You’ve heard that mortgage rates are at all time low’s and want to take advantage, but refinancing can seem like a time consuming complex task, but it doesn’t have to be.
In this article we’re going to show you how to refinance your mortgage quickly and efficiently.
What’s Your Goal?
Do you want to lower or payment?
Maybe you want to pay off your mortgage faster..
Usually when you decide to refinance your mortgage it’s to get a lower interest rate and monthly mortgage payment. However, there are other reasons people choose to refinance, such as refinancing out of an adjustable-rate mortgage into a fixed-rate, or to get a 15 year mortgage to pay off the loan faster.
Use a mortgage refinance calculator to see how much money you can save by refinancing your mortgage.
When to Refinance
Just because you’re able to refinance your mortgage doesn’t mean you should. If you’re trying to lower your interest rate but your credit score isn’t very good you would benefit from working on your credit before you refinance.
Here are some situations when it makes sense to refinance your mortgage loan.
Consolidating debt is a common reason homeowners choose to tap into their home’s equity but it may not be the best idea. It really depends on the type of debt your planning on paying off.
If you have high interest credit cards you wish to consolidate, cashing in your equity to pay unsecured debt is not ideal. Think about it. If anything happens and you can no longer afford your credit card payments, it may hurt your credit score, or you could get sued.
However, if you can no longer afford to pay your home equity loan payments you will lose your home! Paying off unsecured debt with debt that is secured by your house is a huge gamble.
If you have credit card debt you want to pay off you should first consider a balance transfer or personal loan.
Refinancing into a 15-year mortgage term
Refinancing a 30-year mortgage into a 15-year mortgage loan term is becoming very popular in recent years. Primarily, because you can pay off your loan much quicker, save tens of thousands of dollars in interest and get the lowest possible mortgage rate.
Your mortgage payment will be higher with a 15 year loan but a larger percentage of your payment is going towards the principal balance.
Refinancing out of an adjustable-rate mortgage
Adjustable rate mortgages have an initial period (usually 5 years) of a low initial rate, after the period is over the rate will increase each year.
If you have an adjustable-rate mortgage loan chances are you are going to need to refinance your mortgage at some point. You can refinance into another adjustable-rate loan, or lock-in a low fixed rate.
If you have an FHA mortgage with a loan-to-value ratio of 78% or lower, then you can refinance into a conventional mortgage to eliminate mortgage insurance.
Maybe your home’s value has increased since you closed on your loan and you believe the new market value will allow you to drop PMI, then you should definitely speak to a lender about your options.
Mortgage insurance costs between 0.50% and 1% of the loan amount annually. Removing PMI from your loan could potentially save you thousands of dollars per year.
Pros and Cons of Refinancing
There are many benefits of refinancing your mortgage, as well as a few drawbacks. In the end you will need to weigh the pros and cons to decide if it’s in your best interest to refinance your loan.
- Lower interest rate
- Change to a shorter, or longer loan term
- Refinance out of an adjustable-rate mortgage into a fixed-rate
- Cash out the equity in your home
- Lower your monthly payment
- Time consuming
- Lots of documents are required
- High closing costs
- May increase monthly payment
- Lose equity in your home if doing a cash-out or home equity loan
Getting the Best Refinance Rate
On a $200,000 mortgage loan a half a percentage point can lower your monthly payment by $80 per month. Making sure you are getting the absolute best rate possible is important to saving the most money on refinancing.
Maximize Your Credit Score
Your FICO score has the biggest impact on the interest rate you’re offered on a loan. Because of this you need to make sure your credit score is as high as possible before applying for a refinance. One of the easiest ways to quickly increase your credit score is to pay down your credit card balances. For more credit tips check out our article on how increase your credit score in 30 days.
Shop Multiple Lenders
Refinancing a mortgage is never free, lenders charge closing costs that can be as much as when you purchase a home. Not all lenders will charge the same fees or interest rates the same interest rate which is why you should always get loan quotes from 3-4 mortgage lenders.
Credit Score Requirements
The minimum credit score required to refinance will depend on your lender and the type of mortgage loan you’re getting. If you have an FHA mortgage and are trying to do an FHA streamline refinance the borrower requirements are less strict than if you’re refinancing your conventional loan.
The majority of lenders will want borrowers to have at least a 620 credit score before refinancing. If your score is any lower than a 620 then refinancing probably won’t help you that much because the rate you will receive will be very high. You would be better served by working on improving your credit score before applying.
When Can I Refinance My Home?
Most lenders and banks will require that you wait at least 12 months from the closing date before you are eligible refinance. The waiting period will vary from lender to lender.
However, if you are doing a streamline refinance with an FHA or VA loan the waiting period is just 210 days.
Should I Refinance with my Current Mortgage Company?
Refinancing with your current lender will be less time consuming and require less documentation because they may not require a new title search or home appraisal. It may even be cheaper because there are certain items they will have already or don’t need that a new lender may.
You should still shop around with other lenders to make sure your current lender is giving you the best deal and lowest interest rate.
Even if you only want to refinance with the original lender you should still get loan estimates from other lenders. You can use those estimates to help you negotiate a better deal with your mortgage company.
FHA Streamline Refinance
If you have an FHA loan then you may qualify for an FHA streamline refinance. This is a great way to lower your interest rate with a streamlined refinance that doesn’t require all the paperwork that traditional refinancing does.
You must wait at least 210 days since the day you closed on your mortgage to be eligible. Streamline refinancing is much easier because lenders are not required to verify income or have the home appraised.
FHA Streamline Eligibility
- Must have an FHA insured mortgage
- 210 days since closing
- Current on mortgage
- No more than 1 late payment in the past 12 months
- No home appraisal required
- Lower payment by $180 on average
- No income verification
- Less documentation required
- Take advantage of all time low interest rates
- Lower MIP rates
Home Affordable Refinance Program
After the housing market crash in 2008, many homes values plummeted. In an effort to slow down the foreclosure rate the Obama Administration created the HARP program. The HARP program allows homeowner with an underwater mortgage to refinance their loan to get a lower monthly payment.
In order to be eligible for HARP you must have a mortgage owned by Fannie Mae and Freddie Mac. Fannie and Freddie own over 90% of mortgages today so there’s a good chance yours is too.
There is a difference between your mortgage servicer and the owner. While you may make your payments to Wells Fargo or Mr. Cooper Fannie Mae or Freddie Mac may still own the loan itself.
HARP Eligibility Guidelines
- Mortgage must of been funded on or before May 31, 2009
- How appraisals required to determine the loan-to-value ratio
- Mortgage must be owned by Fannie Mae or Freddie Mac
- Must be approved using Fannie Mae or Freddie Mac guidelines
Cash-Out Refinancing and HELOC Loans
You can tap into the equity in your home to get cash out to repair or renovate your home or consolidate debt. Typically you are able to borrow up to 80% of the market value of your home.
With a cash-out refinance you will move your existing loan, if you have one, to the new lender and get additional cash up to a 80% LTV ratio. You will have a single payment for both the loan and the additional cash you receive.
Rates with a cash out refinance are similar to what you would receive on a new purchase. This makes them cheaper than personal loans in most cases. Credit score requirements are often lower than HELOC loans.
Home Equity Loans and HELOC
A home equity loan, or HELOC is an additional loan that requires a separate payment. The second lender will take a second lien holder position. As with a cash out refi, you can borrow up to 80% of the LTV ratio of the property.
Some mortgage lenders offer a no-cost refinance which means there are no closing costs. Be careful about these “no-cost refinancing offers because sometimes the lender will make up for it by charging additional interest. This is why it is a good idea to shop different lenders to compare the rates and fees they charge.
Refinance Closing Costs Breakdown
When you refinance your mortgage you will typically have to pay closing costs. Closing costs are between 1%-3% of the loan amount on average.
- Loan origination fee
- Processing fee
- Discount fee
- Credit report
- Underwriting fee
- Wire transfer
- Flood certification
- Tax services
- Appraisal fee
- Recording fee
- Homeowners insurance premium (first year)
- 6 months property tax reserves
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.