Refinancing your mortgage could save you hundreds of dollars. Bill Oxford / Getty Photographic
Home mortgage loans are one of the most prevalent forms of consumer debt in the United States, with more than $1.6 trillion in new loans originated in 2021 alone.
Fannie Mae anticipates that this figure will continue to rise in 2018. According to Experian, the average outstanding balance on a house loan in the United States is currently $220,380. Clearly, you are not alone if you belong to this group.
Numerous of these mortgage loans have periods of up to 30 years. Whether you have a short- or long-term loan, it is essential to understand that modifications are possible.
Two decades from now, you may not be in the same financial position as when you initially purchased your home, and the loan you took out may no longer be your best option. This is where refinancing mortgages comes into play. Before proceeding with a refinance, you should look around for a lender that meets your requirements.
What is a refinance mortgage?
Refinancing is the process of replacing an existing mortgage loan with a new mortgage loan. Your new loan – which can originate from the same lender or a different lender – will be used to pay off the old mortgage, which will then be totally satisfied and the account closed. You are then subject to the terms of the new mortgage loan until its complete repayment (or refinanced again).
In some aspects, the refinance process will feel comparable to the original mortgage loan process; nevertheless, for most borrowers, it is more simpler and quicker. You will be required to apply and undergo many of the same underwriting requirements as when you first purchased your house, including verification of your credit history, income, and debt load. If authorized, the lender will provide loan terms and repayment choices from which to pick.
Plan your timeframe accordingly. The entire process might take anything from a few days to a month or more, depending on your house, financial status, and the type(s) of loan(s) involved. You should compare mortgage lenders to determine their interest rates and loan terms and to guarantee you are receiving the best deal. Your original lender may not be your best option.
There are six compelling reasons to refinancing your mortgage.
There are numerous excellent reasons to consider refinancing your home loan, despite the fact that it isn’t for everyone. Here are several:
You may be eligible for a lower interest rate. The interest rate on your mortgage loan will determine the total cost of your loan. A difference of even a single APR point can result in savings of tens of thousands of dollars over time. Consider refinancing if market interest rates have decreased and/or your credit score has improved to the point where you qualify for a significantly reduced interest rate. It is essential to perform the necessary calculations to guarantee that your savings will cover any new loan closing expenses. If you can save at least 1 percent, it is usually worthwhile.
One may modify a monthly payment. Refinancing enables you to modify any and all of your mortgage conditions. If you are suffering and need a lower monthly payment, for example, a refinance can prolong your loan term and reduce your monthly payment, even if your interest rate does not change.
It can be used to withdraw equity from your home. If your home is worth significantly more than what you owe on it, a cash-out refinance will allow you to remove a portion of that equity as cash. You can then utilize this money to pay off debt, buy a new home, cover large expenses (such as college tuition), or simply have a monetary safety net. With a cash-out refinance, the maximum loan-to-value (LTV) is often between 75% and 80%. Suppose you owe $100,000 on a home that is now worth $300,000, giving you $200,000 in equity. If your lender permits an LTV of 80%, the maximum amount of your new mortgage loan is $240,000. This grants you the ability to withdraw up to $140,000 in cash.
You can change the type of your mortgage loan. There are numerous forms of mortgage loans, including choices supported by the government and the private sector. Some federally-backed loans, like as FHA loans, have extra costs and restrictions that borrowers may wish to reduce over time. The owner of an adjustable-rate mortgage may wish to switch to a fixed-rate mortgage. This can be accomplished through refinancing into an ordinary loan.
You may withdraw a cosigner. If you purchased a house with a co-borrower, such as a parent or ex-spouse, you may wish to assume sole responsibility for the loan. You can always refinance into a new loan on your own if your mortgage lender will not release the co-borrower (assuming that you qualify).
You can eliminate a PMI requirement. When purchasing a property with a conventional loan and putting less than 20 percent down, private mortgage insurance (PMI) is typically required. However, if your property’s value grows and you’ve built up more than 20% equity, refinancing can allow you to reduce PMI ahead of time.
If one or more of these advantages apply to your present loan, you should consider refinancing immediately. Consult with a mortgage specialist who can assist you in getting started.
How much does refinancing a mortgage cost?
Numerous variables affect the cost of refinancing a mortgage, including the type of loan, the mortgage lender, your credit score, and any incentives or promotions.
Typical elements of a mortgage refinance include:
Closing expenses (including title fees and lender expenses)
Points (paid to reduce the interest rate on a new loan)
New house appraisal (sometimes necessary for cash-out refinancing) helps your lender determine the current market worth of your property.
Taxes
The average closing expenses for a mortgage refinance in 2020, according to data from ClosingCorp, were $3,398. This figure includes applicable taxes. Some lenders may waive some fees or be willing to roll them into the new mortgage loan.
When should a mortgage be refinanced?
When contemplating a mortgage refinance, it is essential to evaluate if the savings and other benefits outweigh the costs. For many homeowners, it may be prudent to at least consider refinancing if:
Your credit rating increases. This can enable higher interest rates and lending terms
The market interest rate has decreased, granting you access to better borrowing arrangements without affecting your creditworthiness.
You must withdraw cash from your home’s equity.
No magical timeframe exists. Refinancing a mortgage is appropriate for certain homeowners at various times and for various reasons. Refinancing too soon after acquiring a home can have repercussions, such as further lowering your credit score or increasing lender skepticism, but if the numbers work out, refinancing can be a terrific method to change your mortgage loan to better suit your needs.
Before refinancing, it is essential to examine how long you will reside in the home and how much money the new loan would save you. Notate how long it will take for the savings from your refinance to surpass the charges of the new loan.
Also consider reverse mortgages.
Reverse mortgages may also be advantageous for homeowners of a particular age. A reverse mortgage allows homeowners (62 and older) who have paid off their mortgage in whole or in large part to access a portion of their home’s equity. This income would qualify as tax-free. There are numerous advantages to reverse mortgages.
Reverse mortgages can assist in eliminating your monthly mortgage payment (by using the equity to pay off the remaining balance). The loan amount you supply will not exceed the value of your house, so you need not worry about going underwater. In addition, the money you receive may arrive in a flat sum or as monthly payments.
However, the advantages of a reverse mortgage differ from those of a conventional refinance. Therefore, educate yourself with both in order to capitalize on these unique financial prospects.
If you are interested in learning more about reverse mortgages, you should contact an expert who can point you in the proper route.