What is Mortgage Refinance?
Refinancing replaces an existing mortgage loan with a new one to reduce monthly payments, lower interest rate or change the loan program. In simple terms, refinance is reducing your current loan burden by taking out a new loan on lower interest rates to finance your existing high interest rate loans. You can also refinance mortgage if you’re looking for access to cash to fund home renovation projects, however you would need to keep your house equity as collateral to obtain a cash-out refinance.
What happens when you Refinance a Home?
Refinancing works a bit similar to purchase mortgages. A mortgage is used to pay for the house you want to buy, while a refinance is used to pay for your old loans or mortgages that you used to buy a house or pay for your student education and more. You are required to qualify for the loan just as you would with a purchase mortgage and meet the lender’s requirements. After you qualify for the loan, you need to file an application, submit documents, sign off the paperwork and close the loan.
When Should you Refinance?
Refinancing can be a big step for someone as it involves going through the entire loan process again. It is always better to think whether refinancing will help you achieve your goal. If so, then go for refinancing. There are several triggers for people that make them start thinking about a mortgage refinance and they are:
Lower Mortgage Rates: If there is volatility in the market that pushes down mortgage rates and the rate is now lower than what you’re getting with your current mortgage, we suggest that you consider refinancing options. This will help you save money with lower APRs.
Pay Off the Loan Faster: If you’re stuck with a 30-year mortgage and looking for ways to reduce that term period, then consider refinancing. You can refinance your 30-year mortgage to a 15-year loan; however, this comes at the expense of increased monthly payments.
Convert Home Equity into Cash: If you’re looking for some extra bit of cash for home renovations, then consider cash-out refinancing. It replaces your current mortgage with a loan of a higher value against your home equity, giving you access to cash that you need. Typically, the interest rate on cash-out refinance is usually lower since it is backed by home equity as a collateral.
Benefits of Home Refinance
Lowering your Monthly Payment: A homeowner is able to reduce their monthly payments by refinancing mortgage with lower interest rates. This allows for savings that can be put aside to pay off other debts or expenditures or used to pay off the loan early.
Switching from an Adjustable-Rate Mortgage to a Fixed-Rate Loan: When you have an adjustable rate mortgage, your payments will fluctuate according to the market conditions. Although the APRs on adjustable are less than fixed rates, it might be a barrier for someone looking for financial stability. With refinancing, you can make the switch to a fixed-rate loan.
Consolidating your Debts: Refinancing helps you with consolidating all your debts. Through refinance, you can take out a loan to pay all your debts and make single monthly payments to the lender. This helps in simplifying your finances and keeping you on top of your debt payments.
Risks of Home Refinance
Refinancing may not personally be the best option for you, as it fully depends on your goals and financial situation. Although there are certainly enough benefits of refinancing, you also need to consider the risks associated with these types of mortgages. Some of these risks are:
Restarts the Amortization Process: If a homeowner is 5 years into paying a 30-year loan and decides to refinance it with another 30-year loan, then they’ll be making mortgage payments for 35 years. Some homeowners who are 10 or 20 years into paying a 30-year loan would not want to extend their time and therefore would look towards refinancing into a shorter-term loan to save on interest costs.
Closing Costs: Refinancing your mortgages might have closing costs associated with it, typically ranging between 3% to 6%. Refinancing options that do not have any closing costs would have higher interest rates. You need to do your calculation and identify where you could possibly be saving money, either paying higher interest rates or paying additional closing costs.
Cumbersome Application Process: While it’s not as time consuming as when applying for a purchase mortgage, it can get very tedious. You are required to fill in forms and submit documents and wait for the lender to get back to you. The entire process can take a lot of time depending on the company, and the deal is not finalized until closing of the loan. Some lenders have made the process a bit simpler through digitalization, however do not go for refinancing unless you’re serious about it.
Unfavorable Market Conditions: If the home values in your area has declined since you have made your purchase, then it is better to wait a while and let the market conditions improve before you consider refinancing. Refinancing when house prices are dropping could run the risk of a lowball appraisal and can affect your chances of qualifying for a refinance.
Should I use a Mortgage Refinance Calculator?
A mortgage calculator is a tool that tells you how much money you can save on interest by refinancing. It takes into consideration the cost of your current mortgage, the interest rate, the term period and of refinancing. Once you provide these details, the calculator will instantly let you know the amount of money which you will save on interest with mortgage refinance and your monthly payment amount.
In short, yes, please use a mortgage refinance calculator as it will help you understand if refinancing is the way to go, identify which one is the right option for you and which lender is providing you with the best refinancing rates.
How does my credit score affect refinancing?
A lender uses the applicant’s credit score to determine the interest rate and the refinance approval. It is always beneficial to have a strong credit score as the higher the score, the lower will be on the interest rate. A borrower with a credit score of 640 will be expected to pay more interest on a $200,000 loan than a borrower with a credit score of 700+. However, do note that if your credit score has fallen since you first obtained your mortgage, then expect to pay higher rates with refinancing.
Is refinancing available for FHA, VA, Jumbo or USDA loans?
If you currently have an FHA, VA, Jumbo or USDA loan, there are refinance options available such as streamline refinance programs. This offers a simple approval process by reducing or eliminating some of the requirements of a standard refinance program such as income, credit or appraisal review. Keep in mind that that streamline refinance loans may not allow a cash-out option.
Do I have to refinance with my current lender?
Its not obligatory to work with your current lender for refinancing, however you may want to consider since they already know your payment history and if you’ve made consistent payments, they might even offer you the best rate with some of the closing costs waived off. Even with these benefits offered, we do suggest that you do your search in identifying lenders with great rates and comparing them with the rates offered by your current lender to get the best
For further details about the best mortgage refinance, you can go through the companies listed out above, we offer unbiased reviews having tried and tested the services they offer, including the application process, customer support and benefits. Reading the reviews will help you compare and narrow down your search in finding the best mortgage refinance for you.
If you are unable to refinance and are struggling with the high monthly payments, ask your lender about other provisions available to you. You might qualify for a mortgage modification where the interest rates and monthly payments are adjusted without the need for refinancing.
How often can I refinance?
There is no such rules or limits on how many times you can apply for a refinance. However, there might be lender specific requirements such as a lender may need previous 12 months payment history before you can apply for a new loan or refinance.
Mortgage Refinance Guidelines
There are specific mortgage refinance rules that you should follow in order to get the most out of your refinance and they are:
- Only consider refinancing if you are getting a lower rate than what you are currently paying on your existing loan.
- If possible, consider refinancing to a shorter period to save on interest costs over the long run.
- Don’t draw equity out of your home in order to pay off short term debts or expenses. You never know when the house market fluctuates and if you own less than 20% of your home, be prepared to pay for pricey private mortgage insurances.
- If you’re looking towards saving money on your mortgage, then refinance to a fixed rate to ensure financial stability. Adjustable APRs can be risky since they fluctuate according to the market conditions.
- Find out the important details of the loan and try to read the fine print. It will give you fair bit of idea on the costs, fees, penalties and more associated with the loan.