Category: Mortgage Refinance

Refinance Your Mortgage

To refinance or not to refinance is not the question here. Thanks to the ongoing pandemic, the Federal Reserve has kept the interest rates fairly low. But is now a good time to refinance? Unfortunately, the answer is not that simple.

Refinancing your mortgage refers to the process of taking out a new loan to replace the present mortgage. The mortgage is one of the substantial financial burdens. So, it makes sense to seize any opportunity to reduce the burden a little. That means you could refinance your mortgage and save.

With many homeowners seeking to make better use of the interest rates and refinance, it may soon be late. For example, the average interest rate on a 30-year fixed-rate mortgage was below 3% in April 2021. But by May, it has increased to 3.28% and will continue to increase. However, this increase was predicted by many groups, including Fannie Mae and The Mortgage Bankers Association.

Here is everything you need to know about refinancing:

• When Is a Good Time to Refinance Your Mortgage?
• Is Refinancing Worth It?
• How Does Refinancing Your Mortgage Loan Work?
• Why Should You Refinance Your Mortgage?
• Is Refinancing a Bad Idea?
• Is it Worth Refinancing a 30-Year Mortgage into a 15-Year Mortgage?
• Am I Eligible for a Mortgage Refinance?
• What to Consider Before Refinancing
• Conclusion

When Is a Good Time to Refinance Your Mortgage?

Generally speaking, mortgage refinance is a good idea to lower the interest rate by at least .5% – 1%. This will substantially lower your monthly payment.

Moreover, the new loan will be based on the balance of the original mortgage. So, if you had paid some of your principal, refinancing could lower your monthly payments and save money.

In addition to that, how long do you want to stay in your home? What are your financial goals? What is your home equity and your current credit score? These factors also play an essential part in refinancing. So, if everything works out, now is a good time as any to refinance your mortgage.

Is Refinancing Worth It?

Refinancing is worth it if you use it for the right reasons. If not, it can quickly increase your financial burden. While lower interest rates may be attractive for one person, others may prefer to refinance for higher monthly payments.

While .5% – 1% makes sense, even a modest 25% makes sense if the costs are low. So instead of looking at the new interest rate, look at the broad picture. Consider how much you will save per month, how much you will save over the loan term and the closing costs.

How Does Refinancing Your Mortgage Loan Work?

The refinancing process is similar to the mortgage loan. You can replace the current loan with a new loan, often with a lower interest rate. After you refinance your existing mortgage, you will have a much favorable interest rate. Monthly payments will be lowered, and possibly a different lender than your original loan.

However, with the new mortgage, you would be resetting the clock depending on the terms. For example, consider you are five years deep in your 30-year mortgage with 25 years on the clock. If you refinance for 30 years, you would be extending the loan terms. However, if the term is 20 years, you would be able to pay off the loan sooner by five years.

Keep in mind that you’d have to pay closing costs which can be a few hundred dollars. Alternatively, they can be anywhere between 2% to 5% of the loan amount. In addition, it may include an origination fee, appraisal fee, and discount points.

According to Ellie Mae’s Origination Insight Report, the average time to refinance a conventional mortgage is about 38 to 48 days in 2019-2020. However, it can take more than a week longer than a conventional loan for FHA and VA loans.

Why Should You Refinance Your Mortgage?

Refinancing doesn’t come free. So, if you are looking to refinance your most significant debt, you better have a good reason. As such, you need to have a clear head about your refinancing goals.

Here are some of the reasons why someone would refinance a mortgage.

Save Money on Lower Monthly Payments

Even the slight difference in the interest rate can create a noticeable impact on your monthly mortgage payments. For example, consider a 30-year $300,000 loan with a fixed interest rate of 4% and a payment of $1,567. Refinancing the loan to the same period with a 3.25% interest rate, your monthly payment drops by $134. This amounts up to $48,420 over the life of the loan.

With a lower interest rate, your new monthly payment will most likely shrink. In addition, it allows you to save money. You can put up the monthly savings against your principle. Or use it for other expenses like an auto loan or maybe your retirement fund.

However, it makes sense to pay off the home loan instead of refinancing for lower payments. At the same time, you may have to sacrifice your savings, including your retirement savings, to finish your loan first. But the advantage is that you will have a home with no mortgage payments. Now you can get back to savings and investments.

Save on Interest Costs

A low-interest rate decreases the mortgage interest you pay throughout the loan.

Both the interest rate and loan term decide how much you save in interest costs over the life of the loan. Reducing one or both factors can result in increased savings both in mortgage interest rates and monthly payments. However, you can prepay the interest in paying for mortgage points.

Ensure that you shop around with multiple lenders for better mortgage rates and terms. Before seeking a new lender, ensure that you check with the current one. They may even offer a better rate if you stick with them.

Get Shorter Loan Term

In 2019, Freddie Mac reported that 78% of borrowers refinanced from a 30-year fixed-rate mortgage to a similar loan. In addition, 14% went from a 30-year fixed to 15-year. And a last 7% refinanced from a 30-year fixed to a 20-year fixed.

Freddie Mac also reports that people refinancing their 30-year mortgages to 15-years pay less interest over a long period of time. They also shave years off your loan. On the downside, your monthly mortgage payment will increase. However, this can help save the interest payments if the property doesn’t qualify for an interest deduction.

Tap into Home Equity

With refinancing your mortgage, you can convert the equity into money and borrow it on your current loan. In such a case, the lender gives you the difference as check or cash which is called a cash-out refinance. However, the condition is that, to qualify for the loan, you need to have enough equity, at least 20% or more.

A survey by Black Knight indicates that 45 million homeowners have tappable equity lying unused. With a cash-out refinance, you can convert the equity to usable money, which you can use for investments or home improvements.

Consolidate Debt

Refinancing offers a low interest rate compared to other mortgages. Hence, it is attractive for homeowners looking to pay off debts. Since the loan allows you to tap into the equity, you can take advantage of the cash-out refinance option. You can use to consolidate debts like personal loan, credit card debt, student loans, or home loan into one single loan. Your loan balance depends on the equity you decide to cash in.

Keep in mind that if your home equity falls below 20%, you may have to pay mortgage insurance on an FHA loan.

Remove Private Mortgage Insurance (PMI)

PMI comes into the picture when you do not have enough down payment for a mortgage. It can cost you a considerable sum every month until the home equity builds to 22%. At this juncture, your lender is required to cancel it if the monthly payments are current.

However, you can get rid of mortgage insurance early by refinancing your loan. But they are an expensive option with closing costs as high as 2%-5% of the loan amount. But if you have other benefits such as a low-interest rate and short break-even point, you can opt for refinancing.

If you are stuck with an FHA loan, and you may be paying PMI for 11 months or even the life of the loan. This depends on how big your down payment was. In such a case, refinancing may be the only option.

Ability to Switch Mortgage Types

Some borrowers refinance their mortgage to convert their adjustable-rate mortgage (ARM) and lock in on a fixed-rate loan. This is true if the current mortgage rates are low and not planning to sell shortly.

In the same line, it makes sense to move from an ARM to a fixed-rate loan in certain situations. For example, this works if you plan to sell in a few years and are not afraid to take on a higher interest rate. It eliminates the fear of future interest rate hikes.

Is Refinancing a Bad Idea?

No rule says refinancing your mortgage is a bad idea. On the contrary, if done right, refinancing your loan can help save a few hundred dollars at least. However, certain factors can drive up the expenses and cost you more in the long run, so caution is advised.

Longer Loan Term – To calculate the profitability of the refinancing loan, take the mortgage rates as well as loan term for a complete picture. Do not take refinance if you aren’t saving enough.

Higher Closing Costs – The closing costs come with unnecessary fees such as loan processing and application fees. Moreover, if you cannot pay the upfront costs and instead add them to your mortgage, you’ll end up paying more.

Moving Soon – If you see yourself moving soon, it is a bad idea to refinance your current mortgage. This is because you are not likely to save enough to outweigh the loan’s closing costs.

Is it Worth Refinancing a 30-Year Mortgage into a 15-Year Mortgage?

At the beginning of a 30-year loan, most of the monthly payments go towards the interest costs. Unless you pay into the principal, you would not be able to build home equity for many years to come. Or you can refinance it into a 15-year loan. While this helps to build the equity, you’ll be taking on a higher monthly payment. If you are someone looking for a lower monthly payment, it may not be ideal for you.

With a 15-year mortgage, you are looking at:

Pros

• Low-interest rate
• Low-interest costs
• Pay off the mortgage quicker

Cons

• Higher monthly payment
• No flexibility
• No leeway in case your financial situation worsens
• Less investment and savings

However, you can refinance the current loan to a longer term and tide it over if the situation warrants it. When personal finances change for the better, you can save up and pay the principal faster.

Am I Eligible for a Mortgage Refinance?

To refinance your mortgage, you’d have to go through a refinancing process, starting with the application. FHA and VA loans qualify easier than conventional loans.

The qualifying criteria for a mortgage refinance are similar to a new mortgage. The most important of them are:

Credit Score: Most mortgage lenders require a credit score of 620 to be eligible for mortgage refinance. However, for a competitive interest rate, you need at least 740.

Debt-to-Income (DTI) Ratio: The lower the DTI ratio, the better your interest rate. However, it depends on the lender as well. Few go as high as 43% for conventional loans, while 50% for FHA loans.

DTI Ratio = Total Monthly Debts ÷ Total Monthly Income

Apart from these, mortgage lenders create their eligibility criteria. As such, there are a few other factors that lenders consider:

• Credit history
• Employment history
• Payment history on the current loan
• Home equity
• Home’s current value

Once you meet the lender’s criteria, you’ll receive an offer with the interest rate depending on the risk you pose. However, you may not get approved or receive favorable terms if your credit history has taken a wrong turn since the first mortgage.

What to Consider Before Refinancing

Before you refinance the loan, consider why you want to refinance your mortgage. To start with, how long do you intend to stay in your home? If you are planning to move in the next few years, stop right there. Refinancing is not the right option for you.

Current Interest Rates: The success of refinancing lies in the interest rate. Even the slightest change in the rate can create a huge impact. Hence, experts recommend you interview several lenders, including your current lender, to find one suited for your current financial situation.

Mortgage Term: Refinancing to a lower interest rate can help you save money but not increase the mortgage terms. That can be counterintuitive since you end up paying more interest over the life of the loan.

Cost of Refinancing: Ensure that you stay in your home at least until you recoup the cost of the refinancing. Refinancing comes with closing costs, including the exact fees and services as when you purchased your home. So, if there is a chance that you may move before you recoup the costs, refinancing is not one of the best financial decisions.

Find the Best Refinance Rates

Just like your initial mortgage, you need to take some time and shop around for better interest rates for the new loan. Look for independent vendors, credit unions, banks, and online comparison sites. If not, you can approach a mortgage broker who can open venues that were previously hidden. They can do the legwork and get you access to vendors and better loan terms.

Make a list of preferred vendors and submit 3-5 requesting loan estimates. It has the estimated interest rate, closing costs, annual percentage rate, and monthly payment. When it comes to mortgages, you’d be better off with a loan that has a high APR, high monthly payment but no fees. Experts suggest you do not pay closing costs with cash; instead, lock it in with the loan amount. And invest the money or stash it for an emergency fund.

Conclusion

Refinancing is a shaky subject, to say the least. While it has its benefits, it is not without drawbacks as well. Refinance loans work well only if you focus on the long-term goals and not on the short term. Having said that, you should go for it, as refinancing could get you through a financial rough patch. A higher credit score, lower debt-to-income ratio, or increased equity could all help you qualify for a better interest rate.

So, is now a good time to refinance? As a rule, the best time to refinance depends on your financial situation. With the interest rates at record lows refinancing can lower your monthly mortgage payments and increase your monthly savings.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Mortgage refinancing is when you pay off your existing mortgage by obtaining a new loan. With the existing one paid off, the new loan takes its place, which you then pay in monthly installments.

But it isn’t as easy as it sounds; Did you know that the costs could be 3-5% of the loan amount, which could be $2,000-$5,000?

The COVID-19 pandemic has caused the mortgage rates to lower to the 3’s from the 4’s of 2019. If you want to refinance, now is the best time before the rates rise again in mid to late 2021.

This article walks you through everything you need to know about refinancing, its types, pros, and cons, mistakes to avoid, tax implications, etc.

What Is Refinancing a Mortgage?

Refinancing is a process by which you obtain a new loan either to pay off the current one or to consolidate the debt, on the condition that the new interest rates are lower with better terms. With refinancing, the borrowers negotiate a new loan agreement with lower monthly payments, a better monthly payment structure, and change the loan type.

Types of Refinancing

No two refinance loans can be the same. They vary in many ways depending on their debt, mortgage, and also the reasons for refinancing. Having said that, there are three types of refinancing loans.

• Rate-and-Term Refinance
• Cash-out Refinance
• Cash-in Refinance

Rate-and-Term Refinance

With a rate and term, the loan amount is equal to the mortgage on the home. The homeowners can pay off the original mortgage and get a new mortgage with an altered loan term or mortgage rate, sometimes even both. You can either:

• Lower the loan term and maintain the interest rate
• Lower the interest rate and maintain the loan term
• Lower the interest rate and the loan term

The aim is to reduce the monthly payments and save money. So, you choose whichever option works the best. However, if you shorten the length of your loan, the monthly payments will be higher.

Cash-out Refinance

With a cash-out refinance, you tap into the equity in your home. Home equity is the difference between the mortgage amount and the value of your home. The new loan you get is higher than the mortgage.

You get to pay off what you currently owe on your home and cash out the excess amount. In the case of a debt consolidation refinance, the cash-out will be directed to the creditors.

Depending on the current market, you may be able to get a lower interest rate or shorter term, whatever you may desire.

Cash-in Refinance

With a cash-in refinance, the homeowners can pay down or close out the existing mortgage. The lower the money you owe to the bank, the lower your interest rate. You can also have a shorter loan term too.

There are various reasons why homeowners prefer a cash-in:

• Lower interest rates and LTV ratio
• Cancel mortgage insurance premium payments

Pros and Cons of Refinancing Your Home

Refinancing the home allows homeowners to take a breather in times of economic uncertainty. However, you are essentially taking a new mortgage loan with better terms with a refinance than your current loan. But it need not be so since it depends on various other factors.

It pays to understand the process, evaluate the pros and cons before choosing to refinance.

Pros

• Low monthly payment
• Lower interest rate
• Save your interest in the long term by reducing your loan term.
• Convert from an adjustable-rate mortgage to a fixed-rate mortgage and enjoy the predictability and stability it offers. Locking the rate helps to protect against rising interests.
• A cash-out refinance helps you pay off the loans and saves you a chunk of money for home improvement projects.
• Homeowners whose principal is paid off will not be required to pay private mortgage insurance.

Cons

• Lowering monthly mortgage payments resets the length of the loan.
• Shifting to a fixed-rate loan prevents you from taking advantage of lowered interest payments in the future.
• Lowered loan term will increase the monthly payment.
• Cash-out refinance will cost you more interest throughout the life of the loan.

To Refinance or Not to Refinance

Refinancing your loan will save money, especially when the interest rates are low. You can also build home equity and pay off your mortgage. But are these worth obtaining a refinance?

Here are a few pointers to consider before making a smart financial decision:

• Can you lower the interest rate by one-half to three-quarters? If so, you can reduce your mortgage payment substantially.
• Your monthly savings should balance the cost of refinancing.
• Do not refinance if you plan on moving any time within the next two years. You cannot recoup the cost within this timeframe.
• Are your proceeds from refinancing going towards retirement savings or on a spending spree? If it’s the latter, do not refinance.
• Are you cashing out to renovate your kitchen or bathroom? Doing both can increase the value of your home.

Best Time to Refinance Your Mortgage

Your mortgage loan officer has a monthly and a quarterly target to meet. Not everyone can keep up with their targets and will be desperate by the end. As such, you will be able to score better terms on your mortgage.

Considering the above, the best time of the month will be the last two weeks of every month. And the best time of the year for refinancing your mortgage will be the last month of every quarter, March, June, September, December.

The Refinance Application Process

The mortgage refinance process can be pretty intimidating, but they aren’t different from applying for a home loan. Here’s a quick overview of the application process:

• Make sure your credit score is high enough for a new loan.
• Compare different mortgage loans to find better loan options.
• Gather all the necessary documentation.
• Apply for a mortgage refinance and ensure that you do not make any mistakes.
• Your lender takes over starting with the appraisal process. You are responsible for the cost of the process, which is $300 and $400.
• Your refinance loan goes through an underwriter who check for the mistake, missing documents, and such.
• Lock your interest rate so that you get the rate specified in the approval letter. Make sure this happens six days before the closing process, or the closing costs can increase.
• You can close the loan in the presence of a lawyer or notary public.
• The three days right of cancel period comes into effect, after which the lender will pay off your old mortgage, and the new refinance loan will be in effect.

Documents Needed for Refinancing a Mortgage

Your lender might require these documents before you qualify for a refinance loan.

• Pay stubs (for the last 2-3 months)
• W-2 and/or 1099-MISC forms (for the past two years)
• Tax returns
• Statement of assets (including bank statements, retirement accounts like 401k, bonds, stocks, mutual funds, life insurance policies, etc.)
• Statement of debts
• Homeowners’ insurance

Mortgage Refinance Requirements

The first step in the refinancing process is to make sure you are eligible for loans and be prepared for the lengthy process. Here are the minimum requirements to apply for a mortgage refinance:

• You may need six months or a year after you own a property with your name on the title to apply for a mortgage loan.
• An adequate credit score of 620 or higher.
• A 20% home equity is the minimum requirement for refinancing.
• Your debt-to-income ratio should be 50% or lower. If you have a higher DTI reduce your loans before applying for a refinance.
• Ensure that you can afford the closing costs. Some lenders may roll it into your new loan.

Costs of Refinancing a Mortgage

A refinance comes with costs and fees that you would have to pay beforehand. So, it pays well to consider how much the refinance would save over the years:

• Origination fee: Up to 1.5% of the loan amount
• Application fee:$75 to $500
• Credit report fee:$30 to $50
• Home appraisal:$300 to $400
• Home inspection:$300 to $500
• Flood certification fee:$15 to $25
• Title search and insurance fee:$400 to $900
• Reconveyance fee:$50 to $65
• Recording fee:$25 to $250

Refinance Closing Costs: Lower and Avoid Fees

The goal of refinancing is to be able to have spare cash for expenses. But what if you cannot afford the fees?

Here are a few ways by which you can reduce the costs:

• Improve your credit score and debt to income ratio.
• Negotiate the fees if possible, especially if you have good credit and stable income.
• If you go with the same company as your mortgage, you can save money on title fees.
• Think twice about paying for mortgage points. With good credit, you are already eligible for a low-interest rate.
• You can also avail of third-party services for a home inspection, title, etc., for inexpensive options.
• Your lender may waive appraisal fees if your home has been appraised recently.

However, few companies may also offer no costs. But in truth, the lender rolls it into the mortgage loan amount spreading it over the life of the loan.

Pitfalls to Avoid When Refinancing a Mortgage

Most homeowners look for low interest in mortgage refinancing. But finding and availing one is not as simple as that. Here are a few mistakes you might want to avoid when looking to refinance a mortgage.

• Not shopping around for better interest rate: Even half a percentage reduction can save thousands in the long run.
• Not looking into the terms: Low mortgage interest rates can hide high fees. Ensure you check the closing costs before finalizing the refinance loan.
• Not Saving enough: To make the refinance worthwhile, you need to make sure that the new interest rate is at least a full percentage lower than the current one.
• Refinancing frequently: In the chase for lower interest rates, homeowners end up refinancing. With every new loan, you have further fees and an increased loan balance. This cycle may take years to break even.
• Not taking time to review the documents, including the good faith estimate: Unscrupulous mortgage lenders can add hidden fees to the final documentation. Make sure it matches with the good faith estimate.
• Cashing out home equity: When you take too much out of your home equity, you leave yourself exposed to financial troubles when the real estate prices fall.
• Extending the life of your new loan: In the search for a lower interest rate and low monthly payment, your repayment term can increase.
• Agreeing to prepayment penalties: There is no need for a refinance to have a prepayment penalty for more than 3-5 years. It is a way for your lender to make up for the “no-cost” refinance.

Misguided Reasons to Refinance Your Mortgage

Even with a lower interest rate, refinancing may end up costly for a few due to their closing fees. While everyone has a reason to refinance, here are a few reasons for which you should not refinance your home:

• Consolidating your unsecured debt like credit card debt into your secured debt; When you miss the monthly payment, you will end up losing your home.
• Do not refinance to save up for a new home. If you plan to move within two years of mortgage refinancing, you are not saving anything at all.
• Cashing out for investing in a stock market is not a good idea even when it seems stable. But if you are looking to build your emergency fund or renovate your home.
• Switch from ARM(adjustable-rate mortgage) to fixed-rate loan only if you are not planning to sell anytime in the near future.
• If you want to refinance purely to take advantage of the no-cost refinance, the fact is there is no such offer. Mortgage lenders wrap the costs into your loan.

Appraise Your Property Before Refinancing

A home appraisal is an essential step in your refinance process where an appraiser gets you an estimate of how much your home is worth at a current point in time.

They start by taking pictures of every room in the house, along with the exterior. Then by comparing your home to the prices of the other homes in the neighborhood, they finalize a price. Your lender considers this as an upper limit for your home loan.

A low appraisal is a serious problem since it lowers the value of your home, whether you are refinancing or selling. Here are some ways by which you can increase the chances of a better appraisal:

• Improve the curb appeal by planting new plants and mowing your lawn.
• Declutter your home and put away everything in its designated place.
• Ensure that all the appliances and light bulbs work.
• Touch up the paint if needed. Or repaint if possible.
• Add small upgrades to increase the home value.

However, you may not always need an appraisal for refinancing. In case you have a VA or a USDA loan, an appraisal may not be necessary at all, and you can refinance up to 120% of your loan value.

Impact of Refinancing on Property Taxes

Refinancing doesn’t affect property taxes in any way. But if you are in a neighborhood with increasing property rates, your appraiser may value your home to be much higher than your earlier assessed value. While this doesn’t increase the taxes in itself, it is an indication that the taxes may increase in the future.

Tax Implications of Refinancing Your Mortgage

While refinancing a mortgage can be a money-saving move, it has profound implications for your tax. Refinance loans are viewed as debt restructures and would not enjoy the same tax benefits as your original mortgage.

For a loan the originated before Dec 15, 2017, the interest will be deducted for a $1 million loan balance. In the case of loans after the cut-off date, the loan balance should be $750K for joint filing and $500k for married filing separately.

Another point to note is that there will be less rate to deduct when refinancing to a lower interest rate during the tax period.

For example, if you pay 5% interest on a 30-year loan and refinance to a 15-year fixed-rate mortgage with a 3% interest, you can see a 40% reduction in interest costs.

While you save money by paying less interest, you would not be able to claim much during the tax period.

Claim Your Refinance Tax Deductions

You can claim your:

• Mortgage Interest
• Discount Points
• Closing Costs

Concerning the discount points and the costs, you can claim these as deductible through the course of your loan. For example, if you have spent $5,000 and $15,000 on these expenses for a 30-year fixed-rate mortgage term, you can deduct $250 and $500 every year from your taxes.

Coming to the mortgage, you can claim the deduction for the interest paid the same year. For example, if you paid $1000 in mortgage rates for the year 2021, you should deduct $1000 from your taxes for the same year.

The Effects that Refinancing a Mortgage Have on Credit Scores

Mortgage refinancing can affect the credit scores, albeit temporarily, in a couple of ways:

• Credit Check: With every refinancing, your lender will do a credit check to check your credit standing and history. This is called a hard inquiry which causes your score to drop slightly and momentarily.
• Applying for multiple loans over a long time period: Every new mortgage loan that you apply for is likely to make a hard credit inquiry every time. And with every check, your credit score can negatively affect your score. Ensure that you place the inquiries within a 14-45 day period to minimize the hit to the credit.
• Account Closure: Every loan that you close can also lower your credit score. But if the loan is in good standing, the hit to your credit score might be less.

Conclusion

Refinancing makes sense if you are looking to lower the interest rates and mortgage payments. But you may want to research and shop around for better options. Not every lender has the same rates, terms, and costs for closing.

Refinancing is an easy way of hitting your financial goals, but only if you are careful about the refinance process and the lender. With the rates at a record low, you may want to commit before they rise again now that the world is returning to normal. But make sure you do not have any plans to move or sell until you break even.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Other timely articles you may find helpful:

• Home Refinance Benefits
• Mortgage Rates
• Mortgage Calculators