How to Refinance a Mortgage
Refinancing your mortgage is a great way to reduce debt and take control of your finances. There are many reasons to swap out your current home mortgage for a new repayment plan. It all depends on what you’re looking to achieve with your new home loan. Use this guide to learn more about the refinancing process to see if this is the right option for you.
What Does It Mean to Refinance a Mortgage?
Millions of homeowners are still paying off their mortgages. Regardless of how much you still owe on your existing mortgage, you always have the option of replacing your current repayment plan with a new one. When you buy a home, the mortgage is used to pay the seller. You will then spend the next 10 to 30 years paying off the rest of the home. If you decide to refinance, you must apply for a new home loan. The money will go towards paying off your old mortgage. You will then have to pay off the new loan according to the terms and conditions.
Common Reasons for Refinancing
Paying off a mortgage usually takes years, if not decades, so it’s not uncommon for homeowners to swap out their current repayment plan for a new one. Let’s explore the many reasons you may want to refinance your mortgage.
Use this mortgage refinance calculator to see how much you could save.
Paying Off the Loan Faster
If your finances have improved since you bought your current home, you might want to pay off the loan faster by swapping it out for a short-term mortgage, such as one with a 15-year repayment plan instead of a 30-year repayment plan. You will be on the hook for a bigger monthly payment, but you can pay off your home 15 years sooner than you would if you stayed with your existing mortgage. You may not have to refinance to pay off your home sooner, though. Instead, you can make additional payments on your current mortgage to pay off the loan as soon as possible.
To determine if it is a better option to make extra payments versus refinancing, you should first calculate how much money you will save in mortgage interest with the new loan, accounting for closing costs as well. For example, see the following scenario:
- Loan amount: $200,000
- Interest rate: 5%
- Monthly payment: $1,250
- Loan term: 30 years
- Loan amount: $200,000
- Interest rate: 3%
- Monthly payment: $860.07
- Loan term: 30 years
- Closing costs: $4,000
In this scenario, over the life of the loan, you’d save $24,643.87 in interest payments. You’d also save $389.93 on your new monthly loan payment.
Another tactic you can use to pay off your loan faster is to refinance, but still pay the same amount you were paying on the original loan. By paying the original amount even if you have a lower monthly payment with the refinanced loan, you’ll be paying more towards the principal of the loan. This will save you even more in interest payments over the life of the loan and help you pay it off faster.
Cashing in on Home Equity
If you need money, you can refinance your mortgage with a new lender to borrow more than what’s required to pay off your old mortgage. This is what’s known as a cash-out refinance. You can use this extra money to make repairs on your home, pay off personal debt or make a major life purchase.
You can also apply for a home equity loan or home equity line of credit (HELOC) instead of refinancing your mortgage. This means the lender gives you a loan or credit card using your home as collateral. These loans won’t replace your existing mortgage.
Get Rid of Mortgage Insurance
Every mortgage must be insured, but mortgage insurance adds to your monthly premium. Mortgage insurance is typically required when there is less than 20% home equity. Having 20% equity means you still owe 80% or more of your mortgage. Once you have more than 20% equity, you are no longer required to have mortgage insurance. You can always cancel your mortgage insurance when dealing with private lenders, but insurance provided by the Federal Housing Authority (FHA) can’t be canceled. FHA mortgage insurance is reserved for individuals and borrowers without a lot of equity. If you have FHA mortgage insurance, you may decide you no longer need it as you accumulate wealth. The only way to get rid of FHA insurance is to refinance the mortgage by taking out a loan.
Better Terms and Conditions
You can apply for a new mortgage loan using a different lender than the one you used to initially buy your home. This gives you access to a wide network of potential lenders, including community-based financial institutions that can help you save money. If you apply for another mortgage at a different lender, it’s important to shop around for the best price.
Look for refinancing options that help you reach your financial goals. For example, you may swap out an adjustable-rate mortgage for one with a fixed interest rate to save money over the long term. This will help reduce the interest payment, especially if the introductory period on your current mortgage has expired. If you feel that you’re paying too much in interest or aren’t satisfied with your current mortgage, you can find a lender that has a history of giving back to the community in the form of low-interest loans. Large corporations and banks may not always have the best rates. If you don’t have a lot of credit, you might be paying too much interest. Consider working with a lender that specializes in working with people with little to no credit, so you can get a better deal with a lower interest rate. You can also try to improve your credit score until you qualify for a better interest rate.
How to Refinance a Mortgage: A Step-by-Step Process
1. Focus on Your Goals
Before you get started, make sure you understand what you’re looking to get out of your new mortgage. From lowering your interest to speeding up your repayment plan, keep your goals in mind throughout the refinancing process.
2. Compare Offers
Shop around for the best price by comparing refinancing rates at various financial institutions. Make sure you can afford your estimated monthly payment before applying.
Use this mortgage calculator to estimate your new monthly mortgage payment.
3. Read the Terms and Conditions
There’s more to a mortgage than just interest. Look through the repayment terms and conditions to see if they work for you. Don’t forget about closing costs, mortgage insurance and other related fees. Factor in these fees to see at what point you expect to break even when refinancing your mortgage to make sure you’re not losing money during the process.
4. Look Beyond the Interest Rate
When applying for an adjustable-rate mortgage, make sure you can pay off most of your debt before the introductory period expires to avoid paying more in interest. Adjustable-rate mortgages usually offer a low interest rate for the first five, seven, or 10 years. After that, the rate will steadily increase. This may sound appealing, but only if you have the money to pay off your debt as fast as possible. Ideally, you and the lender will work together to lock down the interest rate for a limited period of time, so you can pay off the loan before it increases.
5. Submit Your Application
When you’re ready to apply, you must submit all the required paperwork, including copies of your original mortgage, financial records, proof of income and other essentials. You might consider talking with more than one lender to learn about your financing options. Processing your application may take up to two weeks. The lender will evaluate your credit score while looking over your application. Make sure your score is in tip-top shape before applying to save as much money as possible by locking in a lower interest rate. If your score doesn’t look right, contact the credit bureau to address the issue beforehand.
6. Sign the Dotted Line
Once you’ve committed to an offer, there’s no going back. If you applied for a cash-out refinance, you should get a direct deposit, or the lender will send you a check in a matter of days.
Closing a refinancing mortgage may not be as exciting as buying your first home, but it can help you save money over the long term. Keep these tips in mind to make sure you’re refinancing your mortgage for the right reasons. Be sure to choose a financial institution that has your best interest at heart. Contact the professionals at Ent Credit Union to learn more about your mortgage financing options.