Monday, 26 October 2020

How to refinance your mortgage

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Buying a home is a major milestone, but it’s not the end of the journey. You might decide to refinance your mortgage in a few years or even later, and you’ll want to know what to expect.

Homeowners refinance their home loan for a variety of reasons. Once you’ve set a clear goal, you’re ready to shop lenders, compare refinance rates and get the ball rolling. You’ll also have plenty of paperwork to fill out and an appraisal to navigate.

How to refinance your mortgage

Here’s a step-by-step guide to help you get started.

    1. Set a clear financial goal. When considering a mortgage refinance, focus on lowering your monthly payments or interest rate without tacking on more years to repayment, if possible.
    2. Check your credit score and history. The higher your credit score, the better refinance rates lenders will offer you. Look for reporting errors and issues you can resolve to help boost your score.
    3. Determine how much equity you have. First, check your mortgage statement to see how much you owe on the balance. Next, check online home search sites to get a rough idea of your home’s value, or ask a real estate agent to run an analysis. In many cases, you can refinance a conventional loan with as little as 5 percent equity. If your equity is less than 20 percent, though, you’ll likely pay steeper rates and loan fees, plus private mortgage insurance.
    4. Shop multiple lenders. In addition to finding the best refinance rate, pay attention to other refinance fees. Find out whether those costs will be due upfront or rolled into your mortgage. Lenders sometimes offer “no-closing cost loans” but charge a higher interest rate or add to the loan balance. Once you choose a lender, discuss when it’s best to lock in your rate.
    5. Be transparent about your finances. Gather recent pay stubs, federal tax returns, bank statements and anything else your lender requests. Your credit and finances will be reviewed, too, so disclose all of your assets and liabilities upfront.
    6. Prepare for the appraisal. Some lenders may require an appraisal to determine the home’s current market value for a refinance approval. Let the lender know of any improvements or repairs you’ve done since buying your home that might add to its value.
    7. Come to closing with cash, if needed. The closing disclosure, as well as the loan estimate, will list cash needed to close. You might be able to finance those costs, but you’ll likely pay more for it through a higher rate or loan amount. Store copies of your closing paperwork in a safe location and find out how to make your new mortgage payments.
    8. Keep tabs on your loan. Your lender might resell your loan on the secondary market shortly after closing or years later. That means switching mortgage payments to a different company. Watch for mail from your lender notifying you of these changes.

Use a mortgage refinance calculator to learn how a mortgage refinance can work for you.

How does a mortgage refinance work?

A mortgage refinance is when you replace your current home loan with a new mortgage, usually to meet a specific financial goal. Refinances tend to close more quickly than new purchase loans, and you’re not limited to working with the same lender again. Once your refinance closes, the old loan is repaid in full and you’ll begin making payments on the new loan according to the terms you’ve agreed to.

Why should I refinance my mortgage?

The most common reasons to refinance your mortgage are to lower your monthly payments by reducing your rate or term, particularly if you bought your home when rates were higher. Homeowners also refinance to pay off their homes faster, eliminate private mortgage insurance or to take out cash from their built-up equity.

A home refinance isn’t exactly a cake walk. You have to get approved for a new loan, have your finances and credit vetted (again), get an appraisal and pay loan fees. It’s important to have a goal in mind when refinancing your mortgage. Let’s look at each reason you might refinance your home loan in greater detail.

Lower your monthly mortgage payments

Many people refinance their mortgage to lower their monthly payments. A rate and term refinance helps you do this by replacing your mortgage with a new loan sporting a lower interest rate, and for roughly the same term, or repayment period.

Tacking on another 30 years with a new loan when you are already years into an existing mortgage means you’ll pay more interest over time and it’ll take you longer to own your home free and clear. Depending on how much interest you’ve already paid, you may consider shortening the term or making extra mortgage payments to save on interest and repay the balance faster.

Pay off your home faster

Shorter-term loans tend to have lower interest rates because the lender risks its capital for a shorter time period. And the savings in interest payments could be substantial when comparing a 15-year fixed mortgage and a 30-year fixed mortgage. But there are drawbacks to a 15-year mortgage. More of your cash will be tied up in paying down your mortgage. That means you’ll have less money for expenses and to save for retirement, college or an emergency fund.

Eliminate mortgage insurance

When you first got your mortgage, you made a down payment of less than 20 percent, and you’ve been saddled with private mortgage insurance premiums, or PMI, as a result. But in the years since you got the mortgage, you paid down some of the loan balance and the value of your house rose. If the outstanding loan amount is less than 80 percent of the home’s appraised value, you might be able to refinance into a new loan and remove private mortgage insurance.

This could be a solid move if you have a loan insured by the Federal Housing Administration, or FHA. FHA loans have annual mortgage insurance premiums that cannot be canceled if you put down less than 10 percent — even when your loan-to-value ratio falls below 80 percent. The only ways to get rid of FHA mortgage insurance is to refinance the loan or sell the home.

Tap your home’s equity

Homeowners with sufficient equity in their homes sometimes turn to cash-out refinancing to meet a specific financial need. In a cash-out refi, you refinance your home loan into a new mortgage for a larger amount, and receive the difference in cash to use as you see fit.

There are responsible ways to use a cash-out refi. You can use the money to add value back into your home through a major remodeling project. You also can use it to pay off high-interest debt or for educational expenses. To do a cash-out refi, though, you typically need at least 20 percent equity in your home.

How to get the best mortgage refinance rate

Shop around with multiple lenders to get the best deals on interest rates and terms. Additionally, lenders generally offer the best deals to borrowers who have higher credit scores, a positive credit history, and a lower debt-to-income ratio.

As you shop, ideally you want to get a lower rate than what you currently have, but pay attention to the annual percentage rate, or APR. The APR gives you an overall picture of your total borrowing costs, including the loan’s interest rate, lender origination fees, points and other loan charges.

These details, along with your new monthly payments, will be spelled out in the loan estimate each lender gives you. This is a three-page document lenders must provide to you within three business days of receiving your refinance application. You can use the estimate and a refinance calculator to compare loan offers and identify the best deal.

Next steps to refinance your mortgage

Make sure to shop around for the best home refinance rates and terms. Refinancing makes sense if it puts your finances on a stronger footing, so weigh your decision carefully.

If you don’t qualify for a refinance or owe more than your home is worth, a government-backed mortgage program could provide some relief. Your lender might agree to modify your loan or find other solutions to make your monthly payments easier to manage if you face a financial hardship.

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