Mortgage refinancing: everything you need to know

Residential mortgage refinancing
Refinancing your mortgage involves using a new home loan to replace an existing home loan.

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Home mortgages are one of the most common types of debt for Americans — with more than $1.6 trillion in new mortgages coming in 2021 alone. Fannie Mae expects that number continues to increase this year. Across the country, Americans now hold about $17.6 trillion in total mortgage debt and, according to Experian, an average home loan balance of $220,380. If you are one of those who fall into this category, you are clearly not alone.

Many of these mortgages have repayment 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 not be your best option in a decade or two. That’s where a mortgage refinance comes in. But before you go ahead with a refinance, be sure to shop around for a lender that meets your needs – and one that will save you money. long-term.

What is a mortgage refinance?

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

The refinance process will in some ways be similar to the original mortgage process, although for many borrowers it will be 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. If approved, the lender will offer you specific loan terms and repayment options to choose from.

The whole process can take anywhere from a few days to a month or more, depending on your home, financial situation, and even the type of loan(s) involved, so plan your timeline accordingly. You’ll want to compare mortgage lenders to see what kind of rates and loan terms they offer and make sure you’re getting the best deal. Your original lender may not always be the best bet.

6 reasons to refinance your mortgage

While it’s not for everyone, there are plenty of good reasons why you might consider refinancing an existing mortgage. Here are a few:

1. You may be able to lower your interest rate. Your mortgage interest rate 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 fallen and/or your credit score has improved enough that you 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 of 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 adjust a monthly payment. Refinancing allows you to change all the terms of your mortgage loan. If you’re struggling and need a lower monthly payment, for example, a refi can extend the term of your loan and give you a lower monthly payment requirement, even if your interest rate doesn’t improve. not.

3. You can use it to withdraw equity from your home. If your property is worth considerably more than you owe it, a cash refinance allows you to withdraw some of that equity in cash. You can then use that money to pay off debt, buy a new property, cover big expenses (like school fees), or just have a cash safety net.

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

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

You can browse the different types of loans available on different lender sites.

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

6. You can delete a PMI requirement. When you buy a house with a conventional loan and put less than 20% down, you will usually have to pay monthly private mortgage insurance (PMI) on the loan. If the value of your property is increasing, however, and you have accumulated more than 20% equity, refinancing may allow you to remove this PMI requirement sooner than expected.

How much does it cost to refinance a mortgage?

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

Typically, a mortgage refi can involve the following:

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

Recent data from ClosingCorp revealed that the average closing cost for a mortgage refinance in 2020 was $3,398, which includes applicable taxes. Some lenders will waive certain fees or may be willing to roll these fees into your new mortgage.

When should you refinance your mortgage?

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

  • For many owners, it may make sense to at least calculate refi numbers if:
  • Your credit score improves – this can unlock lower rates and better loan terms
  • Market rates have fallen – giving you access to better loan terms without affecting your own creditworthiness
  • You need to withdraw money from the equity in your home

There is no magic deadline: mortgage refinancing is suitable for different owners, at different times and for different reasons. Refinancing too soon after buying the home can have certain consequences – such as lowering your credit score further or introducing distrust of lenders – but in general, if the numbers are right, refinancing can be a great way to adjust your mortgage to make it even better for you. . Be sure to get quotes from lenders first.

Before you refinance, it’s important to consider how long you’ll live 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 refi to outweigh the costs of the new loan.

About Elizabeth Fisk

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