Homeowners refinance their home loan to get a lower mortgage rate and monthly payment.
It can save you thousands of dollars, but it’s not for everybody.
For some borrowers refinancing isn’t worth the hassle, or it’s better to wait.
In this article, we are going to go over some situations in which you should refinance your mortgage.
Rate Search: Check Current Refinance Rates
How Refinancing Works
When you refinance your home, you are replacing your current mortgage loan with a new one. The new loan has a new term, interest rate, and monthly payment.
You can refinance your mortgage with any lender you want. You do not need to refinance with your current mortgage company. While that may be the quickest and easiest way, you may be able to get better loan terms with a new lender.
Just like when you purchase a home, you can expect to pay closing costs to refinance your home. On average, closing costs are between 1%-4% of the loan amount.
Use a refinance calculator to see if you still end up saving money after factoring in all the fees. There is a break-even point, which is the number of months, or years it takes for the monthly savings to cover the initial expenses.
9 Reasons You Should Refinance Your Home
1. Your Rate is Higher than the Current Mortgage Rates
Interest rates are increasing slightly but are still at historic lows. If you have a mortgage rate that’s higher than the current average rates being offered on a mortgage, you can save a lot of money.
A reduction in your rate by just a half a percent can save you tens of thousands of dollars in interest over the life of the loan.
Check out our article on how to get the best refinance rates.
2. You are Struggling to Make Your Payments
If you’re struggling financially and you’re barely able to make your monthly mortgage payments. Refinancing your home loan will not only get you a lower rate, but you can also save hundreds of dollars on your monthly payment.
It’s essential to refi before money gets too tight because you will not be able to refinance if you are behind on your mortgage or have any missed payments in the past six months.
Mortgage refinancing resets the loan term. If you originally got a 30-year mortgage and after ten years, you refinance into another 30-year mortgage. The monthly payment will decrease because the loan amount is lower.
3. You’re Eligible to Remove Mortgage Insurance
If you have a conventional loan, PMI will drop off when the loan-to-value ratio on your loan reaches 78%.
But if you have a Government-backed home loan, such as an FHA or USDA loan, which most first-time homebuyers have. Mortgage insurance may be required for the life of the loan, regardless of the LTV ratio.
However, if your FHA loan is at 78% LTV ratio or below, you can refinance into a conventional mortgage and not have to carry PMI, which will save you thousands each year.
4. You Have an Adjustable-Rate or Balloon Mortgage
An adjustable-rate mortgage comes with a low-interest rate that is fixed for the first few years. After which the rate increases each year.
If your initial interest rate is set to adjust soon, it’s a good idea to refinance into a fixed-rate mortgage to lock in a low rate to avoid paying a higher rate than you need to.
5. You have Home Repairs or Renovations You have to Make
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) is a second mortgage on a home.
Home equity loans are to be used if you have significant repairs or renovations that need to be done in your home. You will be able to borrow up to 80% of the value of your home.
A second mortgage has a shorter loan term between 5-10 years. The interest rate you receive is going to be a little higher than the current mortgage rates.
A cash-out refinance is similar to a home equity loan, but instead of having two, you would just have one. A cash-out refinancing comes with a better interest rate and is repaid over the course of the loan term.
6. Your Credit Score Has Increased Significantly
Your credit rating is directly tied to the mortgage rate you’re offered. The lower your FICO score, the higher the interest rate you’ll receive.
If your score has dramatically improved since you closed on your loan, you should qualify for a lower mortgage refinance rate.
7. Your Income Increased and You Want to Pay Off Your Mortgage Faster
If your financial situation has improved and you wish to pay off your mortgage loan faster.
Refinancing into a 15 year fixed rate mortgage will not only help you pay off your loan sooner. But they come with a lower refinance rate, as much as 1% lower than a 30-year refinance.
A 15-yr mortgage will have a higher monthly payment. Make sure you’re able to afford the new mortgage payment.
8. You’ve Paid Your Jumbo Loan under the Conforming Limit
A jumbo loan is a non-conforming loan that exceeds the conventional loan limits. Jumbo loans are difficult to qualify for and often come with higher interest rates than a traditional mortgage.
If you have paid the home loan balance below the conventional loan limit, which is $453,100 in low-cost areas and $679,650 in high-cost areas of the country. You can refinance your jumbo mortgage into a conventional loan and get a lower interest rate and better loan terms.
9. You’re Close to Retiring and Still Have a Mortgage
If you plan on retiring in the near future and you still have several years left on your current mortgage. You may want to refinance your home loan to take advantage of a lower rate and reduce your monthly payment.
As your income decreases in retirement, your mortgage payment stays the same. This concrete a financial strain for many retired homeowners. Refinancing into a lower rate helps free up your cash flow so you can live more comfortably.
If you’re at least 62 years old and you have home equity, you can get a reverse mortgage. A reverse mortgage eliminates your mortgage payments; instead, a lender pays the borrower monthly payments.
10. You’re Eligible for a Streamline Refinance
If you have a Government-backed mortgage, such as an FHA or VA loan, you may qualify for a streamline refinance. The process of a streamlined loan is much quicker and easier than a traditional refinance.
It allows FHA and VA borrowers to refinance their mortgage into a lower interest rate and payment without all the documentation. Income does not even need to be verified, and in some cases, they may not check your credit.
Compare Multiple Mortgage Lenders
To make sure you’re receiving the best deal, you should get a loan estimate from at least 3-4 lenders. The refinance rate, loan terms, closing costs, and fees will vary lender to lender.
Getting an estimate from more than one lender is an excellent way to negotiate for lower closing costs and a better mortgage rate.
Improve Credit Before Applying
Your credit score will determine the rate you receive. Work on improving your credit rating as much as possible before you apply.
Pay Down Your Credit Card Debt
Paying down the debt on your credit cards not only lowers your debt-to-income ratio. But it also improves your score. Your credit utilization ratio is the amount of debt compared to the credit limits on your credit cards, and it accounts for 30% of your score.
Pay down your balances to at least 15% of their credit limit. This will maximize your credit score and help you get the best rates.
Pay Your Bills on Time
The most significant factor in your credit score is your payment history, and it accounts for 35% of your FICO score. Late payments and collection accounts have a significant impact on your credit rating.
Set up auto bill pay for credit cards and other bills if you regularly forget to make payments on time. The longer you go without any negative items, the higher your credit score will be.
Avoid Using Home Equity for Debt Consolidation
A home equity loan or cash-out refinance should only be used on the home itself, whether it’s to make expensive home repairs or upgrades and renovations that increase the home’s market value.
However, when you use an equity loan to consolidate debt, such as high-interest credit cards or student loans. You’re simply moving the debt around, but now that debt is secured by your home.
If you’re unable to make your new higher monthly mortgage payment, you could face foreclosure. But if you are unable to pay credit cards or other unsecured loans, at least your assets, like your home, are safe.