Mortgage refinancing: Everything you need to know

Mortgage refinancing: Everything you need to know

Home Mortgage Refinancing
Refinancing your home loan is the process of using a new home loan to replace an existing home loan.

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Home mortgage loans they represent one of the most common types of debt for Americans, with more than $1.6 trillion in new home loans originating in 2021 alone. Fannie Mae expects that number to continue to rise this year. Nationwide, Americans now have about $17.6 trillion in total mortgage debt and, according to Experian, an average home loan balance of $220,380. If you are among those who fall into this category, you are clearly not alone.

Many of these mortgage loans have payment terms of up to 30 years. Whether you have a short-term or long-term loan, it’s important to know that you can make changes.

You may not be in the same financial situation as when you first bought your home, and the loan you took out may no longer be your best option a decade or two from now. That’s where a mortgage refinance comes in. But before you go ahead with a refinance, be sure to find a lender that suits your needs and will save you money in the long run.

What is a mortgage refinancing?

Refinancing your home loan is the process of using a new home loan to replace an existing home loan. Your new loan, which may come from the same or a different lender, pays off the old mortgage, which is fully satisfied and the account closed. You are then bound by the terms of the new home loan until it is paid off in full (or refinanced again).

The refinancing process will be similar to the original home loan process in some ways, although for many borrowers it is much easier and faster. You’ll need to apply and go through many of the same underwriting steps as when you first bought your home, checking things like your credit history, income, and current debt load. If approved, the lender will offer you specific loan terms and payment options to choose from.

The entire process can take anywhere from a few days to a month or more, depending on your household, your financial situation, and even the type of loan involved, so plan your timeline accordingly. You’ll want to shop around mortgage lenders to see what kind of rates and loan terms they offer and make sure you get the best deal. Your original lender may not always be the best option.

6 reasons to refinance your mortgage

Although it’s not right for everyone, there are plenty of good reasons why you might want to consider refinancing an existing home loan. Here are some:

1. You may be able to lower your interest rate. the interest rate on your home loan it dictates how much your loan will cost you in the end. Even a single APR point difference can mean tens of thousands of dollars in savings over the years.

If market interest rates have dropped and/or your credit score has improved enough to qualify for a significantly lower interest rate, consider refinancing. It’s important to do the math here to make sure your savings will offset the closing costs on your new loan; if you can save 1% or more, it’s usually worth it.

There are several online tools that can help you determine what interest rates you might qualify for based on your current situation.

2. You can set a monthly payment. Refinancing allows you to change any and all terms of your home mortgage. If you’re struggling and need a lower monthly payment, for example, a refinance can extend the term of your loan and give you a lower monthly payment requirement, even if your interest rate doesn’t improve.

3. You can use it to get equity out of your home. If your property is worth significantly more than it owes, a cash-out refinance allows you to withdraw some of that equity in cash. You can then use that cash to pay down debt, buy a new property, cover big expenses (like college tuition), or just have a cash safety net.

With a cash-out refinance, you’re generally limited to 75-80% loan-to-value (LTV), on average. Let’s say you owe $100,000 on a property that is now worth $300,000, so you have $200,000 in available equity. If your lender allows an 80% LTV, you can have a maximum new home loan of $240,000. This gives you an available cash withdrawal of up to $140,000.

4. You can change your mortgage loan type. There are many types of home loans, including conventional and government-backed options. Some federally guaranteed loans, like FHA loans, have additional fees and limitations that homeowners may want to eliminate as the years go by. A homeowner with an adjustable rate mortgage may want to switch to a fixed rate mortgage. Refinancing a conventional loan can accomplish this.

You can search for different types of loans available to you on various lender sites.

5. You can remove a co-borrower. If you bought a home with a co-borrower, such as a parent or even a former spouse, you may want to take over the loan yourself. If your mortgage lender won’t let you release the co-borrower, you can always refinance a new loan on your own (assuming you qualify).

6. You can remove a PMI requirement. When you buy a home with a conventional loan and put less than a 20% down payment, you will typically be required to pay monthly private mortgage insurance (PMI) on the loan. However, if your property’s value increases and you have more than 20% equity, refinancing may allow you to eliminate this PMI requirement sooner than anticipated.

How much does it cost to refinance a mortgage?

The cost of refinancing a mortgage depends on many factors, including the type of loan, the mortgage lender, your credit score, and any incentives or promotions.

Typically, a mortgage refinance may involve the following:

  • Closing costs (including title fees and lender expenses)
  • Points (paid to lower the interest rate on your new loan)
  • New home appraisal (often required for cash-out refinancing, this helps your lender understand the current market value of your property)
  • Taxes

Recent data from ClosingCorp found that the average closing costs for a mortgage refinance in 2020 were $3,398, which includes applicable taxes. Some lenders will waive certain fees or may be willing to include these costs in your new home loan.

When should you refinance your mortgage?

If you’re considering refinancing a mortgage, it’s important to consider whether the savings and other benefits outweigh the cost.

  • For many homeowners, it may be worth at least looking at the refinance numbers if:
  • Your credit score improves – this can unlock lower rates and better loan terms
  • Market rates have dropped, giving you access to better loan terms without changing anything else about your own creditworthiness.
  • You need to withdraw cash from your home equity

There is no magic time frame – mortgage refinancing is right for different homeowners at different times and for different reasons. Refinancing too soon after buying the home can have some implications, like lowering your credit score further or introducing lender caution, but overall, if the numbers are right, refinancing can be a great way to adjust your home loan for that suits you even better. . Just make sure you get quotes from lenders first.

Before you refinance, it’s important to consider how long you’ll be living in the home and how much your new loan will save you. Be sure to note how long it will take for the savings from your refinance to outweigh the costs of the new loan.

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