Should I refinance my mortgage?
Mortgage rates repeatedly hit record lows in 2020. Interest rates are likely to stay low through 2021.
As a result, millions of homeowners are “in the money” to refinance – meaning they could cut their current mortgage rates and save huge amounts of monthly payments.
Deciding when to refinance your home is of course not an easy one. You are real
Refinance rate and savings depend on many different factors.
Do you know when to refinance your home? Here are three trustworthy strategies that
can help you decide.
Check your refinancing rates (November 19, 2020)
In this article (jump to …)
When do you need to refinance your home?
You save money with your home loan. There is a good chance that you will.
Even if you recently bought the home or completed a refinance, it is likely not too early to find a better deal.
However, refinancing is not a switch. It takes
some time and there are closing costs and paperwork to consider.
You have to weigh this
Advantages of a mortgage refinance against the upfront costs to help you make your decision.
There are three easy ways to look at the numbers:
The break-even rule of thumb: Refinancing may be worthwhile if the savings outweigh your closing costs within the time you plan to stay home Lowering your monthly mortgage payments: Refinancing for a lower interest rate and lower monthly payment can be helpful when your budget is tight and you need to free up your cash flow. This strategy might even be worthwhile if your interest costs are higher in the long runRefinancing without closing costs: If you can find a refinancing program with little or no closing costs, the decision will be a lot easier. You will likely pay a slightly higher interest rate, but you may be able to avoid the cost of refinancing out of pocket
First, clearly define your goals. Do you know what yours
Financial goal is and how a refinance will help you get there.
Then check the refinancing rates that are available to you. If they are well below your current mortgage rate, it is likely worth refinancing.
Strategy 1: The rule of thumb "Refinancing to break even"
Your biggest consideration when
Refinancing will likely be closing costs. Like the original mortgage
The closing cost of a refinance can easily be a few thousand dollars.
With that in mind, the first question you need to ask yourself is: Will I stay at home long enough after the refinancing to break even?
The break-even point is when your total savings are equal to the amount you spent on refinancing the closing costs. From this point on, you will see “real” savings on your new loan.
You can get a simple answer to this question by dividing your closing costs by your estimated monthly savings. For example:
Closing and Refinancing Fees: $ 3,000 Monthly Savings: $ 300Time to break even: 10 months
In this scenario, the homeowner only sees savings after eleven months. If he plans to stay in the house for a few more years, a refinance is likely in his best interests.
Calculate your savings potential with a refinancing calculatorr
Here are some more tips for calculating your refinancing savings:
Closing costs to consider include property, fiduciary, and origination fees. Ignore prepaid items like taxes and insurance as you will have to pay for them anywayLook at your interest savings, not your payment savings. The aim is to pay significantly less interest over the term of the loan and not just lower the payment
If you want to move or sell before break even, take another look at your goals.
There might still be reasons for a refinance (like releasing your cash flow below), but more likely it is a wash. You could wait until the interest rates drop a little lower and you can break even faster.
Strategy 2: The cash flow refinancing method
Saving money over the life of your loan is a good reason for refinancing. But it's not the only one.
Let's say you have been on your current loan for a couple of years and really have trouble with the month
Payments. (It can happen to anyone.)
A new term of 30 years can increase your total amount
Interest payments over the life of the loan. But when it lowers yours
monthly payment and free some cash? Refinancing could be worthwhile
Here is an example of how this type of refinancing could affect:
Total remaining interest
This homeowner would save $ 400 per month by refinancing. That extra cash can cut monthly bills and living expenses significantly. It could make all the difference to afford their home.
However, refinancing to a new 30 year term also means that person would pay additional interest of $ 25,000 over the life of the loan.
Whether or not this type of refinancing is worthwhile depends on your individual situation.
The important thing is that you are fully aware of the short and long term implications for your bank account before making a decision.
Check your refinancing rates (November 19, 2020)
Strategy 3: Refinancing without closing costs
There is another surefire refinancing strategy: refinancing without closing costs.
Believe it or not, any lender can offer you refinance with no closing costs. But it's not exactly a free lunch.
Refinancing without closing costs still technically has closing costs. You just don't pay them upfront.
You can either finance the closing costs (pay off over the life of the loan) or accept a higher interest rate in return for the lender, which will cover your upfront fees.
That might sound backwards considering that you are likely refinancing because you want a lower interest rate.
However, if mortgage rates are low enough you can likely see a slight increase and still save a lot of interest in the long run.
For example, imagine you are refinancing a 30 year fixed rate loan with a balance of $ 300,000 and an interest rate of 4.75%:
Refinancing with acquisition costs
Refinancing without closing costs
New interest rate
Total interest savings (over 30 years)
Of course, paying $ 3,000 in closing costs would save this homeowner more over the life of the loan.
However, if you can't (or don't want to) pay $ 3,000 out of pocket, you can still save more than $ 70,000 over a 30-year period with a no-closing-cost refinance. This is not a bad deal.
Check your new plan (November 19, 2020)
Good reasons to refinance your home loan
The three strategies above are designed to help you determine if it is worth refinancing based on the amount of money you can save.
Refinancing can also help you with other financial goals besides reducing your mortgage payments.
Here are just a few great reasons to refinance a mortgage:
Cancel mortgage insurance: You can use refinance to get rid of mortgage insurance (either PMI or MIP) when you have built up enough equity in the home
Short term refinancing: You can pay off your home sooner by refinancing from a 30-year mortgage to a 15-year loan or a less common loan term like a 10- or 20-year mortgage. The interest rates are usually lower, but your monthly payment will increase as you pay back the loan with fewer payments
Get out of an ARM and lock in low rates: Variable rate mortgages usually start out with low interest rates but can rise later. Refinancing to a fixed rate mortgage can help you set a low interest rate for the remainder of your loan term
Get Money From: When you pay back your mortgage, your home equity grows. ONE Disbursement Refinancing You can access some of this equity to pay for home renovations, tuition fees for children, or other essential items
Consolidate Debt: You can also use a withdrawal refinance to pay off high-yielding debts like credit cards or personal loans at a lower interest rate. Use extreme caution with this method as it is easy to secure debt and end up in a worse place than where you started
Repay mortgages, second mortgages or judgments: If you have taken out a second mortgage ("Piggyback" loan), Home equity line of credit, or some other property appraisal, you can use a withdrawal refi to pay off these things
For more information on these refinancing strategies, check out our complete guide to refinancing a home.
Refinancing your home means taking
a brand new mortgage to replace your old one. As such, you must
Fill out a complete loan application and pass the basic mortgage loan requirements.
The minimum requirements for
Refinancing depends on the loan program used.
Conventional refinancing loans usually require a credit score of 620 or higher. If you have at least 20 percent equity, you can avoid paying for private mortgage insurance and save more moneyFHA Refinance Loans Usually a credit score of 580 or higher is required. Withdrawing funds will likely require a credit score of at least 600. FHA Streamline Refinances does not technically require a credit, income, or employment check – or re-evaluation. However, some lenders can check these criteria anyway. FHA refinance loans charge a Mortgage Insurance Premium (MIP). However, if you have at least 20 percent home equity, you can likely refinance to a traditional loan with no mortgage insuranceVA refinancing usually requires a credit score of at least 620, although some mortgage lenders are milder. VA loans do not require mortgage insurance and usually have the lowest interest rates of any mortgage program. VA Streamline Refinance or "IRRRL" does not require an income or employment review or reassessment USDA refinancing Typically, a credit rating of at least 640 is required. As with USDA home loans, the property must be in an appropriate "rural" area. USDA borrowers also have access to a streamlined refinancing program with fewer documentation requirements
Refinancing Option Is Right For You? That depends on your credit report and
Score, your current mortgage, your home value and loan amount, and your total amount
Aim for refinancing.
Here you can compare refinancing options or chat with a lender who can direct you to the right loan program based on your specific profile and needs.
Refinance Rates Today
Refinancing rates are close today
Record lows in the range of 2% and 3%.
Low rates are expected to continue
for a while – but they probably won't fall much further. So if you are wondering
When you need to refinance your home, now may be the right time to move.
Compare the refinancing rates of a
few lenders to find the best deal for you.
Check your new plan (November 19, 2020)