What Is Mortgage Refinancing?
Mortgage Refinancing means taking out a new mortgage to pay off your existing one. The goal is usually to get a lower interest rate, which can save you thousands over the life of the loan.
To refinance, you apply for a new mortgage and go through a process similar to when you originally bought your home. This means providing financial documents, a home appraisal, and going through a credit check.
If approved, the new lender pays off your old mortgage and you begin making payments on the new loan.
What Is The Reasons For Mortgage Refinancing?
The main reasons people refinance are:
1. Lower interest rate
If rates have dropped significantly since you got your original mortgage, you can potentially switch to a lower rate and save money. Every 1% drop in rate can save tens of thousands over 30 years.
2. Shorter loan term
You may want to refinance from a 30-year to 15-year mortgage to pay the loan faster and save on interest charges. Your payments will go up but you’ll own your home sooner.
3. Cash out
If your home has gained value, you can do a “cash-out” refinance to pull some of that equity out in cash. This can be a good option if you have high-interest debt to pay off or home improvement projects to finance.
4. Switch loan types
You can refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage to lock in a low, stable payment. Or go from a conventional to government-backed FHA or VA loan.
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When Is It a Good Time to Refinance Your Mortgage?
Below are the periods suitable to refinance your mortgage:
1. Rates Have Dropped At Least 1%
If interest rates have decreased by at least 1% from your current rate, it’s probably worth looking into refinancing. For example, if you have a $200,000 mortgage at 5% interest, dropping just 1% to 4% could save you over $40,000 in interest charges over 30 years.
2. You Plan to Stay In Your Home Long Term
Refinancing comes with closing costs, like appraisal fees, origination fees, and title charges. It can take several years of lower payments to recoup those costs through savings.
3. Your Credit Score Has Improved
If your credit score has increased significantly since you obtained your original mortgage, you may now qualify for a lower interest rate. Most lenders require a minimum score of 620 to refinance, but the higher your score, the lower your rate.
4. You Want to Switch to a Shorter Loan Term
Refinancing is also an opportunity to change your loan term, for example, switching from a 30-year to 15-year mortgage. Although payments will be higher, you can save tens of thousands in interest and own your home outright sooner.
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How to Determine if Refinancing Makes Sense for You
Here are some things to consider:
1. Your current interest rate
If interest rates have dropped significantly since you took out your original mortgage, refinancing to a lower rate could save you thousands of dollars over the life of your loan.
2. Your credit score
Your credit score plays a big role in determining your mortgage rate. If your score has improved since you first bought your house, you may now qualify for a lower interest rate. Check your current score and see where you stand. Scores over 740 will typically get you the best rates.
3. How long you plan to stay in your home
As a general guideline, if you plan to stay in your home for at least 3-5 more years, refinancing is probably worthwhile. If you may move sooner, the numbers may not add up.
4. Your equity
The more equity you have in your home, the lower your loan-to-value ratio will be, which can mean a lower interest rate. Most lenders want to see at least 20% equity for the best terms.
5. Current interest rates
Even if rates have dropped, they may drop further in the coming months. If rates are volatile, it may pay to wait and see if they decrease more before locking in your refinance.
6. Gather documentation
Provide documents to verify your income, employment, assets, and financial obligations to get approved for a mortgage.
7. Apply and lock in your rate
Once you find a good rate, apply for pre approval from a lender to lock in that rate. Provide the requested documentation to complete the application.
8. Finalize paperwork
Work with your lender to sign final paperwork to close on your new mortgage. Provide any final documentation requested.
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How To Find the Best Rates For Your Mortgage Refinancing
Compare rates from multiple lenders to find the lowest rate you qualify for. Online tools like NerdWallet, Credit Karma and Bankrate can help you compare rates from different banks and mortgage lenders without affecting your credit score. Look for the lowest rate from a reputable lender.
Acting fast and doing your research are key to getting the best deal when interest rates drop.
Mortgage Refinancing: Best Terms to Save Money
The best way to save money when refinancing your mortgage is by getting the lowest interest rate and shortest loan term possible.
Some of the best terms to save money includes:
1. Interest rate
Shop around at different banks and lenders for the lowest interest rate.
2. Points
Pay discount points at closing to lower your interest rate. Points are fees paid upfront to reduce your rate. For every point you pay, your rate typically drops 0.25%. Paying two points, about 2% of your loan amount, can save you thousands over the life of the loan.
3. Escrow and closing costs
Ask if the lender will waive or lower certain closing costs and escrow fees. Closing costs average 2-5% of the loan amount but can sometimes be negotiated.
Conclusion
Following these steps will help ensure you get the perfect combination of rate, term and closing costs to maximize your savings. Meet with mortgage lenders to discuss your options and crunch the numbers to determine if refinancing now makes good financial sense based on your situation. Lowering your housing costs over the long run can free up money for other financial goals.