Mortgage Refinance activity is dramatically up all across the United States. And the reason behind this is the continuously falling interest rates. However, knowing when to refinance according to your personal mortgage situation is the real trick. According to the experts, lower market interest rates should not be the sole reason for getting a mortgage refinance.
In this article, let’s explore when it is a good idea to refinance your mortgage and is it really worth it.
What is Refinancing?
Refinancing a mortgage loan means paying off your existing loan and replacing it with a new one. There are a number of reasons why homeowners want to refinance their mortgage, but the one that tops them all is to get a lower interest rate. Apart from this, homeowners also opt. for refinancing to change their mortgage company, change their mortgage term, to tap equity in their homes, change their mortgage type, and to lower their monthly mortgage payments.
When is it a good idea to Refinance your Mortgage?
In the first quarter of the year 2020, mortgage rates have hit their historic low in the United States. Many homeowners are attracted towards refinancing and the refinance activity is excitingly up over the last year. But considering only the market interest rate is not always a smart move. Instead knowing when to refinance your mortgage is the trick.
It is true that the interest rate on your mortgage is typically determined by the market factors. But, the best mortgage rates and terms will go to those who have the best credit. So, to figure out if it is a good idea for you to refinance your mortgage at this time does not only depend on the market interest rate instead it’s more about your credit score being good enough to qualify for the right refinance loans.
In other words, if the market interest rates are lower than the interest rate on your primary mortgage. But your credit score is not good enough at the time, it does not make sense to apply for a refinance. As lenders offer higher interest rates to people with low credit scores. In this case, it is wise that you improve your credit score for six months or so and then consider applying for a refinance.
How Does Refinancing Work?
To Refinance your Mortgage, you will have to shop around and apply for a loan, just like when you applied for your first mortgage. To apply for a refinance loan, you can either contact your lender directly, or use a broker to see if you are qualified for a refinance loan and what mortgage offer you can get depending on your financial situation.
To see if you would qualify, you will have to meet some requirements that are set by the lenders. These requirements may vary from lender to lender but the basic requirements to get approved for a refinance loan are as follows
- Equity
To get qualified for a refinance mortgage, you will need to show you have at least 10-20% equity in your home depending on your lender.
- Monthly Income
You will have to show your lender that you have a regular source of income and will be able to make your monthly mortgage payments on time. Lenders also have a look at the debt-to-income ratio of homeowners to see if they qualify for a refinance loan.
- A Maintained Primary Mortgage
Lenders need to make sure that you have maintained and paid your original mortgage on time at least 12 months prior to applying for a refinance loan. In case you have missed any of your monthly mortgage payments for your primary mortgage, your refinance application will most probably be delayed or rejected.
- Credit Score
You need to have a high credit score to get approved for a refinance loan with lower interest rates. In case you have failed to maintain a good credit score, you will be offered higher interest rates.
Is Refinancing Worth it?
Is refinancing your mortgage worth it? The answer to this question depends on your goals behind refinancing. Some homeowners may simply want to change their adjustable-rate-mortgage to a fixed-rate mortgage, so that they can have steady monthly mortgage payments. Others may want to change the term of their mortgage from 30-years to 15-years fixed-rate mortgage.
For some homeowners, refinance is a way to get rid of private mortgage insurance after they have gained 20% equity in their homes. However, the majority of the homeowners want to get their mortgage refinance to get lower interest rates. And luckily, in this current real estate market, interest rates are getting low with each passing day.
So, if you are someone who wants to replace their current mortgage with a new one that offers lower interest rates and you have a good credit score to get approved for it. It probably is a good time for you to get a refinance. Also, you should consider the costs that come with a refinance mortgage and then make a final decision
How Much Does it Cost to Refinance?
The cost of a refinance mortgage depends on a number of factors that include your home’s location, the amount you borrow, and your lender’s requirements and policies. Typically, the closing costs for a refinance mortgage can range from 3-6% of your loan amount. So, if your loan amount is $100,000, you will probably have to pay an amount somewhere between $3000-6000 depending on your lender.
The closing costs that are typically included in a Refinance Mortgage are as follows
- Title search
- A new home appraisal
- Refinance application cost
- Lender’s attorney review fee
- Home Inspection fee
- Origination fee
- Points fees
Remember that, refinancing costs don’t include mortgage insurance, property taxes, and homeowner’s insurance as these payments were set up when you first bought your home. Apart from this, you can also avoid mortgage point fees by asking for a par quote or zero quote.
Should I Refinance my Mortgage?
If refinancing your current mortgage means you are able to get lower interest rates in a fixed-rate mortgage or if it is reducing your mortgage term significantly, then this might be a good option for you. As, it will allow you to save thousands of dollars over the lifetime of your loan. In the current real estate market, even the homeowners who have the latest interest rate can also benefit from the refinance option because of the continuously reducing market interest rate.
But there are situations when refinancing your mortgage might not be a good idea. For example, if you refinance your mortgage just because you would like a new car, or a latest model of iPhone, or just for the sake of redecorating your kitchen. It is not wise to wipe off your home equity just to buy some new stuff. You might lose the ownership of your home in case your financial situation gets difficult.
So, the goal behind a refinance mortgage should be to save overall money on your loan. If refinancing your mortgage serves this purpose, you should go for it.
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