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If you’re wondering if it’s time to refinance your mortgage, you first need to know how much you can save and how much the refinancing will cost you.
Ideally, refinancing will save you money in the short and long term by lowering your monthly payment and lowering your interest rate. But you’ll need to make sure the savings are big enough that you don’t lose money after paying the closing costs to refinance your mortgage.
What is mortgage refinancing?
Mortgage refinancing involves replacing your existing mortgage with a new mortgage with different terms. Usually one of those terms is a lower interest rate. Sometimes it is a different number of years before payment. Less commonly, it is a fixed rate instead of a variable rate, or vice versa.
It can also be a different type of loan, such as a conventional mortgage instead of a Federal Housing Administration (FHA) mortgage. Either way, the goal is for your new mortgage to be more beneficial to you, such as lower monthly payments, than your existing mortgage.
When is a good time to refinance my mortgage?
Homeowners refinanced $ 2.6 trillion in mortgage debt last year with record mortgage rates, according to Freddie Mac, a quasi-government agency that helps support the mortgage market. Rates remain exceptionally low, so it’s worth doing the math and seeing how much you could save by refinancing now. Here are some signs that the time may be right.
- You can lower your rate by at least 0.5%. There is no hard and fast rule that determines which lower interest rates make refinancing worthwhile. You need to calculate how much you would save based on each lender’s offer. But if the current rates are lower than your current rate, now is a good time to do the math and look for options. The typical homeowner who refinanced in 2020 cut his 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 a shorter mortgage can potentially save you more money by combining a lower interest rate with fewer years of payments.
For example, if you borrowed $ 300,000 and your 30-year mortgage rate is 3.5%, your monthly payment is $ 1,350 and you will 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 you will pay $ 49,000 in interest over the next 15 years (plus the roughly $ 10,000 of interest you paid in the first year of your 30-year mortgage). You will save $ 126,000 in the long run, minus the closing costs of around $ 3,000.
The question is whether you can comfortably afford the highest monthly payment on the shorter mortgage: an additional $ 550 per month for 180 months, in this example.
- You want a different type of mortgage. If you have an adjustable rate mortgage but prefer to lock in a fixed rate, this is a valid reason to refinance. If you initially took out an FHA loan because your credit wasn’t good, but your score is now much higher, you may want to refinance to a conventional loan to stop paying FHA mortgage insurance premiums.
- You wish to withdraw part of the equity. In June, home values â€‹â€‹were up 15% from the previous year, according to Zillow. If you are looking for a source of money for repairs, renovations or paying off a high interest rate debt, refinancing with cash might be a good idea if you are able to lower your mortgage rate. .
When is refinancing a bad idea?
It’s tempting to want to refinance when you see how low the current market rates are and how many other people are doing it. However, after considering your own situation, you might find that refinancing is not the right choice for you if any of these situations apply.
- You will significantly extend the term of your loan. Suppose you are five years away from a 30-year mortgage. If you refinance into another 30-year loan, you put yourself in a situation where you are paying off a 35-year mortgage instead. Since you mostly pay interest during the first few years of a 30-year loan, this type of refinancing can be costly in the long term even if it lowers your monthly payment in the short term.
- When your equilibrium period is too long. If shorter-term refinancing isn’t an option, you’ll want to calculate your breakeven point. Divide your closing costs by your monthly savings to see how long it will take you to get a refinance advance. For example, if you paid $ 3,000 to refinance a new 30-year mortgage that would save you $ 200 per month, it would take you 15 months to break even. If you plan to sell your house in a year, you would be losing money refinancing.
- You don’t have a good plan on how you will use the withdrawal refi money. Just because you can cash-in refinancing doesn’t mean you should. If your goal is to someday be mortgage free, and your withdrawal refinancing won’t significantly improve your finances or your quality of life, you might just want to ignore it.
- You are out of work. Most of the time, you won’t be able to refinance if you are unemployed. If you have an FHA or VA loan, you can still benefit from simplified refinancing. If you are having difficulty repaying your conventional loan, you may be eligible for a loan modification. However, without a stable source of income, you probably won’t be able to refinance your conventional loan.
How do I refinance my mortgage?
Refinancing will probably seem easy to you since this is not your first time applying for a mortgage. You already know how the process is going to play out.
However, you don’t have to stick with your current lender. You can and should shop around and get at least three quotes. It makes sense to go for the option that will save you the most money.
Also, something that might be different from your last mortgage application is that many lenders have moved more of their processes online. You may be able to avoid paper documents by uploading the information requested by the lender through a secure online portal. You may even be able to sign your closing documents online and have them certified by a remote notary, depending on where you live and how your lender operates.
What to expect during refinancing
After submitting your application, you will need to provide the lender with documents such as recent bank statements, tax returns, W-2 forms, and pay stubs that prove that you will be able to repay the new loan. Then you will wait.
In June, the average time to close a refinancing was 48 days according to ICE Mortgage Technology.
At some point in the refinancing process, you will need to lock in your interest rate. Your lender should be able to tell you how long you can expect your loan to end based on the company’s current timelines.
You want to make sure that your rate foreclosure will last long enough for you to close. You will probably want to lock in your rate early in the application process to eliminate the risk of a rate hike that will affect your decision to refinance.
Refinancing typically costs less than 1.3% of the loan amount including taxes, according to ClosingCorp, a real estate closing costs intelligence company. The average closing costs for a refinance for a single-family home were $ 3,398 with taxes in 2020.
Here are the fees you can expect to pay when you refinance:
- Registration fees
- Loan origination fees
- Credit file fees
- Points to redeem your fare (optional)
- Home assessment fees
- Pest inspection fees
- Property transfer tax (if applicable in your jurisdiction)
- Lender’s title search and title insurance fees
- Surveying (sometimes)
- Escrow Fee / Closing Service
- Notary fees
If the numbers turn in your favor, refinancing can be a great way to save money. While the process can have its administrative headaches, it’s usually worth the wait (and work) at the end.