With record-low interest rates, mortgage refinance has been a hot topic. By late September 2020, refinances accounted for nearly two of every three mortgage applications.1
Is now a good time for you to refinance?
A mortgage refinance offers many benefits. But the process costs money, so it may not make sense for everyone. Here, we’ll give you some things to consider; we’ll also help you understand the steps to take if you decide to move ahead.
What does it mean to refinance your mortgage?
When you refinance, you take out a new mortgage and use the money from that to pay off your existing mortgage. You can refinance through a mortgage provider like Global Credit Union Home Loans.
How does refinancing your mortgage work?
Remember when you applied for your mortgage in the first place? The process of refinancing your mortgage is similar, but instead of using the money to pay the person you bought the house from, you’re using the money from your new loan to pay off your old loan. You must still meet specific requirements to qualify for a refinance (i.e., your house must be worth more than your new loan amount, etc.), and the process is similar in terms of closing and other steps.
When should you refinance your mortgage?
Most people think about refinancing their mortgage only when interest rates hit a certain level. But you should also consider refinancing when…
- You have a solid reason to refinance, such as the need to do a cash-out refinance or shorten your payoff period.
- You know your overall mortgage terms will improve. For example, if your credit score has improved significantly, you could gain access to better rates and terms.
- You know you can break even with closing costs in a reasonable amount of time. If you anticipate moving in a few years, you may not have time to save enough to cover the closing costs you had to pay to refinance.
Did you know? On December 1, 2020, Fannie Mae and Freddie Mac plan to begin assessing what’s called an Adverse Market Refinance Fee, adding a 0.5% charge (50 basis points) to all refinance loans. This fee was originally intended to go into effect on September 1 but was delayed. Further delays are possible, but if you plan to refinance your mortgage, you may be smart to do it now.
Step-by-step: how to refinance your mortgage
1. Decide why you want to refinance
Decide why you want to refinance your mortgage. Is it to lower your monthly payment? Pay off your mortgage sooner? Get cash out to do a remodel? Your reasons for wanting to refinance will help guide you toward the best refinancing option. They will also help you avoid some of the common refinancing pitfalls. For example, if you've paid 12 years on a 30-year mortgage and you want to take advantage of lower interest rates, you could pay more overall if you start over with a new 30-year mortgage, even with the lower interest. If you plan to sell your house in a few years, you could benefit by refinancing to an adjustable-rate mortgage that allows you to take advantage of lower interest rates before you sell. Use our Online Refinance Calculator to help you estimate savings with various rates and terms.
2. Make sure you have good credit
Make sure you have a good credit score—a higher score will qualify you for better loan terms, but bad credit will cost you over the life of your mortgage. A FICO score of 740 and above will give you the best chance at good rates and terms. Plus, be sure to avoid opening any new credit accounts during the refinancing process; it could delay or even derail your application.
3. Make sure you have enough equity
Make sure you have enough equity in your home. The higher your equity, the lower risk you pose to a lender. While some lenders might let you refinance your mortgage if you have as little as 5% equity, you'll pay lower interest and fees if you have more than 20%.
4. Talk to us about refinancing
Talk to us at Global Credit Union Home Loans about rates and ask us about locking in your rate, so you don't have to worry about increases that occur before your loan closes.
5. Apply to refinance your mortgage
Apply to refinance your mortgage online. One of our mortgage loan originators will contact you to go over your options.
6. Review the Loan Estimate document
Carefully review the Loan Estimate document to make sure you understand our loan terms, fees, and closing costs. Some of the most common fees include the appraisal fee, escrow and title fees, credit and insurance fees, loan origination fees, and interest.
7. Prepare your home for appraisal
Get your house ready for the appraisal. This inspection helps lenders like us determine your home's fair market value. Be aware, though, that if you're in the middle of a remodel, you may have to wait until improvements are complete before your house can be approved for refinancing.
8. Close on the new home loan
Close on the loan and be prepared to pay any outstanding closing costs that are not rolled into the new loan amount. Take this opportunity to ask questions, to make sure you completely understand the loan terms, payment schedules, and details.
Use a mortgage refinance calculator
A mortgage refinance has a lot of variables, so it helps to use our Online Refinance Calculator to determine if the amount you will save in interest will exceed the refinancing costs. Many people are surprised to learn how quickly they can break even by refinancing their mortgage. Once you input the data from both your existing loan and the refinanced loan, the tool will calculate your immediate costs to cover the loan origination fees and the number of months it will take for your savings from the lower interest to offset the fees. It will also estimate your total savings, based on how long you plan to own the property.
Reasons to refinance your mortgage
Lower your interest rate
This is one of the main reasons people refinance their mortgage. The old rule of thumb was that, because of the fees involved, refinancing only made financial sense if you could lower your interest rate by 1 to 2%. But now, with so many other variables, you could save money with even a 0.5% decrease in interest, depending on how long you plan to keep your house and other factors.
Lower your payment
Paying less each month can be a big motivator for refinancing a mortgage. You can lower your monthly payment a couple of ways—by getting a lower interest rate or a longer loan term. Either option could save you hundreds of dollars each month.
Get cash from your home’s equity
When you refinance your mortgage and borrow more with the new loan than you owed on the old loan, your lender will pay you the difference. This is called a cash-out refinance. You can use the extra money any way you wish—to consolidate debt, pay for a home remodel, fund college, or more.
Shorten the loan term
If interest rates drop, you may be able to refinance to a loan with a shorter term—changing from a 30-year to a 20-year mortgage, for example—while keeping your monthly payment about the same. This helps you to build equity in your home faster and allows you to pay off the loan sooner, which decreases the amount of interest you pay over the loan’s term.
Change the type of loan you have
There are many types of mortgages out there, and refinancing allows you to shift from one loan type to another. For example, if you have an adjustable rate mortgage (ARM), you could switch to a fixed-rate loan by refinancing. The switch gives you predictable payments and protects you from future interest rate hikes. You could also go the other way, from a fixed-rate loan to an ARM. Since ARMs have lower interest rates, you’ll save as long as the rate doesn’t adjust higher than your fixed option.
Eliminate mortgage insurance
If you pay for private mortgage insurance, you can usually cancel it once you have built enough equity in your home to meet the requirements (typically 80%). However, rules are a little different for those with an FHA loan. If you have an FHA loan and had chosen one of their low down payment mortgage options, you may have to pay off the loan or refinance to cancel the mortgage insurance.
Did you know? If your goal is to just pay off your mortgage more quickly, consider some options to a full refinance. For example, you may be able to pay extra each month towards your principal. Or you may be able to pay your mortgage on a biweekly schedule. Ask us to help you identify the best option to reach your goal.
Does a refinance make sense for you?
People have many reasons to refinance their mortgage. But keep in mind that every refinance has a break-even point, a point in time when you start saving more than you spent to refinance the loan. A refinance makes most sense when you pass this break-even point.