When should you refinance your mortgage?

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If you’re wondering if it’s time to refinance your mortgage, you first need to know how much you can save and how much the refinance will cost you.

Ideally, refinancing will save you money in both the short and long term by lowering your monthly payment and lowering your interest rate. But you will need to make sure the savings are large enough that you don’t lose money after paying closing costs to refinance your mortgage.

What Is a Mortgage Refinance?

A mortgage refinance is the replacement of your existing mortgage with a new mortgage that has different terms. Usually one of those terms is a lower interest rate. Sometimes it is a different number of years until payment. Less often, it is a flat rate rather than an adjustable rate, or vice versa.

It can also be a different type of loan, such as a conventional mortgage rather than a Federal Housing Administration (FHA) mortgage. In either case, the goal is for your new mortgage to be more beneficial to you, such as lower monthly payments, than your current mortgage.

When Is It a Good Time to Refinance My Mortgage?

Homeowners refinanced $ 2.6 trillion in mortgage debt last year thanks to historically low mortgage rates, according to Freddie Mac, a quasi-government agency that helps support the mortgage market. Rates are still exceptionally low, so it’s worth working out the numbers and seeing how much you could save by refinancing now. Here are some signs that the time might be right.

For example, if you have borrowed $ 300,000 and your interest rate on a 30-year mortgage is 3.5%, your monthly payment is $ 1,350 and you will pay $ 185,000 in interest over 30 years.

If you roll over that amount into a 15-year 2.1% loan, your new monthly payment will be $ 1,900 and you’ll pay $ 49,000 in interest over the next 15 years (plus the roughly $ 10,000 in interest you paid in the first year of your mortgage. to 30 years). You’ll save $ 126,000 in the long run, minus closing costs of about $ 3,000.

The question is, can you comfortably afford the highest monthly payment on the shortest mortgage – an additional $ 550 a month for 180 months, in this example.

When Is Refinancing a Bad Idea?

It’s tempting to want to refinance when you see how low current market rates are and how many other people are doing it. However, after considering your own circumstances, refinancing may not be a good option for you if one of these situations applies.

How Do I Refinance My Mortgage?

Refinancing will probably be easy for you, since this is not your first time applying for a mortgage. You already know how the process will unfold.

However, you don’t have to stick with your current lender. You can and should compare prices and get at least three quotes. It makes sense to go for the option that will save you the most money.

Also, one thing that might be different since you last applied for a mortgage is that many lenders have moved more of their processes online. You may be able to avoid paper documents by uploading the information requested by the lender through a secure online portal. You can even sign your closing papers online and have a remote notary witness them, depending on where you live and how your lender does things.

What To Expect During Refinancing

After submitting your application, you will need to provide the lender with documents such as recent bank statements, tax returns, W-2 forms, and pay stubs that show that you will be able to repay the new loan. Then you will wait.

In June, the average time to close a refinance was 48 days according to ICE Mortgage Technology.

Interest Rates

At some point in the refinancing process, you will need to lock in your interest rate. Your lender should be able to tell you how long you can expect your loan to close based on the company’s current delivery times.

You want to make sure your fixed rate will last long enough that you can get through closing. You probably want to lock in your fee early in the application process to eliminate the risk of a fee increase that would affect your decision to refinance.

Additional Fees

Refinancing generally costs less than 1.3% of the loan amount when taxes are included, according to ClosingCorp, a real estate closing cost intelligence company. Median closing costs for a refinance for a single family home was $ 3,398 with taxes in 2020.

These are the fees you can expect to pay when you refinance:

If the numbers work in your favor, refinancing can be a great way to save money. While the process can have its administrative headaches, in the end, the wait (and work) is often worth it.

This content was originally published here.

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