Should You Refinance Your Mortgage?

When mortgage rates are low, it makes purchasing a home very attractive and refinancing your mortgage to a lower rate.

If you purchased your home at an interest rate of 5.5%, and the current rate is 3.5%, it is almost too good of a chance to pass up saving that much money over the life of your mortgage.

Lower rates not only mean saving money, but it also means being able to pay down your principal faster!

Paying down your principal is excellent because it means you are less in debt and also gives you more equity or buying power.

Should You Refinance Your Mortgage?

• Refinancing means taking out a new loan to replace your original mortgage with different terms.
• Homeowners usually refinance their mortgages for better rates, lower monthly payments, a shorter term, a cash-out, or a fixed-rate mortgage.
• Using an online calculator can help you decide if it's worth refinancing.
• Some cons to refinancing can include high closing costs, a stressful underwriting process, a longer term, and paying more interest in the long run.
• Qualifying for refinancing is nearly identical to applying and qualifying for your original mortgage.
• Knowing why you want to refinance and crunching the numbers can help you decide if refinancing is right.

What is Refinancing?

Refinancing a mortgage is when you take out a new loan to pay off your original mortgage loan, and the new loan then replaces the existing one.

The most common reason for refinancing your home is to receive a better interest term and rate.

Some homeowners refinance to pay off their original mortgage loan, remove a sum from their equity, and replace their monthly mortgage payment with a longer repayment term.

The interest rate ultimately decides whether you should refinance.

Suppose your new interest rate on your new mortgage is lower than the interest rate on your current mortgage, and the total savings outweigh the cost of refinance. In that case, refinancing may entice homeowners who want to save money.

Understanding the Refinance Process is Key

But refinancing can also throw you a curveball.

You may lose funds instead of saving money if you don’t know why and when to refinance or even how to do it.

So, how do you know why, when, and how to refinance?

We’ll take you through the refinancing process so you’re profiting from taking out a new loan.

Why Should You Refinance?

Below are popular reasons why people refinance their mortgages.

Lowering Your Rate

This is refinancing 101.

If you have the means and find the right deal, lowering your rate could mean tons in savings over the next 15, 20, or 30 years.

Paying Off Your Loan Faster

You might be able to pay off your mortgage in a shorter time by changing the number of years of amortization.

This means you can shorten your original mortgage from 30 to 15 years.

As a result, you'll save a significant amount of money in interest payments over the life of your loan.

This new length—dropping down to 15 years-- offers you more significant interest savings and, best of all, can also assist you in building equity faster than if you remained with your 30-year loan.

On the flip side, if you refinance with another 30-year term to reduce your monthly mortgage payments, you'll take even longer to pay off your mortgage and pay more interest over the life of the mortgage.

But what if your finances change, and not for the better?

Don't fret. You have the option to revert to your original 30-year loan.

Changing Your Rate Type

Homeowners with a mortgage with riskier loans, such as an adjustable-rate or balloon loan, can refinance to get a fixed-rate mortgage.

Your new fixed rate might end better, but know you'll be secured when loan rates increase.

Moving to a loan with a fixed rate can help you bypass market fluctuations.

As a reminder, during the 2008 housing crisis, thousands of Americans defaulted on their loans when rates skyrocketed and lost their homes to foreclosure.

So, trying to get out of your adjustable-rate mortgage is suitable.

Cashout Option

A cashout uses the equity accumulated in your property to borrow money at a decreased price.

With a cashout refinance, you can refinance for an amount higher than your current principal balance and take the extra funds as cash.

So if your property is worth, say, $300,000 and there's $100,000 left on your current mortgage, you have home equity in your home worth $200,000.

Equity is the difference between a home's market value and the debt owed on the property.

The most crucial reason homeowners cash out is that they can use the money to make significant home improvements that will increase their value.

But there are also other reasons.

Many who have children use the cash to pay for school tuition or a down payment on a house, while others use it to pay off medical costs.

Debt Consolidation

A popular reason homeowners refinance is to consolidate other debts into a monthly payment plan easier to swallow.

This occurs when a portion of your home equity is turned into a cash-out, and the homeowner can use the money to pay off debts like credit card debts, student loans, or a second mortgage.

Debt refinancing is very similar to a cash-out.

If you have a lot of debt, such as credit card debt, you may know that the average interest rate on these cards features a high median rate of about 13.66%.

In contrast, the median mortgage interest rate is 3.85%.

In the long term, you'll save much money from the lower interest rate when you roll your debt into your mortgage.

Using a Calculator to Help Decide If You Should Refinance

We've established that when the interest rate is lower than the interest rate on your current mortgage, it might be the time to consider refinancing.

Also, if your cumulative savings amount outweighs the costs to refinance.

But if you base your refinancing on falling mortgage rates, you should be very cautious as mortgage refinance interest rates change daily and are never constant.

How much will you save? And how much will it cost?

An online mortgage refinance calculator is the best way to do this.

By plugging in your new interest rate and loan amount, the tool will calculate your monthly savings and your new payment and consider the estimated costs of the refinance.

Although the calculator can only give you an estimate, it can also reveal what you should expect.

What Are Some Reasons Not to Refinance?

Refinancing is not always a walk in the park.

You may have to pay more interest if you lengthen your loan term.

If you use some of your equity, you will receive a higher loan amount on your refinancing loan, which, in turn, can increase your monthly loan payments.

Going Through Underwriting Again

Remember when you were approved for a mortgage on your dream condo?

It was a stressful endeavor and not something homeowners want to repeat.

If you want to refinance, it will be the same process again: submitting income documentation, proof of assets, and debt.

Sure, the market looks great, but there are two popular reasons why you shouldn't refinance.

The Return of Bad Credit

Refinancing can hurt your credit score, which we'll delve deeper into.

If your score is already somewhat in precarious standing, you might want to sit this one out for a while until your credit is impeccable.

A Longer Break-Even Point

One of the reasons to avoid refinancing is it takes too long for you to get back the closing costs on a new loan.

This is known as your break-even period, the number of months to reach the point when you start saving, thereby counterbalancing the costs of refinancing.

Closing Costs

You have to think ahead when it comes to refinancing.

Remember that you need money once your new loan is approved. The costs of a refinance will include a lot of fees.

There's the closing cost, the lawyer's fee, a loan origination fee, escrow charges (taxes), a mortgage insurance fee, and the credit report the lender purchased.

In addition, you also have to pay the fees below:

• Application Fees ($75-$100)
• Appraisal ($300-$700)
• Survey Cost ($150-$400)
• Title costs, which include a title search and insurance ($700-$900)
• Home inspection ($175-$350)

Closing Costs Can Vary Dramatically

The total fees you may have to pay will be around $5,000; however, in some cases, closing costs can rack up to $10,000-$15,000.

Factors such as the area around your property, the property itself, and your credit score will determine how much it costs when you close.

In places like New York City, where jumbo mortgages are the norm, your closing costs will likely be on the higher end.

For closing, you need to come up with the money simultaneously. It might mean you aren't in a position to refinance.

However, you can roll all the costs into the new mortgage.

While you'll need less cash at closing, keep in mind that your monthly loan payments will increase, and so will your interest over the life of the loan.

If these become greater in size, refinancing may not be cost-effective.

Increased Interest

Of course, many refinance to lower their interest rates and monthly loan payments.

However, the process includes extending the loan's term.

If you do this, you'll have to pay more interest over the loan period.

You Need the Tax Deductions

Your monthly mortgage payment interest is tax-deductible on your federal income tax, up to $10,000 a year.

If you want to take full advantage of this tax break, reducing your monthly interest will also decrease what you can deduct.

When is a Good Time to Refinance Your Home?

It may seem like the right time to refinance is when mortgage rates have dropped. However, there are other instances when refinancing makes sense.

Rates are Low

Homeowners who want to refinance their house often do so when they notice mortgage rates falling below their current loan rate.

If rates dip temporarily, it's not a good time to act, as they can go back up before you get a commitment for refinancing.

It would be best if you were looking for a time when mortgage rates are low due to some economic factors.

The Fed will typically cut rates when they feel that the buying power of Americans is falling and fewer people can buy or are planning to buy.

Your Credit Score Has Improved a Lot

Your mortgage refinance interest rate is mainly based on your credit score and how much equity you have in your home.

Your credit score is significant.

If your credit score was fair (around 620) when you got your original mortgage, chances are you didn't qualify for the best rates.

If you now have an outstanding credit score (around 800) and a good payment history on your loan, you will qualify for a better interest rate when you refinance.

If you want to know when to refinance, be aware of two things: your potential savings when you refinance and how refinancing could potentially hurt your credit score.

Your Income Increased or You Reduced Your Debt

If you've gotten a pay raise, have more assets, or managed to pay down your monthly debt, you can refinance to a more favorable term.

By showing that you can increase your monthly payment, you can ask for a shorter term and pay off your mortgage sooner.

Changing it up to a shorter term will also mean less interest paid over the life of the loan.

Ensure the added closing costs don't offset your savings or set you back too far.

Qualifying For Refinancing

Mortgage lenders consider the following factors when trying to secure a new loan.

Your FICO Score

Your credit should be in good standing, not showing many new debts or inquiries.

Homeowners with a good-to-great credit history are usually quickly approved for a refinance.

And if your credit has significantly improved since you took on your mortgage, you may find yourself with more agreeable terms.

Good to exceptional scores range from 670 to 850.

Your Income and Employment History

Creditors want to see that you have a stable livelihood and income.

You shouldn't have any issues if you can prove a steady number of years at your current job, with the same or a salary increase.

Equity in Your Home

Another consideration for underwriting will be how much equity you currently have in your home.

This can be measured by how much of the principal you've paid off and the downpayment you initially put down to purchase the home.

Your equity is an asset.

Your Home's Current Value

You should be in a good position as long as the current market value is the same or higher.

You won't be able to refinance if your mortgage is higher than the home's value.

Usually, a full appraisal is not required, although sometimes the lender may suggest doing this.

Your Other Debt Obligations

Once again, your debt-to-income ratio factors in. This is important because your income isn't your net income.

You need first to debit your monthly debt obligations to generate the net income.

Sometimes, when you have balances on your credit cards, the lender might ask you to pay them all down to help your chances.

What Might Disqualify You From Refinancing

Some factors may not make you eligible for refinancing your mortgage.

Unsteady Job History

When you apply for a new loan, lenders will almost always want to know how long you've been in your position at your job.

They are reluctant to give you a loan unless you've had at least two years of employment in a row in the same position at your job.

They will take into consideration if it happens to be that you have a new job, but only if it's the same profession as your former job.

And while you may have a ton of assets or a high salary, unless you can prove to the underwriter that you have steady work, the underwriter will still, in most cases, deny you a new loan.

Unfortunately, this means freelancers could struggle to qualify for a refinance.

Lack of Funds

Loan servicers also look if you have enough assets to live comfortably while paying your monthly mortgage loan.

Typically, they want to see your bank statements for the last two months that reveal that you can afford to take out a new loan.

If you don't, it'll likely be you.

Higher Debt-to-Income Ratio

Having more debt is like lacking the funds or making a smaller income.

The debt-to-income ratio is one of the most critical factors for the lender.

So, even if you now have more debt, if your income increases even more than your debt, it will offset the ratio.

Your Credit Score Dropped

If your credit score drops to lower levels, it will jeopardize your ability to qualify for refinancing.

For example, if your credit score was originally 720 and is now 650, it could raise a red flag with the underwriter.

How to Decide If Refinancing is Right For You

Homeowners should refinance based on personal needs and not because of low-interest rates.

It would be best if you determined the length of time you can stay at your home.

If you're having a baby, you may have outgrown your home and are now looking to move to the suburbs rather than your two-bedroom apartment in the city.

At this time, you should never refinance as you will not be staying at your home long enough for the break-even point.

In short, if you refinance and then move, you'll lose in a refinance.

When to refinance again?

When you have at least 20% equity in your home, the difference between its market value and what you owe.

Be sure to ascertain property values in your neighborhood to see how much your home may be appraised, or ask a real estate broker to do this.

As mentioned, refinancing is not unlike obtaining a mortgage.

You have to compare interest rates from many mortgage lenders to find the best one suitable for you and then analyze your best offer with the terms of your existing loan.

You might be happy with your mortgage lender, and refinance with them may be more convenient.

But it would be best if you still did your homework on the lender.

You are not guaranteed the best rate or closing costs, so shopping around is essential rather than going with what's more accessible to Refinance.

Here's howHere'sfinance a loan

First, be clear to yourself about why you want to refinance. Crunch the numbers and use an online calculator.

Next, shop around for the best refinance lender rate.

Get Your Documents Ready

Getting approved for refinancing requires giving your lender the necessary paperwork to ensure you can qualify.

The docs you need are similar to the paperwork you need for a single-family home.

Here's what we should put together:

• One or two-month pay stubs
• Two years of W-2s
• Federal tax returns
• Two months of bank statements
• Copy of your insurance policy
• A recent mortgage statement
• A list of all outstanding debts, such as car or student loans.

Apply for a Refinance with 3 to 5 Lenders

It's best to submit all applications quickly to lessen the inquiries on your credit score.

But note that at one point, your credit score will go down no matter what.

First, choose a lender with the best rate

Next, lock in the interest rate.

They are locked, meaning the interest rate can't be can't for a specific period. You and your mortgage lender will attempt to close the loan before the lock ends.

Lastly, close on the loan.

As we discussed, this is where you need to hand over a lump sum of the required money.

Refinancing closing is similar to closing on a home mortgage.

But remember that taking out your initial mortgage loan to buy your condo is the same as taking out a loan to refinance.

You will receive a lower interest rate if you have good to excellent credit.

If you don't, wait until your credit score increases.

How Can Refinancing Hurt My Credit Score?

As mentioned earlier, refinancing will hurt your credit.

While it's not likely that your credit will be destroyed, there are a few ways it can impact your credit score.

Hard Inquiries

We've mentioned that revenging will require a credit check.

First and foremost, any hard inquiries into your credit report will drop a few points.

Factor in several inquiries from shopping for a refinance product, and you're looking at a reyou'reative impact.

Closing Your Original Loan

Once approved for refinancing, the lender will close your original loan. Believe it or not, this hurts your credit.

Just like closing a credit card account affects your score, closing a loan will also cause a decrease. Remember that FICO likes it when individuals balance several accounts simultaneously.

Once you finish paying off your mortgage, you may also notice a drop in your score.

This is just the way the cookie crumbles.

An Increase in Debt

If you refinance for home equity, your score will also drop, negatively impacting your debt-to-credit rate.

Even if it's not for a cashoutit'syour closing costs

What Can You Do If You Don't Qualify for RefiDon'tng?

There's no harm in what you're doing; if it's you, you can continue to sustain it for the rest of the life of the mortgage.

After all, there is no rule that you have to refinance.

However, for those who are not completely satisfied, you can do a few things in the meantime.

Borrow Money From Family

If lack of funds was your problem getting your mortgage refinanced, you might turn to friends and family to borrow money the next time.

The good thing about borrowing money from family is that there is no record on your credit report.

Just remember two things: the money needs to be in your account for some time before you reapply for refinancing, and borrowing money from your family might create tension in your relationships.

Increase Your Savings

Instead of borrowing money from friends or family, you could save up money over time to be ready for the next time you apply for refinancing so you know you have the cash to close.

Increase Your Mortgage Payments

Even if you are turned down for a refinance, you can still work towards paying down your mortgage faster.

Many lenders will accept paying off your mortgage early without penalty.

Remember that if you make larger payments every month, it will cut more into your principal.

The more you cut into the principal, the faster you pay off the interest as your debt goes down.

Reduce Your Debt

If your problem is your debt-to-income ratio, then you need to work down paying your other debt while keeping up with your mortgage payments.

Get Your House Appraised

Sometimes, you need that little extra push to get approved by a lender. That could be having your home appraised.

Perhaps you've made some reno that could up the value of your home beyond the market value they're seeing.

You, the lender, send an independent appraiser to assess the actual value of your home. You will need to foot the bill, however.

Key Takeaways from Refinancing Your Mortgage

There are a few essential considerations before you rush off to refinance.

Remember that you have a choice. You don't have to refinancdon'th your current lender.

It would be best if you shopped around.

And you don't have to apply to don't one mortgage company.

Apply as many as possible, but consider how often your credit may be pulled.

Also, although closing costs and attendant fees vary, the median rate is roughly 2-5 % of the loan amount but often can be more than that.

You need to figure out how long it will take for monthly savings to recoup those costs or "break even" before you" begin on "a long-winded journey to refinancing.

If the numbers work in your favor, it can mean significant savings for you and your family.