How To Refinance Your Mortgage?

06 Aug 2020

If you want to lock in a lower interest rate to save money or tap equity, mortgage refinancing is the option.

So, before you head to look for the lenders, do your homework of getting estimates of the cost of each and every item. 

Some lenders might tout a low rate for you to shift focus towards them, but will charge higher processing and escrow charges than other lenders. That’s a marketing technique that you should not fall prey to.

With interest rates this low than it was in decades, it’s worth investing your time to look at what’s best for you. And if you’re really serious in refinancing your mortgage, then be sure to submit an application. 

Getting a mortgage refinancing with a 1-2% dip in interest rates will mean a significant drop in your monthly budget and an opportunity to pay off your mortgage faster. 

Let’s understand what is mortgage refinancing and how you should do it?

Replacing your existing home loan with the new one is termed as mortgage refinancing. It is done with the purpose of lowering the interest rates and saving on the monthly outflow of cash to pay off the debt faster. 

It is also done to get rid of FHA (Federal Housing Administration) mortgage insurance or to switch to an adjustable-rate to a fixed-rate loan.

Here’s a step by step guide to refinancing your mortgage.
  1. Consider revisiting your mortgage to save on those extra bucks – You could be losing a lot of money on your home loan. Those extra cash can be saved by refinancing to one of the best deals available in the market  at a lower rate. You can avail a few additional features or get at a lower rate, that could help you fund other investments with the money saved. Do a quick review of your existing loan, if you’ve not done in the recent time.

  2. Check your credit – There are a lot of perks of availing a mortgage refinance with good credit. It could improve your chances of getting the loan at a lower interest rate. Other factors that are being considered by lenders are your credit utilization ratio, recent credit applications, payment history, foreclosures, and more. 

  3. Shop for the best rates – Consider the most important aspects of fees, interest rates, and features. The best way is to compare the deals online.  

  4. Apply with at least three to five lenders – It is best to apply for the loan with the lenders within the short time of say a week or two. It will minimize the impact on your credit score. List of fees and costs come up when you plan to refinance your mortgage. Check all of them thoroughly.

  5. Set your goals which will lead towards savings – While trying to pay off your mortgage faster, opt for a shorter term. It would help meet your goal effectively. If you wish to save more money, look out for the option of switching to a lower rate and a shorter term. This might increase your repayment amount slightly, but will significantly save a good chunk of money in interest by reducing the years from the term.

  6. Hire a mortgage broker – To save yourself from the hassle of endless paperwork, time, money, and analyzing the deals by lenders, hiring a broker would be your best bet. He/She will assist you in identifying suitable deals, help you in deciding whether refinancing is a good option or not, and look after the paperwork for the deals. You can make more time for things that also matter to you, once these things are taken care of. 

  7. Finalize your best option – You can now be the decision-maker and close on the lender which you deem fit for your mortgage refinancing. Make the necessary formalities of closure and move your loan to a different lender. A mortgage broker will make the process smooth for you. 

When to refinance your mortgage?

A break-up analysis is something you must be investing time in, to analyze if refinancing is worth for you. 

If you fall into any of these categories, then it will make sense if you consider refinancing your mortgage. 

Having a mortgage tenure of over 15 years – Refinancing is a good way to get the ultimate goal of locking in a shorter term for a mortgage loan. The new terms of financing should not be more than 25% of your take-home pay.

If the rates are already low enough with a 30 year fixed rate mortgage to compete with the 15-year rates out there, do give it a thought once more. Get assistance from the mortgage calculator to crunch the numbers and see what will be your monthly EMI towards a 15-year loan. Proceed only if it’s worth doing the whole process once again.

Having a high-interest rate – Refinancing would be a smart financial move if it lowers your interest rate even for a percentage or two. This could be huge in terms of your saving and payment schedule. When the rates are lower, you can take advantage to pay off. 

If it helps in controlling your monthly bills by the savings made from lowering the rates, you’ll feel more confident to have money to put in towards becoming totally debt-free.

Tap into Equity – You get a check from the lender for the difference of amount when you refinance to borrow more than you owe. Borrowers often get a cash-out to refinance and a lower interest rate at the same time. This will be of great help to you.

Move to a fixed-rate loan from an adjustable one – You will have more financial stability when you refinance your mortgage from an adjustable one to a fixed interest loan. If you prefer steady payments, it is going to be your go-to choice.

To avoid FHA mortgage insurance – Refinancing is the best way to get rid of FHA mortgage insurance is by selling your home or refinancing when you have enough equity. 

What will be the cost to refinance?

The closing costs of refinancing include – 

  • Home inspection fee
  • Lender’s attorney review fee
  • Refinance application, a new home appraisal, and title search
  • Origination fee
  • Points fee

The cost to refinance depends on your home’s location, and the amount borrowed, closing costs for a refinance may range from 3-6% of the loan amount.

The costs typically do not include property taxes, homeowner’s insurance, mortgage insurance because they were set up when you first purchased your home.

Keep in mind refinancing for a mortgage comes with all the same processes and fees you experienced when you first got your home loan, such as paying for a home appraisal, title insurance, inspection, document recording, etc.

Once you’re ready, stop by your local credit union and get pre-qualified for a mortgage refinance loan.