction when tax time rolls around. If you refinance your home and start to pay less in interest, you tax deduction has the potential be to lower.
Most people see this as a reason to avoid refinancing. However, there is a possibility that the interest deduction will be higher for the first few years of the loan when the interest portion of the payment is higher than the principle. Increasing the size of your loan due to cashing out or rolling in closing costs can also have an effect in the amount inf interest you will pay with your refinance. However, the Tax Cuts and Jobs Act, which was passed in December 2017, may have a bearing on whether or not you wish to use a mortgage interest deduction.
The new standard deduction amount is now $24,000 for married couples who are filing jointly. This is compared to $12,700 from previous years and may make itemized deductions less financially attractive to certain taxpayers. However, wealthier homeowners who wish to refinance on large mortgages will still have the ability to deduct interest up to $1 million in mortgage debt at the new limit of $750,000. To ensure that you have all the facts straight, it’s important to consult a tax advisor for information on how a refinance will affect your taxes.
Getting the Best Deal
Shopping for a mortgage is a little more complicated than checking websites for the best prices. Different lenders will offer different rates and different fees that are dependent on factors such as your credit score, employment status and loan-to-value ratio. The only way to ensure that you are getting the best deal for your situation is to collect data from a wide variety of providers. These should include large banks, local banks and credit unions.
When looking for a deal on refinancing, you will need to look at all the fees you will be required to pay. Before completing the formal application, ask the lender if you can receive a “good-faith estimate.” A good-faith estimate details the amount you will be required to pay in closing costs. Sometimes, paying a higher interest rate with lower upfront fees can be beneficial and save you more money in the long run.
In order to determine your rates, lenders will need to pull your credit report, which can have a negative effect on your credit score. However, you can minimize or eliminate the effect on your score by performing your research within a compressed period of time.
Obtaining a FICO score can be done with minimal impact as long as the inquiries are made with in 20 to 45 days of scoring. These figures and other credit score company figures will be largely dependent on the formula or scoring version the lender uses to obtain the score itself.
You also have the option of using a mortgage broker if you don’t want to invest your time in researching multiple mortgage providers. One of the benefits of working with a mortgage broker is that you have someone to work with directly who will collect your informant and contact lenders on your behalf. Brokers are paid by banks and the mortgage companies that they work with, so you will not be required to fork over any funds as the client. Also, lenders sometimes offer mortgage brokers special rates for brining in new customers.
However, like everything else under the sun that appears to be “simplified,” there is a drawback. Brokers are often compensated for larger loans, even if the loan is not in the best interests of the client. Certain lenders are also not willing to work with brokers, which can limit your options when doing your research. However, you can use both methods: the mortgage broker and the self-directed mortgage shop-around to find what you are looking for.
Refinancing a home can be a very good thing if done at the right time and in the right way. Using the tips outlined in this article, you have the potential to save money and make your pocketbook that much happier.
It's also better to clearly understand the differences between home equity loan vs line of credit so you know which one to choose when you need equity financing.
If you're in need of money to fund home improvement and repairs, take a look at our review of home improvement loans.
General Information on Refinance Mortgage
Below are the most basic questions one must ask (and answer) before proceeding to refinance their mortage.
What is refinance mortgage?
It is the process in which you replace your current debt with another debt but with different terms. In this case, it is referring to mortgage particularly.
When you refinance a mortgage, what happens?
The rates and payments that you would follow would now be based on the refinance. If you managed to take advantage of lower interest rates, you may get a cash out as well.
How soon can you refinance your mortgage?
If you’re going to refinance under the same lender, it can take up to 180 days or even longer before you will be allowed to do so.
Do you need good credit to refinance your mortgage?
Like with all things related to loans, it always helps if you have a good credit. However, there are lenders that may be willing to refinance your mortgage although for higher rates.
How many times can you refinance a mortgage?
Theoretically, you can refinance as many times as you like. It is up to lending companies, of course, whether they’d approve the application.
Why refinance mortgage?
As written in the article above, there are a lot of reasons to do it. But the biggest motivation is always lowering one’s debt.
When do I refinance mortgage?
It is recommended that you do so when the interest rates are in your favor or when you alleviate your financial burden by prolonging the life of the loan.
Costs, Rates, and Taxes
In this section, anything related to costs, rates, and taxes will be discussed.
What are today's mortgage refinance rates?
It is impossible to tell without looking into the rates of the current agreement because the refinance rates would be based on that.
How much does it cost to refinance a mortgage?
Most lenders charge between 3 to 5 percent of the loan. However, if you prefer, there are also lenders who offer no-cost refinancing in exchange for higher rates.
What is the average closing cost to refinance a mortgage?
As it is based on the loan amount, it can highly vary. Simply multiply it by 3 or 5 percent to get the range.
How do I find the best mortgage refinance rate?
The only sure way is by rate shopping. Consider too that you may get a better deal with your current lender especially if you have been paying on time.
Do you have to pay mortgage insurance on a refinance?
Yes. However, you may be allowed not to get one if you put a huge down payment on the loan upfront.
Do you need a down payment to refinance a mortgage?
No. But it can help you better negotiate rates if you do so.
What mortgage refinance fees are tax deductible?
Mortgage interest, real estate taxes, and private mortgage insurance are tax deductible if you take the itemized deduction.
How much do I need to refinance my mortgage?
On average, you would need 3 to 5 percent of the new loan amount. If the refinance mortgage is worth $100,000, you would need $3,000 to $5,000.
How much will my mortgage payment be if I refinance?
This question is better referred to the lender as it would be based on the new terms of the loan.
Refinancing your Mortgage
Below are general and specific information on how you can proceed with refinancing your mortgage.
How do I refinance my mortgage?
The first thing you should know is your current home value. From there, you would be in the position to better assess how much you should expect to pay.
Do I need a mortgage broker to refinance?
No. However, mortgage brokers are generally way better at negotiating the best deal for you.
What paperwork do I need to refinance my mortgage?
Some paperwork you will need include Statement of Outstanding Debt, Statement of Asset, your credit report, tax returns, and pay stubs.
How do I negotiate a refinance mortgage?
If you’re doing it on your own, your leverage would rely mostly on your credit score and employment because the best you can actually do is ask whether they can waive fees or lower rates.
How do I refinance a balloon mortgage?
The application is very much the same as with your traditional mortgage. However, you need to make sure that you still have more than 20% equity because most people in a balloon mortgage tend to have a problem with that.
How do I refinance a home with no mortgage?
You don’t because there’s nothing to refinance. You may apply for a mortgage, HEL, or HELOC if you so wish.
How do I refinance my mortgage with a different bank?
It is actually as easy as contacting banks you prefer and asking whether they are open to refinancing your mortgage. What you have to remember is to take note of their requirements and qualifications as those would definitely vary from one bank to another.
How do I refinance my 2nd mortgage?
Interest rates on the second mortgage are normally higher than the first one. So, look into refinancing both mortgages into one loan.
How do I refinance a manufactured home mortgage?
You will have to present proof that the manufactured home is classified as real estate and not personal property. Also, you will need to own the land where it stands.
How do I refinance a mortgage after chapter 7?
You can’t right away. Even FHA prevents you from doing so in a two-year period. Other banks may be more stringent.
How can I refinance my mortgage with negative equity?
There’s only one way you can do this: pay a significant amount of your loan to shut the gap between the value of the loan and of your home.
Value Judgement Questions
These questions should help you decide whether refinancing mortgage is for you.
Should I refinance my mortgage?
Look into the reasons stated in the article and assess if you see yourself in even one of those reasons. Your decisions should not be arbitrary but based on sound judgement.
Should I refinance my mortgage or make extra payments?
If you can actually afford to make extra payments, you should highly consider refinancing. The fact that you can pay a portion of the loan amount upfront may allow you to get lower rates.
When should I not refinance my mortgage?
If you don’t understand the fees that come with it, you should rethink refinancing as you can end up paying even more. Also if the rates aren't low enough then it may not benefit you yet. There may be other ways to save money on your home on the meantime such as finding more affordable home insurance or being more energy efficient. These things add up.
Is it better to refinance with your current mortgage company?
My view is, it is best to refinance with a mortgage company where you will incur the lowest fees.
Should I refinance my mortgage into FHA Streamline?
If time is of the essence, FHA Streamline is a great option. Some of the qualifications you must meet are having made 6 monthly payments to the current loan and that the loan has existed for at least 210 days already.
Should I refinance my mortgage to get rid of PMI?
No because that rarely works. Lenders see people who do this as riskier, imposing a higher interest rate to make up for this added risk.
Understanding the Bounds of Refinancing
There are a lot of types of refinancing that does not exactly fit into “traditional.” Some of them are discussed below:
Can you refinance a home equity loan into a mortgage?
No, that doesn’t make sense. Home equity loan is essentially a second mortgage. While you can refinance a HEL, it is not right to say that it can be transformed into a mortgage by refinancing.
Can you refinance a reverse mortgage?
Yes. However, refinancing in this case is every bit the same as applying for reverse mortgage all over again.
Can I refinance my mortgage with bad credit?
Yes. We recommend looking into FHA streamline refinance and the HARP program as they’re easier to get approved for.
Can you refinance a reverse mortgage to a conventional mortgage?
No. This would entail giving back the amount you got from the reverse mortgage in order to raise the available equity of the house just to get a loan where you’ll be charged exorbitant rates for.
Can you refinance an adjustable rate mortgage?
Yes. And if the interest rates are currently low, we recommend switching to fixed-rate so your budget won’t be affected if rates suddenly go up.
Can you refinance a fixed rate mortgage?
Definitely. If the interest rates drop, you may be able to further reduce your monthly payments.
Can you refinance a HELOC into a mortgage?
No. However, you can refinance HELOC and a mortgage together as one loan. take a look at your best HELOC options and more in our other article.
Can I refinance my mortgage after bankruptcy?
It depends on the lender. But for Chapter 13 bankruptcy, you will need to get a court permission before you’re allowed to do so.
Can I refinance my FHA mortgage with bad credit?
Yes. FHA Streamline refinance is a service available to anyone who already has an FHA mortgage. I don't have an FHA mortgage so I had to fix my credit before I refinanced.
Can I refinance with late mortgage payments?
Late mortgage payments are usually a red flag for lenders, but you still have a chance because you didn’t mist them altogether.
Can you refinance a mortgage with a tax lien?
Yes. But to increase your chances of approval, you must first obtain a Certificate of Subordination from the IRS.
Can you refinance to get rid of mortgage insurance?
Yes, you can. You must note, however, that this only works if your loan balance will drop to 78%.
Additional Questions on Refinance Mortgage
If there are questions that have not been presented in the earlier sections to better organize them for you, you will find them here.
Why refinance to a 15-year mortgage?
If you want to enjoy lower rates and can afford higher monthly payments, refinancing to a 15-year mortgage makes sense.
How do I pick a mortgage refinance company?
Call your original lender and ask what your rate will be should you refinance your loan. Then, shop for other rates and inform them of the current lowest offer to you. If they want your business, they’d offer you an even lower rate.
Is it good to refinance your mortgage?
If you have good reasons, of course it is good. Make sure to identify the reason you’re refinancing and examine the financial implications of refinancing.
How often should I refinance my mortgage?
If the opportunity to save money presents itself, go for it. It is not a matter of how often but only of necessity.
What can I use a cash out refinance for?
Some people use this extra cash to consolidate higher interest debts. Other people will use it to do home improvements. We've even heard of people using this to buy an alarm system among other things. If you're considering this take a look at the top rated home security systems we reviewed recently.