With interest rates still near historic lows, now is an ideal time for many homeowners to consider refinancing their mortgage. Refinancing to a lower interest rate can help you save thousands of dollars in interest payments over the life of your loan. This comprehensive guide covers everything you need to know about the refinancing process from start to finish.
What is Refinancing and How Does it Work?
Refinancing simply means taking out a new mortgage loan to pay off your existing home loan. When you refinance, you are essentially replacing your current home loan with a new loan that hopefully has better terms – typically a lower interest rate. This allows you to lower your monthly payments, shorten your loan term, or both.
To refinance, you apply for a new mortgage on your home. Once approved, the funds from this new loan pay off and replace your existing mortgage. While the home remains as collateral, the original loan is paid off in full by the new lender.
What Are The Benefits of Refinancing My Home Loan?
There are a few key potential benefits that make refinancing worth considering:
– Lower Interest Rate – The main goal is to get a lower rate to reduce your monthly payments and overall interest costs. Even a 0.5-1% rate drop can equal thousands in savings.
– Shorter Loan Term – You may opt to refinance into a shorter loan term (e.g 15 year fixed instead of 30 year). This increases monthly payments but pays the loan off faster.
– Cash-Out Equity – A cash-out refinance converts home equity into tax-free cash in hand. This higher loan amount funds home improvements, debt consolidation, etc.
– Better Loan Terms – Those with FHA, VA, or subprime loans can potentially refinance into a conventional loan with better terms.
When Does it Make Sense to Refinance My Mortgage?
As a rule of thumb, it makes sense to refinance if you can reduce your interest rate by 0.5-1% or more. This cutoff accounts for closing costs to ensure you reach the break-even point on your investment in a reasonable time frame.
It also makes sense to refinance when:
– Your credit score has improved significantly since you took out your existing loan
– Interest rates in the market have dropped substantially
– You can convert from an adjustable-rate to fixed-rate loan to lock in low rates
– You can shorten your loan term to pay off your home faster
Should I Use An Online Lender or Bank When Applying to Refinance?
In the digital era, online lenders and banks both provide a straightforward way to apply for and complete the refinance process electronically. With online lenders like Quicken Loans, LoanDepot, and Fairway Independent Mortgage, the entire process can be done remotely. Documents are eSigned, and you can monitor progress via online account dashboards.
Online lenders tend to have lower overhead than traditional banks, which they pass on via discounted rates and fees. However, banks may offer deeper discounts or specials for existing banking customers. Comparing quotes from multiple lenders ensures you get the best overall value.
No matter where you apply, the most important factors are the loan terms, closing costs, and customer service. Be sure to read reviews and compare lenders carefully before submitting a mortgage application.
FAQs on Refinancing Your Home Loan
Q: How much will it cost to refinance my home?
A: Typical closing costs for refinancing range from 2% to 6% of the loan amount. This covers origination fees, appraisal fees, title insurance, and more. Ask potential lenders for a Loan Estimate to understand total costs.
Q: Should I choose a shorter or longer loan term when I refinance?
A: Preferably, choose the shortest term you can afford based on the monthly payments. A 15 year fixed rate loan will have higher monthly payments than a 30 year loan but pays off in half the time. Faster payoff equals huge interest savings.
Q: Can refinancing hurt my credit score?
A: Any hard credit check can cause a small, temporary drop in scores – usually less than 20 points. However, on-time payments on the new loan can start rebuilding your score quickly. Overall the impact is small versus the long term savings from refinancing.
Q: How soon can I refinance after buying my home?
A: Most lenders allow refinancing after just 6 months of home ownership. Waiting at least 12-18 months allows you to build some equity via principal payments before refinancing. Be wary of early refinancing costs and break even timelines.
Q: Is now a good time to refinance with rising interest rates?
A: Even with rates ticking upwards, they are still over 2% lower than historic averages. Locking in a low fixed rate while you can still makes strategic sense versus hoping for the best later. An expert lender can advise on the outlook for rates and home financing strategies.
The bottom line is that working with the right mortgage lender can simplify the process of refinancing your home loan to maximize savings. Be sure to compare multiple loan offers and closing estimates before jumping in.