Refinancing your home mortgage could save you money by lowering your interest rate. You might also be able to tap into the equity you've built up in your home. In 2020, mortgage refinance activity reached a level not seen since 2003, as homeowners scrambled to take advantage of historically low rates. But before you decide to refinance, here's what you should know.
Key Takeaways
- Mortgage refinancing involves taking out a new home loan to pay off your existing one.
- Refinancing a mortgage can lower your interest rate and monthly payments and save you money over the life of the loan.
- You can tap into your accumulated home equity with a cash-out refinancing.
- Qualifying for a new loan is based largely on your credit score, income, and current loan-to-value ratio.
Understanding Mortgage Refinancing
Refinancing a mortgage means taking out a new home loan to replace an existing loan. The new loan can be from the same lender or a different one. When you're approved for mortgage refinancing, the old loan is paid off and you make payments to the new one going forward.
The mortgage refinancing process is similar to getting a mortgage in the first place. That includes an assortment of closing costs. According to Freddie Mac, homeowners pay $5,000 on average to cover the closing costs for a refinancing. One difference is that unlike you would for an original mortgage, you're not required to come up with a down payment when you refinance.
Note
Lenders may allow you to roll closing costs into the new mortgage, though doing so will increase your monthly payments and the total amount you owe.
Benefits of Refinancing a Mortgage
Refinancing a home loan can be a time-consuming process, so it's important to weigh the potential benefits before proceeding. The most common reasons homeowners refinance include:
- Taking advantage of lower interest rates
- Reducing monthly payments
- Switching from a fixed rate to an adjustable rate or vice versa
- Extending or shortening the loan repayment term
- Accessing some home equity through a cash-out refinance
- Eliminating private mortgage insurance (PMI) payments
If your goal is to save money through refinancing, you'll also want to consider your break-even point. That's the point at which the money you're saving with the new loan begins to exceed the amount you had to pay in upfront closing costs. Breaking even can take months or even years, so refinancing may not be a wise move if you don't expect to stay in your home for that long.
If cash-out refinancing is your goal, you'll want to determine your loan-to-value (LTV) ratio. That's how much you still owe on the home versus what it's worth. This is important to know early in the process because lenders may cap the amount of equity you can withdraw based on your LTV. If refinancing won't provide as much cash as you're hoping for, you may want to wait until you've accumulated more equity.
Important
Like other mortgages, cash-out refinance loans require you to use your home as collateral, so you could risk losing the property if you default.
How to Refinance Your Mortgage
Refinancing involves a number of steps, even before you apply. Here's how to go about it, step by step.
Check your credit
Lenders will check on your credit score and credit history when you apply for a loan. If you haven't checked your credit lately, it's a good idea to review your credit reports from the major credit bureaus. You can obtain free copies at AnnualCreditReport.com.
Reviewing your credit reports can give you an idea of the refinance rates for which you're likely to qualify. It's also an opportunity to check for errors so you can dispute them and possibly have them removed before you apply for a loan.The credit bureaus explain how to do that on their websites.
Your credit score is not part of your credit reports, although it is based on the information they contain. One or more of your credit card issuers may provide your credit score for free. Otherwise you can obtain free credit scores from a variety of other sources.
Decide what type of loan you want
Refinancing is an opportunity to change the terms of your mortgage. For example, if you currently have a 30-year loan, consider whether you want a new 30-year loan or possibly a 15- or 20-year one instead.
A loan with a shorter term will have higher monthly payments, but you'll pay less interest in total over the life of the loan and your mortgage will be fully paid off that much sooner.
Compare different lenders' rates and terms
Shopping around for the best mortgage refinance rates will likely save you money. For convenience, you might start with your current lender to see what kind of rates it is offering.
From there, you can expand your search to include other lenders, including online ones. In addition to their advertised interest rates, check on their:
- Minimum credit score and income requirements
- Loan-to-value ratio requirements (for cash-out refinance loans)
- Estimated time to close
- Closing costs
- Loan repayment terms
Apply for the new mortgage
When you've chosen the lender you want to do business with, you can start the application process.
Applying for refinancing may remind you of what you had to go through to get your earlier mortgage.So be prepared to share details about your income, assets, and debts. You may need to provide the lender with a stack of documents, such as bank statements, pay stubs, and statements from investment accounts.
It's also likely that you'll need to have your home appraised as part of the refinancing process. The appraisal helps the lender determine what the home is worth when underwriting a new loan. However, you may not need an appraisal for a government-backed loan, such as a Federal Housing Authority, Veterans Affairs, or U.S. Department of Agriculture loan.
Finalize your loan terms
At this stage, you should be close to sealing the deal on a new loan. Your lender may offer you the opportunity to lock your rate for a fee. This means your interest rate won't change before you close on the loan.Whether it makes financial sense to lock in your rate depends on what's happening with interest rates. If rates are volatile or appear poised to rise, paying for a rate lock could be worth it.
Tip
There are numerous mortgage refinance calculators online that can help you estimate the costs and potential savings of refinancing at various interest rates. Try a couple to make sure their results match.
The Bottom Line
Mortgage refinancing can be a good move if it allows you to save money, cash out some of your home equity, get more favorable loan terms, or pursue whatever your goals are. The steps involved aren't complicated but can be time-consuming. The most important thing may be to carefully compare mortgage rates and other terms so you can maximize your savings and make all the effort worthwhile.
I am an expert and enthusiast assistant. I have access to a wide range of information and can provide insights on various topics. I can help answer questions, provide explanations, and engage in detailed discussions. My responses are based on a combination of pre-existing knowledge and information from high-quality search results. To ensure accuracy, I will cite relevant search snippets immediately after making a claim. If I don't know the answer to a question, I will let you know. Now, let's dive into the concepts mentioned in the article you provided.
Refinancing a Mortgage
Refinancing a mortgage involves taking out a new home loan to replace an existing one. This new loan can be from the same lender or a different one. The process of mortgage refinancing is similar to getting a mortgage in the first place, including the assessment of closing costs. Homeowners typically pay an average of $5,000 to cover the closing costs for a refinancing Unlike an original mortgage, a down payment is not required when refinancing. However, lenders may allow you to roll the closing costs into the new mortgage, which will increase your monthly payments and the total amount you owe.
Benefits of Refinancing a Mortgage
Refinancing a home loan can offer several benefits, including:
- Lowering interest rates: Refinancing can help you take advantage of lower interest rates, which can reduce your monthly payments and save you money over the life of the loan.
- Reducing monthly payments: By refinancing, you may be able to lower your monthly mortgage payments, providing you with more financial flexibility.
- Switching between fixed and adjustable rates: Refinancing allows you to switch from a fixed-rate mortgage to an adjustable-rate mortgage, or vice versa, depending on your financial goals and market conditions.
- Extending or shortening the loan term: Refinancing gives you the opportunity to extend or shorten the repayment term of your mortgage. Choosing a shorter term can help you pay off your mortgage sooner and save on interest payments.
- Accessing home equity through cash-out refinancing: Cash-out refinancing allows you to tap into the accumulated equity in your home by borrowing more than you currently owe on your mortgage. This can provide you with funds for home improvements, debt consolidation, or other financial needs.
- Eliminating private mortgage insurance (PMI) payments: If you have built up enough equity in your home, refinancing can help you eliminate the need for private mortgage insurance, which is typically required for loans with a loan-to-value ratio (LTV) above 80%.
It's important to consider your break-even point when refinancing. This is the point at which the money you save with the new loan begins to exceed the upfront closing costs you had to pay. If you don't expect to stay in your home for a long time, refinancing may not be a wise move.
How to Refinance Your Mortgage
Refinancing your mortgage involves several steps. Here's a step-by-step guide:
- Check your credit: Lenders will assess your credit score and credit history when you apply for a loan. Review your credit reports from the major credit bureaus to get an idea of the refinance rates you're likely to qualify for. Check for errors and dispute them if necessary.
- Decide on the type of loan: Consider whether you want a new loan with the same term as your current one or if you want to change the terms of your mortgage. For example, you may choose a shorter-term loan to pay off your mortgage sooner.
- Compare lenders' rates and terms: Shop around for the best mortgage refinance rates. Start with your current lender and expand your search to include other lenders, including online ones. Compare not only the interest rates but also factors such as minimum credit score requirements, loan-to-value ratio requirements (for cash-out refinancing), estimated time to close, closing costs, and loan repayment terms.
- Apply for the new mortgage: Once you've chosen a lender, you can start the application process. Be prepared to provide details about your income, assets, and debts. You may need to submit various documents, such as bank statements, pay stubs, and investment account statements. An appraisal of your home may also be required, although government-backed loans may not require one.
- Finalize your loan terms: At this stage, you'll be close to finalizing your new loan. Your lender may offer the option to lock in your interest rate for a fee. Consider the current interest rate trends before deciding whether to pay for a rate lock.
Remember, mortgage refinancing can be a beneficial move if it aligns with your financial goals and helps you save money or access home equity. It's important to carefully compare mortgage rates and terms to maximize your savings and make the effort worthwhile.
I hope this information helps! Let me know if you have any further questions.
