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β€ When to refinance home mortgages
Refinancing your mortgage can be a smart financial move if it helps you save money or eases your monthly financial burden.
Many experts suggest refinancing when you can secure a lower interest rate, shorten your loan term, or both.
However, there are various scenarios when refinancing makes sense, including seeking short-term payment relief or accessing your home’s equity.
In this article, we’ll dive deeper into the world of mortgage refinancing to help you determine if it’s the right move for you.
What is home mortgage refinancing
In simple terms, refinancing means taking out a new mortgage to pay off your existing one. It’s similar to the process of getting a mortgage to purchase a home but with a few key differences. The good news is that refinancing doesn’t come with the same urgency as buying a new home.
You won’t have the pressure of house hunting and moving, and there’s usually no rush to close the deal. In fact, you often have until midnight of the third business day after closing to change your mind if you have any regrets.
Now, let’s talk about the timing and duration of the refinancing process. On average, from April 2019 to August 2020, it took anywhere from 38 to 48 days to refinance a conventional mortgage.
However, during periods of lower interest rates and increased demand for refinancing, the process may take longer.
If you’re refinancing a loan backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), it might add another week to the timeline compared to a conventional refinance.
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How to determine when to refinance
Refinancing can be an attractive option in many cases, but it’s not a one-size-fits-all solution. Here are some common reasons people choose to refinance their mortgages:
Lowering Monthly Payments
One of the primary motivations for refinancing is to reduce your monthly mortgage payment. This can be achieved by securing a lower interest rate or extending your loan term.
Long-Term Savings
By refinancing at a lower interest rate or with a shorter loan term, you can decrease your overall interest costs over the life of the loan.
Eliminating Mortgage Insurance
If you’ve built up enough equity in your home, refinancing can help you get rid of costly mortgage insurance.
Before you jump into refinancing, it’s crucial to consider the associated closing costs. These can include fees like the origination fee, appraisal fee, title insurance fee, and credit report fee. Typically, these costs range from 2% to 6% of the loan amount.
To determine if refinancing is worth it, calculate the break-even point. This point is where your savings from a lower interest rate exceed the closing costs. You can find this by dividing your closing costs by the monthly savings on your new payment.
Here are a few examples to illustrate how the break-even period works:
If your break-even period is around 25 months, that’s reasonable, but if it extends to 75 months, it might not be worth it. The key is to assess how long you plan to stay in your home, as refinancing multiple times can impact your long-term savings.
| Amount refinanced | Closing costs (%) | Closing costs ($) | Current monthly payment | New monthly payment | Monthly savings | Break-even period (months) |
|---|---|---|---|---|---|---|
| $250,000 | 2% | $5,000 | $1,150 | $950 | $200 | 25 |
| $250,000 | 4% | $10,000 | $1,150 | $950 | $200 | 50 |
| $250,000 | 6% | $15,000 | $1,150 | $950 | $200 | 75 |
Reasons to refinance
Securing a Lower Interest Rate
When market interest rates drop, refinancing to obtain a lower interest rate can significantly reduce your monthly payment and total interest payments over time. A higher credit score will help you secure the best rates.
Accessing Home Equity
Refinancing can also be a means to access the equity in your home. Many homeowners choose to take cash out or finance their closing costs through a cash-out refinance.
Shortening Loan Term
Switching from a 30-year to a 15-year mortgage can increase your monthly payment but ultimately reduce the amount of interest you pay over time. This can be especially beneficial if you don’t plan to deduct mortgage interest on your taxes.
Getting Rid of an FHA Loan
FHA loans come with mortgage insurance premiums (MIPs) that can add up over time. If you want to eliminate these premiums, refinancing into a non-FHA loan is the way to go.
Eliminating PMI
For conventional loans, you can request the removal of private mortgage insurance (PMI) once you have enough equity, typically around 20%.
Switching from Adjustable-Rate to Fixed-Rate
Some borrowers refinance to switch from an adjustable-rate mortgage to a fixed-rate one, providing stability and predictability in their monthly payments.
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β€ Pros and Cons of Refinancing
| Pros | Cons |
|---|---|
| 1. Lower Monthly Payments: Refinancing can reduce your monthly mortgage payments. | 1. Increased Monthly Payments or Interest Costs: In some cases, refinancing might lead to higher monthly payments or overall interest costs. Carefully evaluate whether the potential benefits outweigh these increased expenses. |
| 2. Reduced Long-term Interest Costs: Refinancing leads to significant savings on long-term interest costs. | 2. Closing Costs: Refinancing typically involves various closing costs, such as origination fees, appraisal fees, and title insurance fees. Factor these costs into your decision. |
| 3. Access to Home Equity: Refinancing provides an opportunity to tap into your home’s equity for various financial needs. | 3. Application and Documentation Process: Refinancing requires time and effort to shop for a new mortgage, complete the application process, and submit the necessary documentation. It’s a commitment that may not suit everyone’s preferences or circumstances. |
| 4. Elimination of Mortgage Insurance: Refinancing can help eliminate private mortgage insurance (PMI) costs once you have sufficient equity in your home. | 4. Impact on Credit: Lenders often perform hard credit checks during the refinancing process, which can impact your credit score. Consider this if you have plans for other significant financial transactions. |
β€ When to Refinance Home Mortgages FAQ
How long do you plan to stay in the home?
Consider how long you intend to live in your current home. Refinancing can be a smart move if it leads to long-term savings, but if you’re planning to sell within a year or two, the costs of refinancing may not be worthwhile.
How much will it cost to complete the refinancing?
The expenses for refinancing can vary. Depending on your lender and loan terms, it might cost a few hundred dollars or 2% to 3% of the new loan amount.
Weigh whether the potential savings justify the costs. If you can include the closing costs in your loan, you won’t need to pay them out of pocket.
How old will you be when the mortgage is paid off?
Consider the impact of a new mortgage term. If you refinance to a 30-year mortgage, you’re resetting the clock on paying off your home.
If you’re several years into a 30-year loan, think about whether you want to extend the repayment timeline, especially if it means carrying debt into your retirement years. You can also explore refinancing to a 15-year mortgage.
Are you in need of more monthly cash flow?
Refinancing can change your monthly payment. If you require more financial breathing room, it may make sense to refinance for a lower monthly rate. However, ensure you have a clear plan for using the extra funds wisely.
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What documents do I need to refinance my mortgage?
To refinance your mortgage, you’ll need to provide identification, income verification, and credit information. Ask your lender for a list of required documents. The faster you supply the necessary paperwork, the quicker the refinancing process will be. Here’s a general checklist:
- W-2s or 1099s
- Recent pay stubs
- Most recent tax returns
- Statement of assets
- Statement of debts
- Proof of property insurance
- Appraisal
How can you lower your mortgage payment without refinancing?
There are alternative ways to reduce your housing costs without refinancing:
- Mortgage Recasting: Your lender can recalculate your payments based on your current balance. You may need to pay down a significant portion of your principal and pay a fee.
- Removing Mortgage Insurance: If you reach 80% loan-to-value by paying down your principal, you can request your lender to remove private mortgage insurance (PMI).
Who offers a no-closing-cost refinance mortgage?
Many lenders offer no-closing-cost refinancing, where closing costs are added to your loan amount. While this reduces upfront expenses, keep in mind that it may lead to a higher monthly payment and interest rate.
How can you remove a co-signer from a mortgage without refinancing?
Typically, refinancing is required to remove a co-signer. However, some lenders may consider removing a co-signer without a full loan rewrite. You can contact your lender to inquire about this option.
Note that all parties may need to file a quitclaim deed, which transfers ownership and removes the co-signer’s name. Consulting with an attorney might be advisable due to the complexity of this process.
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