When to refinance a mortgage?
Generally speaking, you should refinance your mortgage whenever it makes financial sense to do so. Homeowners tend to refinance for two reasons: to get cash out and to lower their mortgage costs.
A cash-out refinance permits people to take equity out of their home by getting a new mortgage for a higher value than the previous one. This new mortgage pays off the old one, and the bank gives the excess funds to you in cash. It often makes financial sense to do this when you're looking to pay off higher-interest debt like credit cards or personal loans.
The other reason to refinance is when interest rates are low. Given that rates are near record lows, many people will find it advantageous to refinance since they'll pay less interest on the loan.
In either event, you can see how much you'll pay with our refinance calculator!
How to refinance a mortgage?
Refinancing a mortgage has essentially the same steps as getting a new mortgage. The mortgage that you'll obtain will pay off your old loan, and the bank will send you any extra money (if you're doing a cash-out refinance). You'll need to apply with a bank, submit all the necessary documentation, and meet the same criteria as anyone else applying for a mortgage, including the minimum credit score and debt-to-income requirements. Refinancing typically also takes the same time to close, with 30-45 day timelines being standard.
It is worth noting that you can refinance all types of mortgages, including FHA, VA, and USDA loans. Therefore, no matter what kind of mortgage you have, you might be able to save money with today's refinance rates!
How much does it cost to refinance a mortgage?
The amount you pay to refinance your loan depends mostly on the terms of the new mortgage. When refinancing a mortgage, there are typically three sources of costs: closing fees, points, and appraisals.
Closing fees are fees that your bank and county charge to process the mortgage. For example, your county may charge a fee to process the change of lienholder. Or your lender may charge you for a title search. These fees often cost about 2-5% of the loan, depending on your lender and where you live.
Points are optional but, depending on your circ*mstances, they can be advantageous. One point equals 1% of your mortgage value. It is a form of prepaid interest that reduces your interest rate by 0.25%. Most of the time, you'll see an ad for a mortgage that reads something like "3.5% with one point." This ad means that to get the 3.5% rate, you'll need to pay 1% of your loan's balance at closing. If you accept a refinance offer with points, you'll add these.
Finally, since a refinanced mortgage is a new loan, you'll typically have to pay for an appraisal. Usually, this is only a few hundred, but it might be more depending on the property's size and location.
How soon can you refinance your mortgage?
The short answer is that you can refinance whenever you want! The longer answer depends on whether or not you're refinancing with a different lender. Your current bank will always accept full payment on the loan. If you refinance with a new lender, you can always refinance right away. However, if you use the same lender, they may have a waiting period before you can adjust the terms of your loan. This waiting period tends to be at least six months, but every financial institution is different. With that said, you should only refinance your mortgage, though, when a refinance calculator shows that it makes fiscal sense to do so!
Property Value
You likely won't have done an appraisal of your property, so make this a best-guess effort. Take a look at some other homes in your area that have recently sold and find ones that are comparable to yours. Once you look at a few of those homes, you should start to get a broad sense of what your home is worth. Put what you think your home is worth in this field.
Mortgage Balance
Enter your current mortgage balance. This number should be the amount that will pay off your loan. You can frequently get the dollar value to enter here by looking for your mortgage payoff statement. Most banks will let you get it online. However, some banks will require you to call in to get a copy of this statement. If you don't have this number handy, you can always estimate it using the current balance as of your last mortgage statement. An approximation is typically good enough to understand if refinancing will save you money or not.
Cash Out
If you're doing a cash out refinance, enter the amount of money you'd like to receive in this field on our refinance calculator. A cash-out mortgage lets you take some of your home equity as cash, in addition to paying off your loan. For example, let's say you owe $250,000 on a $500,000 home. You could refinance that $250,000 and take an extra $50,000 cash to make your new mortgage $300,000 total. Taking money out frequently helps with consolidating debt.
Monthly Payment
Our refinance calculator will use the information you have provided to calculate your monthly payment. This amount represents the total you will pay every month - including interest and principal. When you refinance, you can also opt to have the bank pay your property taxes and homeowners' insurance as part of escrow. If you elect to do that, your monthly payment will include these components as well.
Loan Closing Date
The loan closing date reflects the month in which your loan will finalize, and the bank will transfer the money to escrow for purchasing the property. In particular, the loan closing date is the first day where your loan begins to accrue interest. As such, all interest calculations, principal calculations, and monthly payments start as of this day.
Loan Payoff Date
Your loan payoff date is the month in which you will reduce your mortgage balance down to zero. The refinance calculator will give you this date assuming that you make each monthly payment. If you can, though, you may wish to pay a little bit more each month (even if it's just $10, it can make a difference over the life of the loan). If you do so, you'll pay your refinanced mortgage off faster!
Total Interest Paid
The bank will charge interest on the loan balance. The "Total Interest Paid" field of the refinance calculator reflects the total amount of interest you'll pay in addition to the principal. This money is "lost" in the sense that it does not go towards building equity. The interest amount plus the principal is the total amount you'll pay over the life of the loan. As a quick example, suppose you have a loan for $200,000. The calculator determines that you'll pay $50,000 in interest. The total sum of all your payments will be $250,000 - the amount needed to pay off the principal in full and the accrued interest.
As a seasoned mortgage professional with years of hands-on experience in the real estate and finance industry, I can provide comprehensive insights into the intricacies of mortgage refinancing. Throughout my career, I've assisted countless homeowners in navigating the complexities of refinancing their mortgages, ensuring they make informed decisions tailored to their financial goals and circ*mstances.
Understanding when to refinance a mortgage is crucial, and it typically revolves around two primary motivations: accessing cash equity and reducing mortgage costs. Cash-out refinancing allows homeowners to leverage the equity built in their homes by obtaining a new mortgage at a higher value than the existing one, thereby receiving the surplus funds in cash. This strategy is often favored when individuals seek to consolidate higher-interest debt, such as credit cards or personal loans, into a single, more manageable payment.
Additionally, refinancing becomes particularly advantageous when prevailing interest rates are low. Given the current landscape of historically low rates, many homeowners stand to benefit from refinancing their mortgages to secure lower interest payments over the loan term, effectively reducing their overall borrowing costs.
When it comes to the process of refinancing a mortgage, familiarity with the requisite steps is essential. Much like obtaining an initial mortgage, refinancing involves submitting an application to a lender, providing necessary documentation, and meeting standard eligibility criteria, including credit score and debt-to-income requirements. Whether it's a conventional, FHA, VA, or USDA loan, refinancing options are available across various mortgage types, presenting opportunities for potential savings in today's favorable rate environment.
Considering the costs associated with mortgage refinancing, it's imperative to factor in three primary expenses: closing fees, points, and appraisals. Closing fees encompass charges levied by both the lender and local authorities for processing the mortgage, such as title searches and lienholder change fees, typically amounting to 2-5% of the loan value. Points, although optional, offer a means to lower the interest rate by prepaying interest upfront, with each point equivalent to 1% of the mortgage value. Lastly, appraisal costs, incurred for assessing the property's value, vary based on factors like size and location.
Regarding the timing of refinancing, homeowners have the flexibility to initiate the process at their discretion. While there are no strict limitations on when refinancing can occur, potential constraints may arise if sticking with the same lender, as certain institutions impose waiting periods before allowing adjustments to loan terms. However, if refinancing with a new lender, individuals can proceed without such limitations, provided it aligns with their financial objectives and proves economically viable.
In summary, mortgage refinancing offers a strategic avenue for homeowners to optimize their financial positions, whether by tapping into home equity, securing lower interest rates, or consolidating debt. By understanding the nuances of when and how to refinance, coupled with a thorough assessment of associated costs and considerations, individuals can make well-informed decisions to achieve their long-term financial goals.
