How to Best refinance your mortgage 2022-2023
With interest rates rising, refinancing your mortgage now may only make sense if you want to add or remove a borrower from your loan, switch from an adjustable rate to a fixed rate — or a longer loan term — or take equity with cash. -out refi.
Refinancing a mortgage means that you get a new home loan to replace your existing home loan. If you can refinance into a loan that has a lower interest rate than what you are currently paying, you can save money on your monthly payment and the interest you pay over the term of the loan. You can also take advantage of cash-out refinancing, which allows you to tap into your home equity as essentially a low-interest loan.
When it makes sense to consider mortgage refinancing
As a rule of thumb, refinancing is worth considering if you can lower your interest rate by at least half a percent and you plan to stay in your home for at least a few years.
There are a variety of reasons for refinancing that can make financial sense, including:
- To lower your monthly mortgage payment by securing a lower interest rate
- While the cost of refinancing can be recovered over a reasonable period of time
- Get a shorter term, such as a 15-year loan to replace a 30-year mortgage, so you can pay it off faster and lower the total amount of interest you owe.
- Get a longer term, such as a 30-year mortgage to replace a 15-year mortgage, to make your monthly payments more affordable.
- To switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan – a smart move if you think rates are going to rise in the future, or if you just want predictable monthly payments.
- To leverage your home equity in a cash-out refinance
- Eliminate Private Mortgage Insurance (PMI) if you have built up at least 20 percent equity in your home
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How to refinance your mortgage
Step 1: Set a clear financial goal
There should be a good reason why you’re refinancing, whether it’s to lower your monthly payments, shorten your loan term, or draw out equity for home repairs or debt repayment.
What to consider: If you’re lowering your interest rate but restarting the clock on a 30-year mortgage, you may pay less each month, but pay more over the life of your loan. That’s because most of your interest charges are in the early years of the mortgage.
Step 2: Check your credit score and history
You will need to qualify for a refinance just as you needed to get approved for your original home loan. The higher your credit score, the better refinance rates lenders will offer you – and the better your chances of getting underwriters to approve your loan.
What to consider: Although there are ways to refinance your mortgage with bad credit, if you can, spend a few months building up your score before you start the process.
Step 3: Determine how much home equity you have
Your home equity is the total value of your home that you owe on your mortgage. To figure it out, check your mortgage statement to see your current balance. Then, check out online home search sites or get a real estate agent to run an analysis to find your home’s current estimated value. Your home equity is the difference between the two. For example, if you still owe $250,000 on your home, and it’s worth $325,000, your home equity is $75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and lower fees (and won’t have to pay PMI) if you have at least 20 percent equity. . The more equity you have in your home, the less risky the loan is to the lender.
Step 4: Shop multiple mortgage lenders
Getting quotes from at least three mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when is best to lock in your rate so you don’t have to worry about rates going up before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of the fee and whether it will be paid upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Get your paper in order
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documents ready before starting the refinance process can make it go more smoothly.
Step 6: Prepare for assessment
Mortgage lenders typically require a mortgage refinance appraisal to determine the current market value of your home.
What to consider: You’ll pay a few hundred dollars for an appraisal. Telling the lender or appraiser about any improvements or repairs you’ve made to your home after buying it can lead to a higher appraisal.
Step 7: Come to the stop with cash if necessary
The closing disclosure, as well as the loan estimate, will list how much money you need to pay out of pocket to close the mortgage.
What to consider: You’ll be able to finance the cost, which is usually a few thousand dollars, but you’ll pay more for it through a higher rate or total loan amount, which also means more interest in the long run. In most cases, it makes more financial sense to pay expenses upfront if you can afford to.
Step 8: Keep tabs on your loan
Store copies of your closing paperwork in a safe place and set up automatic payments to ensure you stay current on your mortgage. Some banks will even give you a lower rate if you sign up for AutoPay.
What to consider: Your lender or servicer may resell your loan on the secondary market immediately after closing or years later. That means you’ll owe mortgage payments to a different company, so keep an eye out for mail notifying you of any such changes.
Risks of refinancing your mortgage
Refinancing is not free
Just like your original mortgage, your refinanced mortgage comes with costs, such as origination fees, appraisals, title insurance, taxes and other fees. Even if a refi results in a lower monthly payment, you won’t actually save money until the monthly savings offset the cost of refinancing — and in the current rate environment, refinancing may not save you money at all. You’ll need to do some math (use this calculator) to figure out how many months it will take to reach this break-even point. If there’s any chance you’re going to move before then, refinancing might not be the best move.
You may incur a prepayment penalty
Some mortgage lenders charge you extra for paying off your loan early. A high prepayment penalty can tip the balance in favor of sticking with your original mortgage.
Your total financial expenses may increase
If you refinance for a new 30-year mortgage and you’re well on your way to paying off your original 30-year loan, you’re going to pay more in interest than you would have with the original mortgage, because you’re extending the loan. Loan Repayment Timing.
Refinance Vs. Cash-out Refinance: What’s the Difference?
When you refinance to reset your interest rate or term or switch from an ARM to a fixed-rate mortgage, it’s called a rate-and-term refinance. Rate-and-term refinancing pays off a loan with proceeds from a new loan using the same property as collateral. This allows you to lower your interest rate or shorten the term of your mortgage to build equity more quickly.
In contrast, cash-out refinancing gives you more cash than you need to pay off your existing mortgage, closing costs, points and any liens. You can use cash for any purpose. To be eligible for cash-out refinancing, you generally need to have more than 20 percent equity in your home.
An example of a rate-and-term refinance
Jessica gets a $100,000 mortgage with an interest rate of 5.5 percent. After three years, Jessica has a very good credit score and can refinance at an interest rate of 4 percent. After making 36 on-time payments, she still owes about $95,700.
In this situation, Jessica could save more than $100 per month by refinancing and starting with a 30-year loan—or, she could save $85 per month, while keeping the loan’s original payment date, paying off in 27 years, and That also reduced the total cost of the loan by about $8,000.
Better yet, in terms of savings on interest, refinance into a 15-year loan. The monthly payments will be higher, but the interest savings are huge.
An example of a cash-out refinance
Christopher and Andre owe $120,000 on the mortgage on a home valued at $200,000. That means they have 40 percent or $80,000 in equity. With a cash-out refinance, they can refinance for more than $120,000. For example, they can refinance for $150,000. With that, they’ll be able to pay off $120,000 on the current loan and have $30,000 cash on hand to pay for home improvements and other expenses. That would leave them with $50,000 or 25 percent equity.