When is the right time to refinance my mortgage?

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When to refinance your mortgage depends on several factors, including whether the benefits outweigh the costs. Learn more. (iStock)

When it comes to finding a way to lower your mortgage costs, refinancing could be the answer, and many homeowners agree. In 2020, Americans gave the mortgage industry about $ 2.6 trillion in refinancing – more than double the amount in 2019 – according to Freddie Mac data.

Refinancing allows many homeowners to take advantage of low mortgage rates, reduce their monthly payments and leverage their home equity. But even if the rates are at their lowest, that doesn’t always mean refinancing is the right decision for you.

Before you can decide on the right time to refinance your mortgage, there are a few things you need to consider.

Credible allows you to compare mortgage refinance rates from various lenders in minutes.

When to refinance your mortgage

The right time to refinance a mortgage is different for everyone. Whether this is the right decision for you depends on a few factors, such as your financial goals and how long you plan to stay in your home.

That said, there are some common factors that may indicate refinancing is the right decision for you.

You want a lower interest rate

One of the most common reasons homeowners refinance lower their interest rate, which can save thousands of dollars over the life of the loan. If you took out a mortgage when the rates were high, you could be paying too much on your mortgage. Refinancing in this case might make sense.

You want to leverage the equity in your home

Whether you want to pay off high interest debt or do some major home renovations, you can tap into your home equity with a cash refinance (more details below).

Assuming your new rate is lower than your current rate, refinancing with cash might be a wise financial choice. But keep in mind that the best use of your home equity is usually to increase or preserve the value of your home with improvements or repairs. Cashing in on equity to pay off other debt turns unsecured debt into debt secured by your home.

You are ahead of your mortgage repayment

When you start paying off your mortgage, your monthly mortgage payments go more towards interest than your principal (the amount of money you originally borrowed). The longer the term of your loan, the more your monthly payments will go towards the capital. This change is called depreciation.

If you refinance now, before these payments start to flow out of your principal, you won’t have to start the amortization process all over again.

You want to change the type of loan

If you currently have amortgage, or ARM, you probably received a lower rate at the start of the loan. But after a while, the rate will reset and could go up – potentially by a lot. Refinancing to a fixed rate mortgage to lock in a low rate might make sense.

You want to get rid of PMI

If you took out a conventional loan when you bought your home and your down payment was less than 20%, you probably paid for private mortgage insurance, or PMI. This protects the lender – not you – if you fall behind on your mortgage payments.

One way to get rid of PMI is to refinance – you may be able to do this if the value of your home has increased significantly since you bought it and your loan-to-value ratio is below 80%. In this case, refinancing to eliminate PMI could save you hundreds or thousands of dollars each year.

You want to pay off your loan sooner

If interest rates have gone down since you first took out your mortgage, refinancing your loan for a shorter period may be a good idea, especially if you can comfortably make larger monthly payments. In most cases, shorter term loans tend to have lower interest rates, which saves you money.

So if you refinance your 20-year mortgage to a 15-year mortgage, you can pay off your loan five years sooner and save yourself five years of interest.

How does mortgage refinancing work?

Refinancing your mortgage means you take out a new loan to pay off your existing loan. Whether your new mortgage is from the same lender that holds your current mortgage or from another lender, it will have a different interest rate and term. You can even choose another type of loan.

Just like when you took out your initial mortgage, you will need to go through an application and approval process. You will likely also have to pay closing costs.

With Credible, you can compare mortgage refinance rates without affecting your credit score.

How much does refinancing cost?

Refinancing fees typically cost between 3% and 6% of the amount borrowed. Keep in mind that this does not include any fees you might incur to pay off your existing mortgage, such as a prepayment penalty.

Although refinancing fees vary by lender and location, here is a list of typical fees that you are most likely to pay:

  • Registration fees
  • Original fees
  • Assessment fees
  • Closing or legal costs
  • Escrow (goes to taxes and insurance)
  • FHA or VA insured loan fees
  • Title search and insurance fees

What are the different types of refinancing?

Homeowners can choose from the following refinancing options:

  • Refinancing at rate and duration – With rate and term refinancing, you can change your interest rate, the term of your loan, or both. This allows you to save money on interest or guarantee a lower monthly payment. Your new loan amount will generally be equal to the remaining balance on your original mortgage, unless you decide to defer closing costs on your new mortgage.
  • Refinancing of collection – This type of refinancing also allows you to change your rate, your term, or both. But you borrow more than you need to pay off your current loan and pocket the difference in cash, which you can use for almost any purpose. You can only choose to refinance with withdrawal if you have enough equity in your home.
  • Refinancing of collection – Instead of withdrawing extra money, a cash refinance allows you to make a lump sum payment on your existing mortgage to reduce the principal balance of your new mortgage. It’s similar to a mortgage overhaul, where the lender agrees to change the terms of your loan when you make a lump sum payment.
  • FHA streamline refinancing – If you currently have an FHA loan, you may be eligible for FHA Simplified Refinance. The main advantage is that borrowers do not have to complete as much paperwork as with traditional refinancing. But to qualify, you can’t be behind on your current mortgage, and you can’t withdraw more than $ 500.

Should I refinance my mortgage?

When you decide to refinance your mortgage, consider whether you want to put in the time and effort. While refinancing is an individual decision, you can do some math to determine whether it’s worth paying the closing costs for the chance to save money on a new mortgage.

How to calculate your breakeven point

Calculating your breakeven point helps you make sure that a refinance makes financial sense to you once closing costs and other costs are factored in. The breakeven point is the time it takes for your refinance to pay off itself. It makes more sense to refinance if you stay in your home after this period.

To calculate the breakeven point, take the overall mortgage costs of your new loan and divide it by the monthly savings you will receive. For example, if you owe $ 6,000 in closing costs but will save $ 250 each month through refinancing, it will take 24 months for you to break even.

This means that for the refinancing to be worth it, you will want to stay in your home for more than 24 months.

If you are ready to refinance, use Credible to compare mortgage refinance rates from various lenders.

When refinancing your mortgage doesn’t make sense

The idea of ​​reducing your mortgage costs through refinancing can be appealing. But it’s not always the right decision for everyone. Here are some scenarios in which refinancing may not be a good idea:

  • You have a prepayment penalty. If you have to pay a prepayment penalty to prepay your current mortgage, factor those charges into your closing costs to see if it’s worth it. Ask your current lender how much would the prepayment penalty be. In some cases, you may be able to negotiate a penalty waiver if you refinance your mortgage with the same lender.
  • You already have a home equity loan. If you have a home equity loan or home equity line of credit (HELOC), ask your lender if you qualify for refinancing. Otherwise, you will have to pay off the amount you owe on your mortgage before you get a new mortgage.
  • You are moving soon. If you plan on moving in less than a year, you may not be able to break even, so refinancing probably wouldn’t be worth it in this situation.

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