How To Refinance My Mortgage? -The Complete Guide To Mortgage Refinancing
“How to refinance my mortgage?” is a valid question, but also should be “when” and “how” to refinance my mortgage to get the most out of it.
When people talk about refinancing a mortgage, they mean paying off their current loan and replacing it with a new one. And even when it sounds pretty simple, there are some things you need to know before deciding if refinancing is for you.
How Does Refinancing Work?
The process is pretty similar to getting a mortgage for the first time. That means you need to go shopping for mortgage options and start considering what each one of them has to offer. But most importantly you need to check which one offers benefits over your actual mortgage.
For instance, if you have been paying your mortgage on time, your credit score may be better now. That will give you access to better interest rates and maybe to some other benefits.
You must pay special attention to closing costs and terms. Sometimes getting a lower monthly payment will translate into extended mortgage periods, and if you also need to pay a high upfront cost, the whole deal may not be worth it.
Why Refinance My Mortgage?
There could be plenty of reasons to consider when refinancing your mortgage. Depending on your lending terms, fluctuation in interest rates, and current market conditions, you can lower your payments, shorten the term of your mortgage, or even use the equity of your house as an emergency fund in case you need it.
Refinancing costs are usually around 3% to 6% of your principal, but it also implies some other expenses, such as an appraisal, title search, and application fees.
The most common reasons people refinance are:
● To Get A Better Interest Rate
Financial experts advise refinancing your mortgage only if you can reduce the interest rate by at least 2%. Although, for many lenders, it’s still a good deal when they can lower them by 1%.
Reducing interests can help you save money on your monthly payments, but also the whole mortgage. It also increases the rate at which you build home equity.
● To Get Shorter The Loan Term
As a homeowner, sometimes you can refinance your mortgage if the interest rates fall. Sometimes those refinancings can translate into way shorter mortgage terms. A drop from 9% to, let’s say 5.5%. Can reduce your term up to 15 years.
● To Switch Between Adjustable And Fixed Rate Term
Adjustable rates tend to start offering lower interest rates than fixed rates, although sometimes periodic adjustments can result in higher rates in the long run. When that happens, refinancing can be an effective way to lower those rates and eliminate concerns about future increases.
● To Cash Out A Portion Of Your Home Equity
Years after you get your first mortgage, you have built equity. While this is not exactly the most financially wise decision, it can help you through rough times such as an emergency or a divorce.
Types Of Refinancing
Refinancing loans are divided into three types:
● Rate-And-Term Refinance Loan
This type works great to switch from an adjustable to a fixed rate and it also can help you lower your monthly payments. You can change the interest rate and/or loan term, with no changes on the monthly amount you currently pay.
● Cash-Out Refinance Loan
This is the best option when you need financing for a project or to cover an emergency. Keep in mind you will be cashing out part of your house equity, so don’t take the decision lightly.
Cashing out usually means getting higher monthly payments at higher interest rates.
● Cash-In Refinance Loan
Contrary to the last one, this type of refinancing means you are adding extra money to your mortgage, which translates into a lower balance, fewer monthly payments, or a better interest rate. This type of refinancing can help you restore your mortgage if it has been neglected in the past, but it also can be helpful to get rid of any private mortgage insurance (PMI) in your policy.
Streamline Refinances
There are refinancing programs that let you bypass some verification processes. They are called “streamline” because they tend to be easier and faster to get than the rest. Lenders that offer this type of refinancing waive some parts of the typical process such as credit score checks, income verifications, or home appraisals.
If your current mortgage is backed by the Federal government -like FHA, VA, or USDA loans-, chances are you have access to a streamlined refinance. Here’s what you need to know
● FHA Streamline Refinance
It usually waives credit score verification and you don’t need a home appraisal. Although this type of refinancing loan is usually low, borrowers need to pay for upfront mortgage insurance and annual insurance premiums, which can impact your finance.
You must have a healthy payment history and prove you’ll get a “net tangible benefit” -that means the refinance loan will have a lower rate or lower payments- over your actual loan.
There is no cash-out refinance loan via the FHA Streamline Refinance program. However, the FHA does back cash-out refinancing loans, although it has more requirements.
● VA Streamline Refinance
Only borrowers with a VA-backed mortgage can access a VA Streamline Refinance. This mortgage is better known as the VA Interest Rate Reduction Refinance Loan (IRRRL), and it waives income, asset, and credit score verifications.
And just as in the one above, you are required to show the refinance will result in significant savings or a considerable term reduction.
● USDA Streamline Reference
USDA Streamline Refinance program is available for borrowers who already have a USDA Mortgage. As you know USDA mortgages are available only in certain rural areas. This program does not verify income assets or credit scores. Borrowers who use this program are bound to a 30-year fixed interest rate.
● Fannie Mae’s High-LTV Refinance Option (HIRO)
This option allows borrowers with no, or even with negative home equity to get a loan with lower present rates.
To qualify, you need to have a Fanie Mae-backed loan, and your first mortgage must be from October 1st, 2017, or later.
Costs Of Refinancing Your Mortgage
Besides an appraisal, title search, and application fees, there are several other expenses in the refinancing process to keep in mind. Starting with an upfront 3% to 6% of your principal.
Some of the factors at play to determine the cost are
● The size of the loan
● Lender terms and conditions
● State laws and regulations
● Your credit score
● Your home equity
There are also other expenses you need to cover when thinking about refinancing, such as:
● Application fees
● Origination fee
● Credit report fee
● Home appraisal
● Home inspection
● Flood certification
● Title search and insurance
● Recording fee
● Reconveyance fee
If you are thinking about refinancing your mortgage, one of the first things you need to do is weigh all the costs and consider the new monthly amount you will be required to pay.
You can end up saving a lot of interest or significantly shortening your mortgage period. Although not paying attention to the whole details may end up backfiring.
You can get an estimate of your refinancing costs and new monthly payments with this mortgage calculator.
Things To Avoid When Refinancing Your Mortgage
Refinancing can be helpful under certain conditions, but it also can carry extended periods or increased interest rates if you don’t choose correctly. These are some of the risks you are exposed to when refinancing your mortgage:
● Longer terms and higher interests
● Higher monthly payments, since loan amounts tend to be bigger
● If you don’t pay enough attention, you could end up getting worse terms and conditions in your new loan
Refinancing Mortgages And Credit Score
Any type of loan you get can affect your credit score for better or for worse, depending on how you manage it. Keeping an eye on your current mortgage and other types of loans is always the wisest decision.
● Hard Inquiries
Whenever you apply for a new loan or credit line, a hard inquiry appears on your credit report. The impact of said inquiries tends to be minimal, however, they can temporarily affect your scores until you prove you can carry on with your newly acquired credit obligations.
Your score can also drop if you have had several inquiries across many weeks or months.
If you have a good credit score, you just need to keep it up to avoid any damage. However, if you are already in a difficult credit situation, missing a payday or making the wrong move, can affect you widely the next time you need any type of loan.
7 Most Frequently Asked Questions About Refinancing
1. Why To Refinance My Mortgage?
There could be plenty of reasons to consider refinancing your mortgage. You can lower your payments, shorten the term of your mortgage -depending on your lending terms, fluctuation in interest rates, and current market conditions-, or even use the equity of your house as an emergency fund.
People refinance their mortgages for some of these reasons:
● To get a better interest rate
● To shorter loan terms
● To switch between fixed and adjustable rates
● To cash out a portion of their home equity
2. How Soon Can You Refinance Your Mortgage?
You need to have a mortgage running at least for 7 months before you can ask for a refinancing. Although you can have a maximum of one late payment, it will be easier to get a refinancing loan if all your payments have been made on time.
3. What Are Today’s Mortgage Refinance Rates?
Mortgage rates change all the time and there are also external factors that can affect the total refinancing cost, such as your credit score, payment history, and even the lender or state laws. You can use this mortgage calculator to get a pretty good estimate about refinancing.
4. How Much Does It Cost To Refinance My Mortgage
Keep in mind upfront costs are not the only thing to consider when refinancing. You also need to make sure your new monthly payments and loan terms are comfortable with your finances.
Some of those extra costs are:
● Application fees
● Origination fee
● Credit report fee
● Home appraisal
● Home inspection
● Flood certification
● Title search and insurance
● Recording fee
● Reconveyance fee
5. Does a Home Equity Loan Affect My Credit Score?
Yes, but no more than any other loan or debt you carry. When you apply for a new credit or loan a hard inquiry appears in your credit report. Although these inquiries tend to be minimal, they can temporarily affect your credit.
Remember, just like with any other debt, any late or missing payments will affect your overall credit score, making it difficult to get approved the next time you apply for a loan.
6. What Is A Streamline Refinance?
They are called “Streamline” because they tend to be easier to get and faster to approve. These programs are available mainly for borrowers with FHA, VA, or USDA loans, who can prove their finances will be positively affected by a payment or term reduction.
7. Can I Use My Home Equity Without Refinancing?
You can use a cash-out refinance loan to tap on your home equity, but you also can get a Home equity loan or Home equity line of credit (HELOC) without refinancing your mortgage. If you want to know more about how to get a Home Equity loan, here’s everything you need to know [“Home equity loans”]
Closing
Refinancing your mortgage can be a very effective way to shorten your loan term or lower your payments, but they can also become helpful as an emergency fund if you need it.
Remember to crunch your numbers and make sure your new payments won’t become a problem in the upcoming years.
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