Compare current refinance rates to reduce your monthly payment and save thousands in interest.
What exactly is meant by “refinancing” a mortgage?
Getting a new house loan to replace an existing one is what is meant by the term “refinancing your mortgage.” You will normally follow the same steps you did when you obtained a mortgage for the purchase of your home, with the exception that your new loan will pay off your existing mortgage.
Refinancing your mortgage could help you save money by allowing you to:
lowering the interest rate that you’re paying. You are not required to remain at the current interest rate on your mortgage. You may be able to lower your monthly payments and get a better interest rate on your mortgage by refinancing.
reducing the overall length of your loan. If you can accelerate the payoff of your mortgage, you will realise significant cost savings on interest fees.
Putting money in your pocket or purse. A cash-out refinance can accomplish all of the aforementioned, in addition to providing you with additional funds that you can use toward achieving your monetary objectives.
However, before you get started, you should make certain that you have prepared yourself for a successful refinance by going into the process with a goal and a plan.
How to locate today’s most competitive rates for mortgage refinancing
Shopping around is one of the most reliable ways to locate the most favourable refinancing rate. Pick three to five different mortgage lenders, and then collect quotations to compare different refinance rates. You might potentially save thousands of dollars in interest costs over the course of your repayment term by shopping around with multiple lenders.
Be sure to evaluate the expected expenses and fees that are associated with each lender, which can be found on the loan estimate that you receive after submitting an application to refinance your mortgage. When you initially hear about a low rate, it may sound appealing; but, if it comes with significant fees, it may not actually provide you with the best value.
Trends in refinancing interest rates
Should I consider getting a new mortgage?
If it is possible to cut your interest rate by more than one percentage point through the use of a refinance, then doing so is probably in your best financial advantage to do so. Calculating your break-even point is, however, the most reliable method for ascertaining for certain whether or not a refinance would be in your best interests. To calculate this, simply divide the total amount of your closing costs by the amount of monthly savings you anticipate. The figure that you get as a result is the amount of time in months that it will take for you to start seeing savings from the refinance.
If you were to refinance your mortgage and realise that it would save you $150 on your monthly payment but would cost you $5,000 in fees, the point at which you would break even would be approximately 33 months, which is just under three years ($5,000 divided by $150 equals 33.33). If you intend to remain in your house for at least three more years after the refinancing, you will come out ahead financially.
The Consumer Financial Protection Bureau (CFPB) advises that you should not refinance unless it would be possible for you to “break even” within two years of the transaction. A refinance, on the other hand, will not be detrimental to your financial situation so long as you intend to continue living in your home beyond the time at which you will have broken even. After a successful refinancing, your financial savings will increase in proportion to the length of time you continue to own the property.
Is it a smart time to refinance my mortgage right now?
In light of the fact that it is anticipated that interest rates will continue to be high and continue to rise during the year 2022, it is possible that now is not the best time to refinance if you are seeking for a cheaper rate. Nevertheless, there are other economically reasonable reasons to refinance at this time, including the following:
reducing or eliminating your need for mortgage insurance as a result of an increase in the value of your home If you have 20% equity in your home, you can get rid of private mortgage insurance (PMI) on a traditional loan. However, even if you don’t have 20% equity, you may still be able to get it reduced.
You can reduce the amount of money you pay each month for your mortgage by switching from a 15-year loan to a 30-year loan with a fixed interest rate.
You can pay off your debt more quickly by refinancing it from a term of 30 years to a term of 10, 15, or 20 years.
Paying off an adjustable-rate mortgage (ARM) before the rate and payment on the ARM increases to a level that is greater than the existing 30-year rates.
Using the equity in your house as a source of funding for home upgrades, debt consolidation, or the purchase of a second home.
Switching from a loan backed by the government to a conventional loan in order to avoid paying the FHA mortgage insurance that is required on loans backed by the Federal Housing Administration for the life of the loan (FHA).
How to get a new mortgage on an existing house
Are you curious about how the process of refinancing a mortgage works? It’s easy to feel overwhelmed by all of the many aspects that are involved, but if you follow these six steps, you’ll be well on your way to achieving your goals:
Determine the “why” behind your refinancing decision. Are you hoping to get a lower interest rate on your mortgage? Are you able to afford a greater monthly payment if it means receiving a shorter loan term in exchange? Are you prepared to take a loan against the equity in your home?
Evaluate the state of your finances. Get a copy of your credit report and your credit score. If you want the greatest possible interest rate, you should aim for a credit score of at least 740. You should make sure that you have sufficient financial reserves in your budget to handle the refinancing closing expenses, which can range from 2% to 6% of the total amount of your loan.
Find out as much as you can about the value of your home. If you need assistance determining how much your home is worth, you may either use an online tool that estimates home values or get in touch with a real estate professional. When you have greater equity in your home, your mortgage rate will normally be cheaper.
Look around, and then apply for jobs. Choose three to five different refinance lenders, then submit an application to each of them. It is recommended by FICO, the business that created the credit scores that are most often used in lending, that you finish those applications within a time limit of 14 days in order to avoid the temporary hit to your credit score that might result from several hard inquiries.
Put a lock on the rate of your mortgage. After you have decided on a lender, you should get a mortgage rate lock to ensure that you will receive the interest rate that was provided to you.
Finish up with your refinancing. Collaborate with your money lender to complete your refinancing, turn in any paperwork that is still outstanding, and set a date for your closing.
Different kinds of refinancing loans
Conventional lenders, as well as lenders in the United States that have been recognised by the Federal Housing Administration (FHA), are the ones who offer the most common types of mortgage refinancing choices. The Department of Veterans Affairs (VA) as well as the United States Agriculture and Consumer Services (USDA).
Refinancing loans based on interest rate and period. This is the most common sort of refinancing, and it is done with the intention of modifying either the interest rate on your mortgage or the length of time it takes to pay it off.
Refinancing loans with a cash-out option. When you get a cash-out refinance, you receive a new mortgage with a bigger sum than what you presently owe on your previous loan. This allows you to pull out more money from your home equity. You get to keep the cash that is equal to the difference between the two loans.
Streamline refinance loans. Only homeowners who currently have a loan backed by the government (either by the FHA, the VA, or the USDA) are eligible for the streamline refinance option. There is typically no need for a home appraisal or documentation of the borrower’s income. To be eligible for the refinance programme, all you need is to already have a loan insured by the FHA, VA, or USDA and be able to demonstrate that you would come out ahead financially as a result of the refinance.
Refinance loans with a high loan-to-value (LTV) ratio. Homeowners who have traditional loans but little or no equity in their properties may be eligible for a high loan-to-value (LTV) refinance. When refinancing a conventional loan, the highest loan-to-value (LTV) ratio that is permitted is 97% for a rate-and-term refinance, and it is 80% for a cash-out refinance.
Common minimum refinancing requirements
You may get an overview of the requirements for refinancing, including credit score, debt-to-income (DTI) ratio, and loan-to-value (LTV) ratio, in the table that follows. These requirements apply to the following types of refinance loans: