Refinance

Refinance

Mortgage refinancing occurs when homeowners get a brand-new mortgage to replace their current loan. The primary goal in refinancing is usually to lower the interest rate on the loan. However, some homeowners undergo a mortgage refinance as a way to take cash equity out of their homes.

Home refinance helps reduce monthly payments through a lower interest rate for some owners. For other homeowners, a lower interest rate reduces the overall amount of money the homeowner must pay to ultimately pay off the mortgage.

When is a Good Time for a Mortgage Refinance?

In the most general sense, the best time to consider refinancing a mortgage is when current interest rates are lower than the rate on the current mortgage. However, the interest rate doesn't need to be dramatically lower to make refinancing a good idea. A rate reduction as low as 0.75 percent may offer some benefit.

At its most basic level, home refinance makes sense when the process will save you money in the long run. Mortgage experts usually recommend refinancing when you plan to remain in your home for several years and can reduce the mortgage interest rate by at least 0.75 percent.

In some cases, a homeowner who is in danger of losing their home may consider a home-refinance, even if the process won't actually result in money saved. For some homeowners, a reduced monthly payment from a mortgage refinance can help the family remain in their home and make the higher overall cost worth it in the long run.

Is a Home Refinance a Good Idea Right Before a Move?

In most cases, a mortgage refinance won't save you substantial money if you plan to move just a few years after you complete the refinance. A mortgage refinance is a new loan, which means it comes with another round of closing costs, just like your original loan.

The Federal Reserve indicates that homeowners can pay anywhere from three to six percent of the outstanding principal in the form of refinancing fees or closing costs. Even if you score a lower interest rate, you might only save a few hundred dollars overall during those first few years. The actual savings on a mortgage refinance won't add up to a substantial amount for several years, so it's often better to refinance only when you plan on staying in your home for many years.

How Much Does Refinancing a Mortgage Cost?

One of the most important calculations you must figure out when refinancing a mortgage is the total fees you'll pay for the service. Some expenses may include prepayment penalties on the old mortgage and closing costs for the new mortgage.

You'll add these costs together with the new mortgage amount to determine whether refinancing makes sense. However, you should expect to pay anywhere from three to six percent in closing costs for your refinance plus any prepayment penalties associated with the old loan.

What are Points on a Mortgage?

Sometimes referred to as lender credits, points are a tradeoff in the mortgage process that allows you to reduce your interest rate by paying additional money upfront. Some mortgage lenders also use the term points to refer to upfront fees charged on a new mortgage loan. In other cases, the term refers to lender credits offered when there's a problem with the mortgage.

Some homeowners will "pay points" on their mortgage to reduce their interest rate. Paying points effectively increases your closing costs because they're rolled into the payments you make at the start to secure the loan.

Is it a Good Idea to Pay Points to Lower a Mortgage?

In most cases, one point reduces the interest rate on a mortgage by one-quarter of a percent. An example would be an interest rate of five percent reduced to 4.75 percent when the homeowner pays one point. Homeowners can even pay fractions of a point to reduce their interest rate.

The only time it makes sense to pay points on a mortgage to reduce your interest rate is if you plan to remain in your home for several years after the mortgage refinance. For example, paying one point on a $200,000 mortgage may save more than $20,000 over the life of the loan with a 4 percent interest rate, but the total savings will only reach $20,000 if the homeowner remains in their home for the entire 30 years of the mortgage term.

What Does it Mean to Lock an Interest Rate?

Sometimes referred to as a rate lock or lock-in, locking the interest rate on a mortgage loan means that the interest rate won't change between your offer on a house and the closing, as long as no changes occur on the mortgage application. According to the Consumer Financial Protection Bureau, rates may change daily and sometimes hourly, so locking in a rate can help when interest rates are on the rise because of current economic conditions.

The drawback of a rate lock is that you might miss out on a lower interest rate if rates fall after the lock-in. It may also become more expensive to secure the mortgage if there are any delays in reaching the closing.

Can You Get a Mortgage Refinance with Bad Credit?

You may qualify for a mortgage even if you have bad credit, but you can expect a higher interest rate whether you're applying for a new mortgage or trying to get a mortgage to refinance. You may need to pay a higher down payment to secure a mortgage when you have bad credit.

For many homeowners, it doesn't make sense to refinance a mortgage unless their credit is good and will qualify them for a lower interest rate.

Is it Impossible to get a Home Loan with Late Payments?

A home loan isn't impossible to get when you have a few late payments. In most cases, you can get a mortgage as long as you have fewer than three late payments, with none of those payments resolved more than 30 days late.

You may even qualify to get a loan at a relatively competitive interest rate, but it depends on your lender and the explanation you provide for your late payments. There's no harm in talking to a lender about the possibility of a refinance, but you may want to hold off on the formal process until you can guarantee that you'll receive a lower interest rate with the new mortgage loan. Contact us today!