If you’re wondering if now is the time to move forward with the refinancing process, you’re not the only one. Mortgage refinancing has long been seen as a way to improve your current mortgage by making it more affordable or securing overall better terms.
And with rates at all-time lows, the thought of refinancing a mortgage might be quite appealing.
What Is Refinancing?
Mortgage refinancing is the process of securing a new mortgage loan with different terms and using the proceeds from the new mortgage loan to pay off your current mortgage loan. Your new mortgage loan usually has more favorable interest rates, which results in a savings on the monthly mortgage payment and total costs over the life of the loan.
You might also choose to refinance your mortgage to shorten your loan term and pay off your loan quicker. So, while you might pay the same or slightly more each month, you’ll pay less for your loan in the long run and enjoy having your house fully paid for sooner.
Steps To Refinancing A Mortgage
Refinancing a mortgage is similar to the process of a purchase mortgage. You can expect to follow the steps listed below, though your lender’s process could vary slightly.
Determine immediate financial need and set new objectives
You first want to evaluate your financial situation and decide if refinancing your mortgage is an effective way of saving on your mortgage. Will the new rate and term add enough savings to offset closing costs?
Also, you want to consider if you’re financially able to go through the refinancing process successfully. While there are many factors that go into determining mortgage refinancing qualification, your credit score and debt to income ratio are two very important ones that help your lender determine whether your application is approved.
Choose a trusted lender
Next, you want to choose a lender you trust to apply for a mortgage refinance. You can apply for pre-approval to compare what their financing options are. The loan terms you want to consider include loan payment duration, interest rates, closing costs, etc.
Lock the interest rate
After you establish the financing option that works best for your needs, you may want to lock in your interest rate by committing to move forward with the refinancing process.
Conduct property appraisals and submit financial documents
Your lender may want a comprehensive valuation of the property known as a property appraisal. You will also need to submit any required financial documents, which typically include at least two years’ tax returns and bank statements detailing financial transactions.
Approval and closing
The final step is to receive your final approval and close on your mortgage refinancing.
Mortgage Refinancing Costs
It’s important to understand the various closing costs that are part of the refinancing process.
Most lenders will charge a non-refundable mortgage refinancing application fee.
This is a fee charged by the lender for processing the loan application under review. Most lenders charge an origination fee as a percentage of the total loan amount, and the rate typically varies between 0.5% and 1% of the amount.
Credit report fee
The credit report fee covers the cost of the retrieval and review of your credit report to confirm your creditworthiness.
Home appraisal fee
This fee is for a certified appraiser to validate the value of your home. The appraiser’s report confirms that the value of the house supports the loan amount in accordance with the loan programs specific terms and conditions.
Home inspection fee
A home inspection fee covers the cost of a professional home inspector to check the property for any current or potential problems.
This is a fee paid to the local government to record the new mortgage.
Title search & insurance fee
Having title insurance protects you and your lender from potentially costly defects in a title to a property. You can secure either lender’s title insurance or owner’s title insurance. The title search fee searches public records of the property being refinanced.
Closing attorney fee
The closing attorney fee covers the cost of the legal services involved during the closing process.
Private mortgage insurance
If your home’s equity is less than 20% of the value of the home, you will have to pay monthly private mortgage insurance or PMI, until the equity reaches that mark.
When To Refinance Your Mortgage
Refinancing is typically only worthwhile when it saves you money. You want to compare your current mortgage terms to your new mortgage terms to decide whether it’s worth it to pursue a refinance.
You have a high interest rate
If your interest rate is higher than what you may qualify for during a refinance, it might be a good idea to move forward. Refinancing to a lower interest mortgage can save you on your monthly payment and in your total interest charges over the life of the loan.
You have a long loan term
If you have a 30-year mortgage, you might want to refinance to a 15-year mortgage. While you’d pay more each month for your monthly payment, you will pay your home off quicker, which is a significant benefit.
You have an adjustable-rate mortgage (ARM)
Having an adjustable-rate mortgage means your mortgage payment can increase and decrease over time as interest rates change. You might want to refinance to a fixed-rate mortgage, which gives you more stability in your monthly payment over the life of your loan.
Why You Might Choose Not To Refinance Now
While there may be various reasons to refinance, there are equally as many reasons why you might choose to hold off. There are several reasons why refinancing may not be realistic at the moment.
It’s not worth it
After comparing your current mortgage and potential refinance mortgage, you may realize that you won’t save enough to justify it. Often, the various refinance costs listed above can cut into these potential savings making it not worth the hassle.
You plan to move within 2 years
A near-future plan to move may be a solid reason to forego the refinancing deal. If you plan to move, you likely won’t have enough time to see the savings.
Your credit has declined
A decline in your creditworthiness can throw a wrench in your refinancing plans. Losing your job, falling behind on loan payments, or accumulating credit card debt can make it more challenging to qualify for reasonable refinancing rates. It might be in your best interest to try again later once your credit score improves and your finances stabilize.
Deciding If And When To Refinance Your Mortgage
The decision to refinance your mortgage is one that should be made cautiously. Whether now is the right time to refinance or not requires that you evaluate various factors, one being your refinancing costs.
Ready to estimate how much you could save in interest by refinancing your mortgage?