With mortgage rates at historic lows, there has never been a better time to refinance a mortgage. Refinancing a mortgage may allow you to reduce your interest rate, cut your monthly payments, reduce the number of years it takes you to pay off your home, or tap into your home’s equity.
Refinancing may also allow you to get rid of mortgage insurance payments or remove monthly escrow requirements, which can have a serious impact on your monthly cash flow.
Is it a good time to refinance my mortgage?
The best times to consider a mortgage refinance are when your credit improves to the point where you qualify for a new loan that has a lower interest rate or when interest rates drop significantly. But, there are additional considerations that you should take into account.
Good Reasons to Refinancing a Mortgage
- You plan to stay in the property for several more years
- You can lower your mortgage rate by more than 0.5%
- You can lower your monthly payment without extending the time it takes to pay off the loan
- You have savings that allow you to accept some cost today to increase cash flow in the future
- Your credit score has improved significantly since you acquired your first mortgage, which may allow you to qualify for a better rate
Negative Factors for Refinancing a Mortgage
- You cannot afford the upfront closing costs of your new loan
- You can lower your monthly payments, but must extend the loan and pay more in the long run
- Recouping the upfront closing costs of your new loan will take too long (also known as the break-even period)
- Your credit score has decreased significantly since your first mortgage, which may disqualify you from the better rates
- Your debt-to-income ratio has increased substantially, which may disqualify you from new loans
Three Thrifty Guys Mortgage Refinance Calculator
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Check Your Credit Score And History
You will need to qualify for a refinance, which is similar to getting approval for your initial home loan. Aside from getting your home equity value, another qualification is your credit score and credit history. Lenders have heightened their standards for loan qualifications in recent years. It might surprise you that even with your good credit score, it may not be enough to qualify for the lowest interest rates.
Most lenders favor a credit score of 760 or higher to qualify for the lowest interest rates. Those with lower interest rates can still be eligible for a refinance but with higher rates and fees. It only makes sense to take a few months to increase your credit score before starting the refinancing process.
Find Out The Real Costs of Refinancing
There are several costs to refinancing a mortgage that are important to consider. Fees often add up to thousands of dollars and are due upfront, so be prepared for these.
- Third-Party Fees – Upfront fees including title insurance, appraisals, and credit checks
- Points – Upfront payments of 1% of your loan are common
- Escrow – Prepayment of property taxes and homeowners insurance
- Lender Fees – Fees payable at closing including loan origination fees and mortgage application fees
- Additional closing costs
Get Quotes from Multiple Lenders
Shopping around for a lender who not only offers a competitive interest rate but also the lowest fees is worth your time and effort. Because refinancing can cost thousands of dollars, make sure refinancing has a tangible benefit to your finances and that you’ll stay in your home long enough to recoup the fees.
Applying with multiple mortgage lenders allows you to compare interest rates and fees. Take note of whether the fees are due upfront or rolled into your new mortgage. There are also many instances where lenders offer “no-closing cost loans” but charge a higher interest or add to the loan balance. After choosing a lender, discuss when it’s best to lock in your rate to avoid it from increasing before your loan closes.
Doing this may well save you thousands of dollars. However, applying with multiple lenders may result in score-lowering credit inquiries. One way to remedy this is to submit all applications within two weeks to minimize the impact on your credit score.
Prepare All Necessary Documents
Having all the necessary documents on hand before starting the process makes it go more smoothly. Secure all recent pay stubs, federal tax returns, bank statements, etc. Your Lender will give you a list of all the documents they require. Be transparent about your finances and disclose assets and liabilities upfront.
Refinancing can be a great financial move provided that it reduces your mortgage payment, shortens the term of your loan, or helps you build equity. However, as noted above, there are many important factors considerations to keep in mind. If you have questions about any of these topics, drop us a quick note in the comments below and we'll respond quickly.
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