Mortgage refinancing is the process of getting a new mortgage with a lower interest rate to save money. There are many reasons to refinance a mortgage, including getting a lower interest rate, getting a lower monthly payment, taking cash out of your home, choosing a fixed or adjustable rate mortgage, shortening or extending your loan term or even changing mortgage lenders.
When you refinance your mortgage, there are several types of mortgage refinancing. The best mortgage refinance options will depend on your specific financial situation. Each option may offer different rates and loan terms. Here are three main types of mortgage refinancing:
A rate and term mortgage refinance is the most popular type of mortgage refinancing. With a rate-and-term refinance, you get a new mortgage with a lower rate and use the proceeds to pay off your old mortgage. You will get a new interest rate and loan terms when you refinance. Conventional, FHA, VA and USDA mortgages are all eligible for rate-and-term refinancing.
A cash-out mortgage refinance will get you a new, larger mortgage loan that will be used to pay off your old mortgage. You get to keep the excess cash. A cash-out mortgage refinance is a good option if you have built significant equity in your home. Lenders want you to keep at least 20% equity in your home after you refinance, so you could cash out up to 80% of the value of your home. For example, assume that your home is appraised at $500,000, and you owe $100,000 on your mortgage. This means that you have $400,000, or 80%, equity in your home. Lenders want you to maintain at least 20% equity, or $100,000. This is a loan-to-value of 80%. So, you could cash out $300,000. Your new mortgage could be $400,000, for example. For cash-out refinance mortgages, Conventional, FHA and VA mortgages are eligible. USDA mortgages are not eligible for a cash-out refinancing, but you could refinance a USDA mortgage into a Conventional mortgage first.
A cash-in mortgage refinancing is best if you have less than 20% equity in your home and you want to save money on your mortgage. However, anyone can do a cash-in refinance mortgage, even if you have more than 20% equity in your home. A cash-in refinance mortgage can help you pay off your principal balance to lower your loan-to-value ratio, which can help you get better loan terms. For example, let’s assume that your home is appraised at $500,000 and you owe $450,000 on your home. This means that you have a 90% loan-to-value ratio. To refinance your mortgage, you will want to target at least 20% equity in your home, which is an 80% loan-to-value ratio. So, you could pay off $50,000 on your mortgage upfront, which means you would now owe $400,000, which is 80% loan-to-value. Now, you can refinance your mortgage and get a lower rate and new loan terms.
A mortgage refinancing is the process of replacing your current mortgage with a new mortgage at a lower interest rate. When you refinance a mortgage, a lender will give you a new mortgage and use the proceeds of the new loan to pay off your old mortgage. Your new mortgage may have a lower rate, different loan terms and a different pay-off date than your old mortgage.
You can get the lowest mortgage refinancing rates by comparing rates and loan terms with multiple lenders. When you refinance a mortgage, you can get a lower mortgage rate, which can save you money and help pay off your mortgage faster. How do you get the lowest mortgage rate? Lenders will evaluate several criteria. If you have a high credit score, stable employment, recurring monthly income, a low debt-to-income ratio and at least 20% equity in your home, you may be well-positioned to get a low mortgage rate.
To refinance your mortgage, you can take several steps:
There are many reasons to refinance a mortgage. Here are a few main reasons why you should refinance a mortgage:
Get a lower interest rate
Get a lower monthly payment
When you refinance your mortgage, you can get a lower monthly payment. For example, a lower interest rate can decrease your monthly payment. Another way to lower your monthly payment is to switch from a shorter-term mortgage to a longer-term mortgage. For example, if you have a 15-year fixed mortgage, you could get a lower monthly payment by switching to a 30-year fixed mortgage when you refinance your mortgage.
Change your loan term
Mortgage refinancing gives you flexibility to change your loan term. A shorter loan-term such as a 15-year loan, for example, may have a higher monthly payment, but can save you money overall. In contrast, a 30-year mortgage comes with a lower monthly payment, but may cost more overall due to higher total interest.
Change interest rate type
When you refinance your mortgage, you can choose a fixed interest rate or a variable rate. A fixed interest rate means you have the same interest rate for the duration of your mortgage. No matter what happens to interest rates, your interest rate will stay the same. A variable interest rate, or adjustable-rate mortgage, means that your interest rate can increase or decrease over the duration of your loan. If you currently have a fixed rate and prefer a variable rate mortgage, or vice versa, then mortgage refinancing can help you.
Cash Out Equity
If you have built equity in your home, and want to cash out some of that equity, you can refinance a mortgage. You can use that cash for living expenses, for home improvements, medical expenses, to pay off debt, to fund your business, investments or any other purpose. If you are using your cash out mortgage refinancing for home improvements, the interest expense may be tax deductible.
Remove Private Mortgage Insurance
If you purchased your home with less than 20% equity, your lender may have required you to take Private Mortgage Insurance, or PMI. If time has passed and you have built equity in your home, refinancing your mortgage could help to remove the requirement for private mortgage insurance. Each lender has its own requirements for private mortgage insurance, so you can check with your new lender when you refinance.
There are several risks to refinancing your mortgage.
The best time to refinance a mortgage is when you can get a lower interest rate. A lower interest rate helps you save money on your mortgage and can lower your monthly payment. If current interest rates are lower than the interest rate on your mortgage, then it could be a good time for you to refinance your mortgage. The goal of mortgage refinancing is to reduce your interest costs so that you can pay off your principal balance faster. Often, you can realize more savings from mortgage refinancing when you own your home for a longer time period. While each lender is different, most lenders require that you have your current mortgage for at least 12 months before you refinance.
To refinance a mortgage, you typically need at least a 620 credit score. Some lenders may have no minimum requirement for a credit score. A credit score of at least 580 may be required for certain government programs. That said, each lender may have its own requirements to refinance.
Like any new loan, lenders will check your credit score when you refinance a mortgage. Therefore, your credit score may be impacted when you apply to refinance a mortgage. If you apply to refinance a mortgage with multiple lenders, the good news is that any credit checks typically count as a single credit inquiry on your credit report. Therefore, it can be beneficial to apply to multiple lenders within a short time period to find the best mortgage refinancing rate.
Over time, mortgage refinancing may improve your credit score. Why? It’s possible your credit score may improve because you may pay off your mortgage faster once you get a lower interest rate. Plus, you may use the money you save from refinancing a mortgage to pay off student loans or credit card debt. One way to improve your credit score is to pay off high-interest debt. Making on-time payments on your mortgage over time also can raise your credit score.
When you refinance a mortgage, you can choose between a fixed and variable interest rate. A fixed interest rate means that the interest rate on your mortgage will never change for the duration of your loan. A variable interest rate means that the interest rate on your mortgage can change over time based on movements in prevailing interest rates.
A fixed interest rate will provide you with more certainty and predictability because you will have the same interest rate every month. Since the interest rate on a variable interest mortgage can change, you may have a higher or lower monthly payment over time. Typically, the starting interest rate on variable rate loans are lower than on fixed rate loans.
Most lenders prefer that you have at least 20% equity in your home. However, each lender will have its own criteria for mortgage refinancing.
To refinance a mortgage, you will need several documents, including:
Discount points are optional fees that you pay at the closing of your mortgage loan in exchange for a lower interest rate. Effectively, you are prepaying part of your mortgage interest upfront so that you can lower your monthly payment and save money. One discount point costs 1% of your mortgage loan amount and lower your interest rate by approximately 0.25%. For example, let’s assume you borrow $300,000 at a 5% interest rate. You could pay 1% of $500,000, or $5,000, to lower your interest rate from 5% to 4.75%. Before buying points, make sure that your savings over the life of your mortgage loan will outweigh the upfront costs.
When you refinance your mortgage, you will pay closing costs. There are several types of closing costs, including appraisal fees, title insurance, title search, property taxes, transfer taxes, recording fees, settlement fees, among others. The amount of your closing fees will depend on the geographic location of your home and type of mortgage refinancing.