By Rae Oakley, Flyhomes Mortgage
Ever wonder what it might be like to refinance your mortgage? Have you found yourself pondering is it worth it? How much does it cost? How do I go about getting a quote? Where do I even start?
Wonder no more! Here is our beginner’s guide to refinancing your mortgage.
What is refinancing?
In short, when you refinance your mortgage you apply for a new mortgage loan and use it to pay off your current mortgage(s).
There are two basic kinds of refinances.
Rate and Term Refinance
A rate and term refinance allows you to take advantage of a lower interest rate and/or a different loan program than you currently have. This is most commonly done to take advantage of lower market rates or to change your loan program from an adjustable rate to a fixed rate loan.
A cash-out refinance requires a minimum of 20% equity in your home. It increases the balance you owe, providing you with additional cash that you can use towards home improvements, debt consolidation, or quite frankly, anything you’d like.
When is the right time?
Because every financial situation is unique, it’s difficult to pinpoint a recommendation that will work for most homeowners.
You can always reach out to your lender for a quote. Our rule of thumb at Flyhomes Mortgage is that you should be saving at least 0.25% off of your current interest rate for a rate and term refinance to make sense.
On top of interest savings, it’s important to consider how much it will cost to close the refinance (common fees include an underwriting or processing fee, appraisal fee, and title and escrow fees). To offset these closing costs, we typically recommend that our clients consider taking a slightly higher interest rate with a lender credit large enough to cover all of the associated closing costs. The other option would be to roll the costs of the refinance into the new loan. Take note that this option increases the amount of principal owed, which increases your monthly payments.
If you’re looking into a cash-out refinance to pull some equity out of your home, you can consider doing that once you have a need for those additional funds.
At Flyhomes Mortgage, we monitor our customers’ loan terms to provide suggestions on when the right time to refinance might be.
What do I need to get a quote?
No matter which bank, lender, or mortgage broker you work with, you’re going to need to provide basic details. It’s easiest to have a copy of your most recent mortgage statement on hand, but if you don’t, here are the items you’ll need for a mortgage lender to get started:
-Estimated current value of your home
-Current loan program (30yr fixed, 7/1 ARM, etc)
-Current interest rate
-Principal balance left to pay
-Your approximate credit score
How do I know if I’m getting a good deal?
When looking at a refinance quote, it’s important to note a couple of things. The first is obviously your new interest rate—how does it compare to your current rate? What’s the difference in your monthly payments with this new rate?
The other important consideration is how much you’re paying for the refinance. What are the specific closing costs required? Most lenders can quote you an interest rate that comes with a large enough lender credit to cover the costs of the refinance.
If there are any costs associated with your refinance, compare how much you are paying up front against how much you’ll save monthly. For example, if you’re paying $1,000 in closing costs for a refinance in order to reduce your monthly payment by $50 per month, you’ll need to keep your mortgage for at least 20 months before you’ll actually start to realize the savings.
Don’t be thrown off by prepaid items such as mortgage interest, property taxes, and homeowner’s insurance that are collected as a part of a refinance, since these are costs that you’re already paying as a result of owning the home. If you have an escrow account tied to your current mortgage, you’ll also receive a refund of that balance when you refinance.
You may also have the option to roll the closing costs and prepaids into the price of the new mortgage. While this reduces the costs required at closing, it increases your principal owed, so there’s a chance it might increase your monthly payment.
Shopping around with different lenders will provide the ultimate transparency into whether you are getting the best deal. Just be sure that you’re comparing apples to apples when you look at your quotes.
Want to talk about refinancing?