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Do I Need to Refinance My Mortgage?

refinancing a mortgage
Mortgage

Homeowners may wonder, “When should I refinance my mortgage?” There are many scenarios when a homeowner may need to refinance their mortgage. These include getting rid of mortgage insurance, converting their current loan to a different type of loan, removing a borrower from the loan, or accessing their home equity to pay for an unexpected bill.

Do I Need to Refinance My Mortgage?
Photo by Kostiantyn Li on Unsplash

Eliminate Mortgage Insurance

Homeowners who put down less than 20 percent on a conventional mortgage are typically required to pay private mortgage insurance or PMI. Once the homeowner reaches 20 percent equity, they can request to have their PMI removed from their loan. However, if the home’s value increases dramatically, the homeowner may want to refinance their mortgage sooner if the increase means they now have 20 percent or more equity in the home.

Convert Loan Types

Some types of loans, such as FHA loans, require the borrower to pay a mortgage insurance premium, or MIP, for the life of the loan. If the homeowner’s financial situation improves enough to make them eligible for a conventional loan, they may want to refinance in order to drop the MIP payment from their loan. Similarly, a homeowner with an adjustable-rate mortgage may want to refinance to a fixed-rate mortgage to lock in a lower interest rate and have steady mortgage payments for the life of the loan rather than fluctuating payments.

Remove a Borrower

After a separation or divorce, a homeowner may need to refinance their mortgage to remove their ex-partner from the loan. This can happen after the division of assets if one partner is granted full ownership of the home. In order to qualify, the partner who is remaining on the loan must qualify for the new loan using their income and assets, including any alimony or child support payments. The homeowner may also consider a cash-out refinance as a way to split assets with their ex-partner.

Access Home Equity

Homeowners may need to refinance their mortgage in order to access their home equity if they are hit with an unexpected bill. For example, a serious health diagnosis or accident could result in extremely high medical bills that the homeowner is unable to pay. Homeowners can choose a cash-out to refinance to access their home equity and help pay down those bills to avoid defaulting and having them sent to collections.

Benefits of Mortgage Refinancing

Homeowners may be wondering, “Should I refinance my mortgage?” There are several benefits of refinancing a mortgage. Homeowners can take advantage of lower interest rates, a shorter loan term, or the opportunity to pay off high-interest debt.

Decreased Interest Rate

Interest rates fluctuate over time, and homeowners may be able to lock in a lower rate by refinancing their mortgage. A lower interest rate means less overall interest paid over the life of the loan, and a lower monthly payment. That can allow homeowners to put more money toward their retirement, their emergency savings, or even their dream vacation.

Shorter or Longer Loan Term

Many homeowners refinance their mortgages to change the loan term. A shorter loan term means that the mortgage will be paid off sooner, and the homeowner will end up paying less in interest by the time the loan matures. Conversely, a longer loan term can help reduce monthly payments, which can be helpful for homeowners who are struggling to pay their mortgages.

High-Interest Debt Consolidation

A cash-out refinance provides the homeowner with a lump sum of cash from their home’s equity. This cash can be used to pay off or consolidate high-interest debt such as credit cards or personal loans, which can in turn help the homeowner get out of debt faster.

How to Save Money on the Cost to Refinance

Refinancing can be expensive since most types of mortgage refinance require the borrower to pay closing costs between 2 and 6 percent of the total loan amount. However, there are some ways homeowners can save money on the cost of refinancing, including the following. Negotiate lender fees. Homeowners can ask their lender whether their refinancing fees are negotiable. Some examples of potentially negotiable fees include application, origination, and underwriting fees. Boost your credit score. While improving credit scores can take some time, it can be worth it if the homeowner may be able to get a better rate with a higher credit score. Homeowners can work on paying their bills on time and paying down their high-interest debt. Ask about mortgage points. Some lenders may allow homeowners to pay mortgage points, which can help decrease the interest rate on the loan. In general, each point is worth 1 percent of the loan amount and decreases the interest rate by 0.25 percent. Use the same title insurance company. This can help homeowners save up to 40 percent on their title fees. Shop around. Different lenders may offer different interest rates and loan terms. Homeowners can request quotes from several different lenders to find the best offer for them, and then apply with their chosen lender. Consider a streamlined refinance. Homeowners who have an FHA, VA, or USDA loan may qualify for a streamlined refinance, which can help them avoid paying some fees.

Questions to Ask About Refinancing

Refinancing a mortgage is a huge financial decision and one that homeowners should not enter into lightly. Before deciding which type of refinancing to choose, homeowners may want to ask their lender the following questions.

What types of refinancing options do you offer?

Which refinancing option is best for me?

What are the qualification requirements to refinance my mortgage?

What is the difference between interest rate and APR?

Do you offer rate locks?

Will refinancing decrease my monthly mortgage payments?

Will you service my loan after closing, or will you sell it?

How much money can I get from my home’s equity if I choose a cash-out to refinance?

What are the closing costs I will need to pay?

What is a closing disclosure?FAQs

Refinancing a mortgage can come with many questions, especially for homeowners who don’t fully understand the process. The following are some of the most common questions about mortgage refinancing that homeowners may have.

Q. How does refinancing work?

Refinancing a mortgage is essentially taking the current loan and replacing it with a new one that has a lower interest rate or a different term. Homeowners interested in refinancing will need to determine the best type of refinancing for them, apply with their chosen lender, and pay closing costs on the loan. Once the refinance is complete, the homeowner’s old loan will be paid off and they will have a new monthly mortgage payment. For more information on how to refinance a mortgage, homeowners can contact their lenders.

Q. Why does refinancing cost so much?

The costs to refinance a mortgage can be quite high, especially for properties with large loans. This is because a refinance is a brand-new loan that replaces the original mortgage. Just like with the initial mortgage, the borrower must go through an application process that includes a credit and income check, an appraisal, and new title work. This means that the cost of refinancing a mortgage may end up being similar to the cost to purchase a new home.

Q. What costs should I account for when refinancing my mortgage?

In general, it costs between 2 and 6 percent of the loan amount to refinance a mortgage. This cost is made up of several factors, including application fees, appraisal fees, attorney fees, origination fees, and title fees. Borrowers can contact their lender directly to determine the exact costs that they will need to account for when it comes to refinancing their mortgage.

Q. How much does it cost to refinance my mortgage?

The average cost to refinance a mortgage is between 2 and 6 percent of the total loan amount. That means the total cost will be dependent on the amount of the mortgage; for example, the cost to refinance a $200,000 mortgage may be between $4,000 and $12,000, while homeowners who have a $500,000 mortgage will pay between $10,000 and $30,000 to refinance.

Q. When is refinancing a bad idea?

While refinancing is a good option for many homeowners, it can also be a bad option for some. The following are some examples of when refinancing may not be the best idea. The homeowner plans on moving soon and will not recoup the cost to refinance their loan. The homeowner doesn’t have enough equity in their home to avoid PMI. The homeowner’s credit score is lower than 620, or the homeowner has a debt-to-income ratio below 45 percent. Refinancing will not result in the homeowner having a lower interest rate or lower monthly payment.

Q. How can I lower the cost of refinancing?

There are several ways that homeowners can lower the cost of refinancing their homes. These include improving their credit scores, negotiating fees with their lender, shopping around with several lenders, purchasing mortgage points, opting for a streamlined refinance, and using the same title insurance company as they did for the initial mortgage.

Sources: Forbes, Credible, Rocket Mortgage, LendingTree, HomeAdvisor, CNBC

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