When and how to refinance your mortgage

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• There are many benefits to refinancing your home mortgage, provided you have the right conditions.
• There are many ways to reduce your interest rate, pay off the loan quicker, or get cash from your home.
• If you have a plan to move very soon or if your credit score is declining, refinancing might not be the best option.

There will be a point in your life when you have to decide whether or not you want to refinance if you own a mortgage. This strategy, which basically replaces your current loan with a new one can help you reach a number of financial goals. If used in the right circumstances, it might even lower your monthly payments and interest rate.

Here are a few scenarios in which refinancing might make sense — and some when it may be ill-advised.

What is a mortgage refinancing, exactly? 

RefinancingThis is when you take out another mortgage and then use the money to repay your existing one. You might get a different term or an entirely new interest rate with the new loan. You could get a different type or term of mortgage. 

Refinance with cash-outAnother option is to consider this. This is when you take out a larger mortgage than the one you have. The new loan will pay off your existing one and you’ll get the difference in cash. To pay for home repairs and renovations, many homeowners turn to cash-out refinancing.

Mike Tassone was co-founder and CEO of the mortgage marketplace. Take ChargeExplains: “The purpose is to borrow against the equity in the home and increase principal balance.

7 reasons to refinance your home 

Refinancing your mortgage can often be a smart move — but only in the right circumstances. Before refinancing, it is important to consider the pros and cons of each option.

These are seven reasons to refinance:

1. A lower interest rate is possible

Refinances are a great way to save money over the long-term. 

Tassone suggests aiming for a minimum of a quarter-point decrease, but the lower rate you are eligible for, the more money you can save. 

Remember that interest rates are influenced by both the market and your credit score. The rates that are most favorable to borrowers with high credit scores will usually be the lowest. It is a good idea to work on your credit score before refinancing.

2. Your home’s value has increased

There are two advantages to refinancing if your home’s worth has increased.

You might be able to cancel your mortgage insurance. Conventional mortgages require that borrowers pay mortgage insurance until they reach at least 80%. Ratio loan-to-value — meaning their mortgage loan amounts to 80% or less than the home’s value. You can refinance to a new loan with no mortgage insurance. This could help you save both your monthly payment as well as the long-term.

Higher home values also mean you have more equity which could allow you to borrow more in cash-out refinances. A cash-out refinance might be an option if your home is valued higher and you are looking to pay for major repairs or other expenses.

3. You need to pay your loan off faster

Refinance allows you to take out a new loan at new terms. Tassone refers to this as “reworking your loan in order to better meet your current needs.” 

If you want to pay your loan off faster, for example, you could refinance from a 30-year loan into a 10-year or 15-year loan. While this will usually result in higher monthly payments, it can also lower your long-term cost of interest and allow you to pay down the mortgage sooner.

4. Credit score has improved

Mortgage financing is largely influenced by your credit score. Your credit score is used by lenders to determine your interest rate. It can also help determine the terms and types you are eligible for.

Mayer Dallal, managing Director of mortgage lender, says that if your credit score has improved significantly since the original loan was taken out, you may be eligible for better terms. MBANC.

5. You would like to get rid of mortgage insurance

The majority FHA loans come with mortgage insurance — typically for the life of the mortgage. It can cost anywhere from 0.45% up to 1.05% per year.

You can refinance your FHA loan into a traditional loan if you want to reduce the costs. The amount of your loan must not exceed 80% of your home’s value.

6. You can get an adjustable-rate loan

With an adjustable-rate mortgage, your interest rate can rise over time — meaning your monthly payment can increase. Refinance to a fixed-rate mortgage to avoid this. It offers a stable interest rate and a predictable monthly payment for the loan’s term.

7. You have large debts or are facing huge expenses

You can use cash-out refinancing to pay for major renovations, medical bills, college tuition and other expenses. It can also help you eliminate higher-interest debts — like credit cards, which currently carry rates over 16%, According to the Federal Reserve.

Al Murad, executive vice-president of sales, at Al Murad says that the average mortgage refinance rates are only a fraction of those of credit card interest rates, so cashing out to pay down credit cards and other higher-interest-rate debts might be a smart financial decision. AmeriSave Mortgage.

You can use a cash out refinance to pay higher-interest debts. In essence, you roll the debts into your mortgage loan and pay them off over time. 

7 reasons refinancing your property might not be an option 

Refinancing has its benefits, but it’s not right for everyone — nor for every situation. Sometimes, refinancing may actually end up costing more.

These are seven reasons why refinancing may not be the best move.

1. Other costs and fees could offset savings

Refinancing comes with closing costs. The 2021 Budget Refinances at an average costAccording to CoreLogic data, it was less than $2,400. However, this varies depending on where you live and who your lender is. It can sometimes cost up to 6% of the loan amount, according to the Federal Reserve.

Refinancing should be considered worthwhile if the long-term savings are greater than the initial costs. Dallal points out that refinancing a mortgage can have high closing costs, making it not worth the time and effort.

Personal Finance Insider can be used Calculator for mortgagesGet an estimate of how much you could save by refinancing your home. Compare that figure to Average closing costsCheck with your state’s government to determine if it’s worth it.

2. You might move soon

To come out on top, you want to stay in the home long enough to hit your breakeven point — or the point at which you saved more than the refinance initially cost you.

Tassone states that refinancing is generally not a good idea if there are no savings in payments and the time it takes to close the closing costs exceeds the time you plan to stay in your home. You need to make sure that you will be in the new mortgage for a sufficient time to save more than the initial refinance cost, which can run into the thousands.

3. Inflation rates are substantially higher

You should be cautious if you are considering refinancing your mortgage loan. This would involve trading a low interest rate to get a higher one. While there may be some reasons to refinance your mortgage loan, you should weigh the long-term benefits and costs.

Check out this chart to find out what the current mortgage rates are. Freddie Mac’s Primary Mortgage Market Survey. To compare the long-term cost of your current loan and a possible refinance, you can use a mortgage calculator.

4. Your loan has been with you for a while

Mortgage loans are amortized. This means you pay more towards interest at the start of the loan, and more towards your principal balance over the course of the term. Refinancing your mortgage loan after the term is over can be very difficult. It means resetting all that progress you made and starting over — with the majority of your payments, once again, going toward interest.

Tassone states that refinancing into the same product you have as your current loan will cause your amortization period to be reset. This could lead to higher interest and total payments.

This approach may not be recommended if you have difficulty making your monthly payments. Refinancing to a 30-year mortgage will spread your monthly payments over a longer time period, and reduce your monthly cost. 

5. You cannot afford to pay the closing costs

Refinancing comes with its own costs. While some lenders may claim “no cost” refinances are available, they simply roll closing costs into your mortgage. This results in higher interest rates and payments. Higher interest rates are also associated with these loans.

Tassone acknowledges that this is not always a bad thing. However, he emphasizes the importance of knowing the long-term cost of such a move. Also make sure the move aligns with your goals and budget. 

6. Credit score is now lower than ever

Murad states that if a homeowner’s credit score has dropped significantly due to credit card debt, or other factors, then it might not be a wise decision to refinance.

A lower credit score usually means a higher interest rates and more favorable terms for loans than you have. Lenders want to see credit scores of 740 and higher if you are looking for the lowest rates. 

7. Prepayment penalties apply to your current loan

If you pay your loan off too soon (typically within three to five-years of getting it), some lenders may charge fees. These are known as prepayment penalties.

Check your loan documentation and ask your servicer whether your mortgage has any prepayment penalties. If so, what is it and when it applies. Refinancing may be more expensive upfront, but prepayment penalties can also reduce the savings you can make in the long term.

How to decide if refinancing makes sense

To determine if refinancing is a good option for you, you can calculate the time it will take to reach profitability.

Imagine that your monthly mortgage payment was $2,000 at the beginning. Now, you have a $1800 monthly mortgage payment. This means that you are saving $200 each month by refinance.

Divide your monthly savings by the closing costs to calculate your breakeven point. You would divide $6,000 by your monthly savings if you refinanced.

6,000/200 = 30

It would take you 30 months or two-and-a-half years to make a profit on your refinance. Refinancing won’t be a good idea if you don’t plan to live in the house for long. If you are looking to stay in the home for the long-term, refinancing might be something you should consider.

What is the average time it takes to refinance your mortgage?

According to the average refinance process, it takes approximately 49 days from application through closing. DataICE Mortgage Technology.

You can request quotes from at least three to five lenders to get started. You’ll receive loan estimates from at least three to five lenders. These will break down the terms and rates, as well as the costs. This can be used to compare with other offers. 

Once you have chosen a lender you will complete the application and submit financial documents, such as bank statements and tax returns. You’ll also schedule a home appraisal. Once all of these steps have been completed, you will be assigned a closing date. This is the day you sign final paperwork and pay closing costs. 

You might want to speak with a mortgage broker if you have any questions about refinancing. They can help you shop around and have access to loan product from dozens of lenders.