Do you ever wonder if you’re paying too much for your mortgage?
Many homeowners could save money by refinancing their mortgage into a lower rate and payment.
You may want to refinance your mortgage but not want to go through the hassle.
In this article we’re going to take an in-depth look at refinancing so you can see for yourself if you could benefit from refinancing your loan.
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What is Refinancing?
When you refinance a mortgage, you are replacing your current loan with a completely new loan with new terms. You can refinance your loan with your current lender, or with a new company.
The new loan will have better terms that will save you money over the course of the loan.
When is Refinancing a Good Idea?
There are a few different reasons you may be wanting a mortgage refinance. Maybe you are looking for a lower interest rate, or to drop mortgage insurance. Here are some situations in which it makes sense to refinance.
Lower your Interest Rate
If your current mortgage has an interest rate above 5%, then you may be able to get a lower rate by refinancing.
Interest rates are still hovering just above all time low’s so it’s a great time to take advantage of the low rates.
Even if you are able to lower your rate by just a half a percentage point, it can add up to tens of thousands of dollars in savings over the course of your loan.
For example: On a $250,000 mortgage with a 5% interest rate your monthly payment is $1,342. By refinancing to a rate of 4.5% you can lower your payment to $1,267, a monthly savings of $75, which adds up to almost $30,000 in savings over the life of the loan.
Lower Your Mortgage Payment
You can lower your monthly mortgage payment quite a bit by refinancing your loan and resetting the term.
If you have had your mortgage for a few years and paid the balance down, when you refinance into another 30 year loan you are stretching that balance over 30 years again which results in a lower monthly payment.
If you can also get a lower interest rate you can lower that payment even more.
Get Rid of Your Mortgage Insurance Premium
If you have an FHA loan then you’re paying mortgage insurance for the life of the loan, regardless of the loan-to-value ratio. By refinancing out of an FHA loan into a conventional loan you can drop PMI as long as your LTV ratio is 78% or lower.
Mortgage insurance on FHA loans is usually between .50% – 1% of the loan amount. By dropping PMI you can save thousands of dollars per year.
Shorten Your Loan Term
A 15 year mortgage is becoming a popular option. A 15 year fixed-rate mortgage has an interest rate that is almost a full percentage point lower than a 30 year loan.
If you are looking to pay off your mortgage as fast as possible and save as much as you can, then refinancing to a shorter loan term can save you tens of thousands of dollars.
Get Cash using the Equity in Your Home
If you have equity built up in your home you can get a loan using your equity as collateral. A home equity loan or home equity line of credit (HELOC) can get you up 80% of your homes value in cash.
You can use the money to pay off high interest credit card debt, make home improvements, or just about anything else you want to. Home equity loans have low rates and a re-payment period of 3-10 years.
Change Your Loan Type
If you have an adjustable-rate mortgage your interest rate will increase after the initial low rate period ends. It’s a good idea to refinance into a fixed-rate mortgage to lock in a low mortgage rate.
Tips to Refinancing Your Mortgage
Check Your Credit
Your credit rating will be a big factor in whether or not you should refinance your mortgage. The higher your credit score, the better interest rate you will get.
You can get a free copy of your credit report once per year on the site www.annualcreditreport.com
There are several websites that allow you to check your credit score for free. These sites are completely free and do not ask for your credit card information.
Improve Your Credit Score Before Applying
Because your interest rate is directly tied to your credit score, it’s a good idea to increase your score before applying to refinance your loan.
The easiest way to increase your credit score quickly is to pay down your credit card balances.
Your credit utilization ratio is the amount of available credit you have used up. Try to pay your balances below 15% of your credit limits to maximize your score.
Shop Rates and Offers with at Least 3 Lenders
The loan terms you get will be different with each lender. Some lenders charge certain fees that others don’t.
In order to make sure you’re getting the most competitive rate and terms you need to get a loan quote from at least 3 different lenders.
You can use these loan quotes to help you further negotiate to get the absolute best deal on your loan.
Refinancing Your Mortgage with Bad Credit
Having poor credit is does not necessarily mean you can’t refinance your home loan. There are some programs and mortgage companies that can refinance your mortgage with bad credit.
Here are some typical minimum credit score requirements by refinance type.
- FHA Streamline Refinance – 620 credit score
- Traditional Refinance – 620 credit score
- Home Equity Loan and HELOC – 680 credit score
- Cash-out Refinance – 640 credit score
- 203k Refinance – 660 credit score
Types of Refinance Programs
Rate and Term Refinance
A traditional refinance is commonly referred to as rate and term refinancing. It’s simple, refinance your mortgage to get a better interest rate and new term.
This is the most common type of refinance used by homeowners who just wish to take advantage of todays low interest rates and get a lower monthly payment. In order to refinance a mortgage it must produce a net tangible benefit.
- 640+ credit score
- Current on your mortgage payments
- No late payments in the past 12 months
- Documented income
If you have equity in your home and need cash then you would get a cash-out refinance.
In order to qualify for a cash-out refinance loan you will need to have at least a 30% equity stake in the property.
The new loan can be for up to 80% LTV with the extra given to you as cash.
For example: Let’s say your home is worth $200,000 and your loan balance is $100,000.
The LTV ratio is 50%. You would be able to get $40,000 cash back with a total loan balance of $160,000, or 80% LTV.
- 640 or higher credit score
- Must be current on your mortgage payments
- Have at least a 30% equity stake in your home
Cash-out Refinance Pros and Cons
- Loan rates very low compared to other types of loans
- Lower the rate on your mortgage
- Use cash to pay off high interest debt
- Renovate your home
- Make expensive home repairs
- Payments may be tax deductible
- A single loan payment
- High closing costs
- Reduces the amount of home equity you have
- Less favorable loan terms
- Could face foreclosure if you cannot make the new higher payment
You may hear of a cash-in refinance, which is the complete opposite of cash-out refinancing.Homeowners do a cash-in refinance to lower their mortgage balance.
Am FHA streamline refinance is a program available for home owners with an FHA mortgage loan.
As there name suggests streamline refinancing is a quicker process that eliminates a lot of the paperwork and documentation typically required when getting a loan.
- Must have an FHA, VA, USDA home loan
- Wait 210 days from the closing date
- No late payments in the past 6 months
- No more than one late payment in the past 12 months
- FICO score of 620 or higher
FHA Streamline Refinance Program Benefits
- Home appraisal is not required
- Lower monthly payment
- Income does not need to be verified
- Quick and easy process
- Lower interest rate
- Reduce your MIP rate
- No loan-to-value limits (You can be underwater on your mortgage)
If you have a VA loan there is a VA streamline refinance loan you can apply for.
Home Equity Loan and HELOC
A home equity loan, or home equity line of credit (HELOC) are similar to a cash-out refinance in that you are able to get cash using your home’s equity.
The difference is that home equity loans are a second loan on the property and do not replace the primary mortgage.
A HELOC works similar to a credit card. You will have a revolving line of credit that you pay back monthly. You can borrow month, pay it back, then borrow again, like a credit card.
Because home equity loans are a second loan on your home, the credit requirements are more strict. Most lenders require a minimum 680 credit score.
Home Equity Loan Pros
- Get cash to pay off high interest debt
- Low interest rate compared to other types of loans
- Use cash to increase your home’s value
Home Equity Loan Cons
- Lose equity in your home
- Could face foreclosure if you’re unable to make payments
Home Affordable Refinance Program HARP
In 2010 the Obama Administration created the HARP program to help homeowners who were underwater on their mortgage save money by refinancing their home.
Even if you owe more money on your mortgage than your property is worth, you may be able to refinance with the HARP program. However, you need to hurry. The HARP program is scheduled to end in December of 2018.
- Fannie Mae or Freddie Mac must own your loan
- Loan sold to Fannie or Freddie on or before to May 31, 2009
- Must be current on your mortgage
- No late payments in the past 6 months
- No more than one late payment in the past 12 months
- Must be for your primary residence
- Must be first time using HARP, cannot use the programs twice
Refinance Frequently Asked Questions
How soon can you refinance a mortgage loan?
You can refinance your loan immediately , however, your current lender will not likely allow you to refinance before the loan is 180 days old. You would have to refinance with a new lender.
How much does it cost to refinance?
A refinance loan will have closing costs just like any other home loan. Origination fees and a home appraisal will be charged, on average you will pay between 2%-4% when refinancing your mortgage.
How long does it take to refinance?
According to Fannie Mae’s report in 2017 the average time it took to complete a refinance was 46 days.