If youre a homeowner, refinancing your existing home loan may make sense for a variety of reasons. It could help you meet financial goals, lower your interest rate or change your mortgage to a better loan term or type.
However, it also can have costs, especially if you have to pay for upfront fees. It can take years to recoup these costs, so consider whether theyre worth it for you.
Costs
Refinancing your existing home loan can be a great way to save money, whether you want to lower your interest rate, shorten the term of your mortgage or tap your home’s equity for cash. But before you refinance, it’s important to understand what the costs of doing so will be.
One of the biggest costs associated with refinancing your home is the closing cost. This will generally total several thousands of dollars and can either be paid out of pocket at closing or rolled into the new loan and paid monthly.
Closing costs are different for each lender, so it’s important to shop around and get quotes from various lenders. These costs may include loan application fees, closing fees, a credit report fee, appraisals and other fees.
You should also be aware that you’ll likely have to pay for private mortgage insurance (PMI) if you have a conventional mortgage and your mortgage is greater than 80% of the value of your home. This fee can be between 0.05% and 1% of the loan amount per year, and it can add to your long-term costs.
Other fees you might be charged with a refinance are loan origination and documentation fees. These fees are typically around 1 percent of the new loan amount, so you should expect to pay them when applying for a refinance.
These fees can vary depending on your credit score and the type of loan you’re taking out, but they should not be an overwhelming expense.
In addition to the standard closing costs, you’ll often have to pay an appraisal and private mortgage insurance. These are both common and necessary when refinancing a mortgage, but you can often find ways to avoid them if possible.
Another important thing to consider when deciding if you should refinance is the time it will take to recover your costs. Generally, it takes about 25 months to recoup a mortgage’s closing costs, so you’ll have to wait at least that long before you start seeing savings.
Refinancing is a wise financial move for homeowners who plan to remain in their home for years and don’t face significant financial pressures. However, it’s not a good idea for homeowners who are looking to sell and move to a different house soon.
Benefits
Refinancing a home loan is a good option for many homeowners, including those who are facing a financial hardship or planning to buy a new home. However, you should not refinance your existing home loan without carefully considering all the costs and benefits associated with it.
The first benefit to consider is interest savings, as lower mortgage rates can reduce your monthly payments. To calculate your potential interest savings, use a mortgage calculator to factor in the current mortgage rate and other factors, such as your down payment, property taxes, and homeowners insurance.
Depending on your situation, refinancing a mortgage may also allow you to take cash out of the equity in your home to pay off debt, make improvements, or save for retirement. A cash-out refinance can be an attractive option for borrowers who need additional money to cover a large purchase or for those looking for a flexible payment plan, such as a 15-year or 30-year mortgage.
A cash-out refi can also give you the opportunity to remove private mortgage insurance (PMI), which is usually required if you dont have a 20 percent down payment on your home. In addition, a PMI reduction can help you save money by reducing your monthly payments.
You should also consider the amount of closing costs you will have to pay when you refinance your home. These are typically between 3% and 6% of the new loan amount, which can add up to significant amounts of money.
The amount of time it takes to recoup these costs, known as your break-even point, depends on how much you save. For example, if you save $200 per month by refinancing and your closing costs total $4,000, it would take about 20 months before youd have recouped the cost of your refinance.
You should also consider the fact that refinancing can increase your total debt load, as youll have to repay any extra money you put toward your mortgage. This can be a major negative if you are already struggling to afford your mortgage and have too much debt to qualify for a lower rate. If youre in a financial hardship, it may be wise to seek help from your loan servicer instead of refinancing.
Time to Refinance
When you refinance your existing home loan, you replace your current mortgage with a new one that has better terms and a lower interest rate. It can help you achieve a number of financial goals, like lowering your monthly payments or cashing out your equity. However, you should only consider refinancing if it will save you money and help your long-term financial situation.
A major consideration when deciding whether to refinance is your current mortgage rate. Most experts advise not to refinance until your current interest rate is at least 0.75% below the new rate you’ll receive in a new mortgage.
Another key factor to consider is your credit score. A high score can significantly improve your chances of securing a low interest rate. Most lenders require a credit score of 760 or higher to qualify for the best rates, according to Freddie Mac data.
If you have a credit score below 640, refinancing may be impossible or will be more expensive. You can improve your credit score by making on-time payments and paying down debt.
You’ll need to complete the same paperwork as you would with your first mortgage, including income verification, tax return information and appraisals. Lenders will also ask for documentation that proves you’ve made improvements to your home. This can include receipts for home repairs or upgrades.
Refinancing takes time, just as with the purchase of a new home. The average closing took 52 days as of December 2022, according to ICE Mortgage Technology.
Some lenders offer online processes that make it easier and faster to refinance a mortgage. Some of these processes, such as automated underwriting and online appraisals, can reduce the time it takes to close a refinance.
Your lender will likely charge a fee for the service, which could be anywhere from 1% to 5% of the principal balance of your new loan. These fees can be applied to both your original and refinanced loans.
The lender’s fee can be a significant part of your overall cost, so it’s a good idea to shop around before you commit to a refinance. This will allow you to compare rates from several lenders and find a lender that offers the lowest rate.
When is it Worth Refinancing Your House?
A homeowners best asset is their home, and refinancing your existing mortgage can be a powerful tool to help you save money and improve your financial situation. The key is to know when its worth it and what steps to take to get the most out of the process.
The answer to this question depends on a lot of factors, including your credit score and your overall financial situation. But generally speaking, its best to refinance when interest rates are low.
If youre looking to lower your monthly payments, a refinance can also help you lock in a lower rate and shorten the term of your loan, which can reduce the amount of interest paid over time. This can help you pay off your loan faster and build equity in your home.
But remember, a refinance is also a costly transaction. It can cost you 2% to 6% of the refinancing value in closing costs, so its important to weigh these costs against any potential savings you may enjoy from a lower mortgage interest rate.
Youll also need to document any improvements or updates you have made to your home. These can include pictures and receipts of work performed on the property, which will be important for an appraisal.
Your credit scores will play a big role in whether youre eligible for a mortgage refinance, so be sure to check your scores before you apply. In some cases, it might be better to wait until your credit scores are in a better place before you apply for a refinance.
In the meantime, its a good idea to talk to a lender before you refinance your mortgage, so you can get an idea of what kind of loan terms you can qualify for and whether theyre right for you. You can also contact a broker who will help you shop around for the best rate and loan terms.
A refinance can be an excellent opportunity to access your homes equity, which can be helpful if you need to pay for large expenses, such as a home improvement project or education costs for your children. It can also be an opportunity to consolidate debt, as long as the amount on your new loan doesnt exceed half of your annual income.
