June 9, 2021
To put it simply, refinancing your home is kind of like getting a mortgage — with way less stress and complications. When you’re thinking about a refinance, you no longer have to worry about whether or not you can get the home, because you live there! Another perk is that banks are usually more receptive to accepting homeowners rather than people who have never owned before. There is less paperwork and red tape to worry about, and most of the work is handled by the financial institution you choose to work with.
Refinancing becomes especially attractive when interest rates drop or remain low compared to previous rates that you accepted. You can refinance a home with your current lender or with a different one, but a large part of how well refinancing will work for you depends on whether it will improve your overall financial situation.
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When Is a Refinance Worth It?
The prospect of being able to enjoy a lower interest rate on your mortgage is a primary driver for refinancing. Being able to lower your interest percentage may reduce your monthly mortgage payment by $100 or more. However, a mortgage’s interest rate—while important—is not your only financial factor to consider.
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Private Mortgage Insurance: Mortgage lenders typically require PMI when mortgaged amounts exceed 80 percent of a home’s appraised value. If you weren’t able to make a 20-percent down payment at purchase, you’ll accrue equity as you pay on your loan’s principal. If your home increases in value, you may be able to reach 20 percent sooner and drop the extra expense of PMI through a refinance.
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Type of Mortgage Loan: If you took advantage of the initially lower interest rate of an ARM—adjustable-rate mortgage—and now face periodic hikes in that rate, you may benefit from switching to a fixed-rate loan with a lower interest rate.
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Mortgage Term: When you refinance, you reset the clock on the term. Choosing 30 years, for example, extends the term of the loan while refinancing for 15 or 20 years may offer an even lower rate and contribute to your principal and equity more rapidly.
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HELOCs and Home Equity Loans: Home equity lines of credit—HELOCs—and home equity loans are convenient financial resources. Using them, however, equates to an additional monthly payment with a higher interest rate. Refinancing may allow you to roll balances into the primary mortgage amount and interest rate. Visit our site to learn more about HELOCs.
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Cash Out: If you have sufficient equity in your home, you may be able to access some of it through a refinance with a cash-out option. Often, homeowners who want to repair, remodel or add on to their home use some of their equity to increase the value of their home or pay off essential home-related debts.
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Closing Costs: Creating a new loan usually comes with a price. Even no-cost refinances typically roll the usual closing costs into your loan versus having you pay them upfront. Closing costs for a mortgage refinance can include, for example, fees for the loan application and origination, home appraisal, credit report, title and insurance, points and settlement.
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Break-Even Point: To determine whether a refinance is worthwhile, you need to balance your costs and potential savings against a timeline. Simply put, how long will it take you to recoup your costs to make the monthly savings worthwhile? You can calculate your monthly payments with our Mortgage Calculator.
Comparing the pros and cons of refinancing your mortgage should give you a sense of whether refinancing is a good option for you right now. On the positive side, a refinance may reduce your monthly mortgage payment amount, help you pay off your loan sooner, let you tap into your home’s equity, or allow you to consolidate HELOC and home equity loan balances. However, a refinance may also come with closing costs and fees, take time to recoup the financial investment, and extend your payoff date years into the future.
IS REFINANCING THE RIGHT DECISION FOR YOU?
The Refinancing Process
So how does home refinancing work? Refinancing bears many similarities to finding a mortgage lender and closing on the loan when you first bought your home. You’re still looking for the best deal, and your credit report and payment history still matter. You’ll still have to provide standard financial information and typically pay for an appraisal of your home to establish its current value.
Lenders and loans differ in the conditions they offer, so when you’re looking at how to refinance your home, pay particular attention to factors like:
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Locking In Your Interest Rate. Interest percentages can change daily, so you’ll want to gain a sense of where rates are and where they’re headed. When you’re satisfied with the interest rate quoted, you’ll want to lock that rate in for a period of time that will cover you through closing.
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Negotiating Any Points. You may be able to reduce the interest rate on your loan by paying points, but you must usually pay points upfront. One point equates to one percent of your loan amount, so paying two-and-a-half points on a $225,000 loan, for example, would mean coming up with $5,625 in addition to a down payment and any other closing costs.
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Getting a Home Appraisals. Before getting a new rate for your home, you may need to provide an updated home appraisal to your lender. This is a standard process that most financial institutions use when determining whether to offer a home loan.
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Choosing the Right Type of Loan. In addition to conventional mortgage loans, FHA, VA, Jumbo and USDA loans may also be eligible for home refinancing options. Just be sure to understand any restrictions or limitations associated with that particular loan program.
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Understanding All Closing Costs. Your lender should provide you with a Good Faith Estimate detailing all closing costs early in the process. Optimally, you can request one prior to filing the formal application so that you can calculate how well their proposed terms might work for you.
Start Your Refinance Today
Monthly mortgage payments are the primary element of every homeowner’s budget, and they’re a prime way of building your equity in a valuable asset—real estate. If you’d like to learn more about getting the absolute most from your money while you build equity in your home, reach out to the home refinancing experts at La Capitol Federal Credit Union. We can show you how to refinance your home and help secure a competitive mortgage rate you’ll love.