Refinancing a mortgage is a complicated process that many people may not fully understand. That’s okay! Luckily there are free informational resources online, like this one, that can provide some more insight to help you get a better idea about mortgage refinances. A mortgage refinance is when you essentially swap the original loan with a new loan. It has a lot of components that are a part of the process. Before understanding all of the different aspects to refinancing a mortgage, you first want to understand common reasons that homeowners choose to refinance.
Why Do People Refinance a Mortgage?
There are plenty of different motivations when it comes to why homeowners choose to refinance their mortgage. Oftentimes, homeowners are looking to reduce their interest rate, and improve their loan terms. However, other homeowners may consider refinancing their mortgage if they want to change their type of mortgage, tap into their home’s equity, improve their loan to value ratio, consolidate debt, and more.
When Should You Consider a Mortgage Refinance?
The mortgage refinance process takes time, energy, and effort. It is important to understand when it is truly a good time to refinance so that you make a decision that is best for your lifestyle and budget. There are some questions you can ask yourself when considering whether refinancing your mortgage is something that you want to consider.
Why Are You Trying to Refinance?
You’ve read about some common reasons that homeowners refinance but why do you want to specifically? Understanding your motivation for refinancing your mortgage can help you pick the best type of refinance for your goals.
Get a Lower Interest Rate
The interest rate that you pay on your loan is also referred to as a mortgage rate. This rate is constantly changing, which means that there may be times where the average mortgage rate is below what you currently have. When this happens, many people look to refinance their home to take advantage of the saving opportunities. A reduced rate can mean a lower monthly payment and less money spent over the lifetime of the loan.
Change the Type of Mortgage
There are two types of interest rates. One is an adjustable rate mortgage (ARM) and the other is a fixed rate mortgage. When you have an ARM, the interest rate is constantly changing. This means that sometimes it can be low, while other times it can be high. There is no fixed stability with this rate because it is always adjusting. A fixed rate mortgage is another story. This type of mortgage has a fixed rate which means that the interest rate will stay the same over the course of the loan. This makes it easier for homeowners to budget every month since they can expect the same costs.
Improve Your LTV (Loan to Value Ratio)
Your LTV can play an important part when refinancing your mortgage. This is because your private mortgage insurance (PMI) will likely take this number into consideration. Depending on the type of refinance loan that you get, you may be required to have PMI. This protection can usually be removed once a homeowner’s LTV is at least 78% of the home’s original value.
Tap Into Your Home Equity and Get Cash Out of Your Home
Your home equity is not a form of liquid cash that you can just go to your lender and withdraw. Instead, it must be accessed through specific means. Some lenders may have limitations on when a homeowner can access these funds.
When homeowners have multiple lines of debt, some turn to refinancing their mortgage to “kill two birds with one stone.” A homeowner may be able to roll their current debts into their home loan, depending on the type of refinance they get. This can be a great form of debt management and allow homeowners to become more responsible borrowers with a better budget.
What Does Your Financial Situation Look Like?
It’s important to see how your finances will be impacted long term when you refinance your mortgage. If you have a reduced monthly payment and can save more money every month, then that new budget will need to be properly handled. Not only will you need to account for closing costs and updated refinance terms that could impact your budget, you will also need to check out your credit score.
Your credit score is important when it comes to refinancing a mortgage because it provides lenders information in regards to how you are as a borrower, whether you are high risk or not, etc. You can look at your credit report online for free at this site. You get one free credit report per year! Overall it is important to see how your finances are. This means seeing if they improved from when you closed your original loan, got worse, or stayed the same.
What are the Costs of a Mortgage Refinance?
Refinancing a mortgage isn’t free. There are closing costs associated with this process that can be quite expensive. You can expect to pay between 2% to 5% of the value of the home during closing (or on average $5,000). There are a variety of closing costs that you can come across. Some of these may include:
- An appraisal fee
- Title insurance fee
- Legal fees
- Recording fee
- Mortgage Points
- Credit reporting fees
Other factors that may impact your closing costs can include the type of loan, the loan amount, the location of the home, prepaid interest charges, and more. The lender plays a huge role in the cost of a mortgage refinance. That is why it is important to find a lender that works for your budget and what you are trying to achieve.
Are There Reasons Not to Refinance a Home?
Yes! This is a big financial decision that may not be right for you to make right now. There are plenty of reasons to avoid refinancing your mortgage. Some of these instances may include:
- You are moving before you reach your refinance break even point.
- Your current loan has a prepayment penalty.
- The current loan is almost paid off.
- You are currently dealing with financial hardship.
These situations can make refinancing a mortgage not as beneficial as they could be. In fact, in some instances a mortgage refinance may be more of a financial mistake than anything.
You are Moving Before You Reach Your Refinance Break Even Point
A break even point is simply the point at which you will break even. In regards to refinancing a mortgage, it is the point where the costs of the mortgage refinance are outweighed by the savings. The break even point is different for every homeowner and refinance. There are free tools online that you can use or you can calculate your break even point by yourself. If you are finding the break even point on your own then you can do so by dividing all loan costs by the monthly savings. For example, if it costs $5,000 to refinance a mortgage, and you save $250 every month then it will take 20 months to reach your break even point and truly see the savings of your refinance (5,000 divided by 250 equals 20). If you move within 20 months then it may not be beneficial for a mortgage refinance because the costs would outweigh the savings.
Your Current Loan Has a Prepayment Penalty
Every lender is different. That is why some may have a prepayment penalty on their home loan products. A prepayment penalty is an expensive fee that is charged to the homeowner if they sell or refinance their home before a specified time frame. Usually this time frame is between one to five years from the date of the original loan. If your current loan has a prepayment penalty then that should be considered with the cost of the refinance when figuring out your break even point.
The Current Loan is Almost Paid Off
Sometimes if you are close enough to paying off your current mortgage, a refinance may not make sense. You will need to look at the math of the refinance to see if it is truly beneficial with updated loan terms.
You are Currently Dealing with Financial Hardship
If you are struggling financially, refinancing your mortgage may need to hold off. First, it may not make sense if you have a lower credit score than what you had when you got your current mortgage. A lower credit score will likely mean a higher interest rate. You may get denied a mortgage refinance as well if your current financial position isn’t up to par with lender standards.
Summary of the Pros and Cons of Refinancing a Mortgage
There are both benefits and drawbacks that you should be aware of before you refinance your mortgage. In summary, some of the benefits include:
- Getting a Lower Interest Rate
- Reducing Your Monthly Mortgage Payment
- Shortening the Length of Your Loan
- Getting Cash Out of Your Home
- Consolidating Debt
- Changing the Type of Mortgage
- Getting Rid of Private Mortgage Insurance
Now while all of these benefits may sound pretty nice, there are drawbacks that you need to keep in mind. The drawbacks may outweigh the benefits for your specific financial situation. Some drawbacks include:
- Hefty Closing Costs
- A Longer Loan Repayment Plan
- Less Equity in the Home if You Tap Into It
- Borrower’s Remorse
- Dealing with the Refinance Process
How to Qualify for a Mortgage Refinance?
Still interested in refinancing your mortgage after taking many aspects into consideration? Then it may be time for you to begin the process! Before beginning, you will want to look at what qualifies a homeowner for a mortgage refinance. Every lending institution is different, so their criteria for eligibility will vary. A good rule of thumb is to have a good credit score/credit standing, steady income, and at least 20% equity in the home. There will be other factors that you should consider as well like your DTI, current mortgage, etc.
Good Credit Score/Credit Standing
You should consider refinancing your mortgage if you have a minimum credit score of 620. While there are some types of refinance options available that accept borrowers with a minimum credit score of 580, you can have more options with a better credit score. Not only do you need a good credit score, but it is also good to have a good credit standing. This means your history doesn’t show any issues like a lien on a mortgage, bankruptcy, car repossession, foreclosure, etc. If you have any involuntary liens, like tax liabilities, these should be resolved before you begin the refinance process. Making sure your credit report doesn’t show any issues will be key when refinancing your mortgage.
Lenders look to see that you have a steady flow of income to ensure you can handle a mortgage payment. People that have gaps of unemployment with no pay can pose a risk to lenders. When there is a borrower with a high risk financial situation, lenders may be less likely to lend to them.
20% Equity in the Home
It is important to know how much home equity you have because lenders may have criteria around how much a borrower must own before refinancing a mortgage. Every lender is different so while some may require 5% home equity, others may require 20%. A good rule of thumb is to increase your home equity to 20% so you can worry less about meeting lender criteria and potentially see more refinancing opportunities with better terms.
Your Debt to Income Ratio (DTI)
Your debt to income ratio is exactly what you would expect! This is a ratio that looks at your debt (the amount of money that you owe) compared to your income (the amount of money you bring in). Lenders look at your DTI as another factor that goes into your creditworthiness and ability to handle a mortgage. If your DTI is too high then lenders may view you as a borrower that is too high risk.
How Much Do You Owe on Your Current Mortgage?
You may need to look at additional options if you owe more than what your home is currently worth. It may make sense to wait for a refinance if this is the case. Your lender may be more flexible than you realize so you should discuss what options may be realistic for you to consider if you find yourself in this type of situation.
What are Some Different Types of Mortgage Refinances?
There are plenty of types of refinances that are available. However, there are six popular ones that homeowners typically get.
This type of refinance is a great option for homeowners that want to change their current interest rate as well as the length of their loan. This is the most common type of mortgage refinance that homeowners choose. In this refinance, the original mortgage is replaced with a new one that has updated terms and conditions. There are plenty of loans that are eligible for this type of refinance. This is a refinance that is a great option for people who want to save money as well.
When people want to tap into their home’s equity and get cash out of their home, then they should consider a cash out refinance. This refinance is helpful to people that need to access their home equity. Instead of the new loan reflecting the remaining amount of the current loan, it will take into account the total value of the home. For example, if your home is worth $250,000 and you have $175,000 remaining on the loan, then you have $75,000 of equity that is available. Generally lenders will have restrictions on how much home equity can be accessed.
The opposite of a cash-out refinance is a cash-in refinance. Instead of tapping into home equity to take out cash, borrowers who choose a cash-in refinance provide additional funds during closing to reduce the total amount that they owe to the lender. When borrowers choose a cash in-refinance, their main goal is to likely reduce their LTV.
No Closing Cost Refinance
Sounds too good to be true? That’s because it is. There is not a true “no closing cost” refinance, even if lenders advertise them. Instead these refinances have the closing costs rolled into the total loan amount or the lender will find a different way to charge you with an increased interest rate.
A streamline refinance is a type of refinancing option that is a bit of an easier process compared to a traditional option like a rate and term refinance. This refinance option allows borrowers to skip the appraisal, credit score verification, DTI review, and proof of income. This is a popular option for homeowners with property that has lost value. It’s also a great option for those dealing with financial hardship that still want a mortgage refinance. Only government backed home loans are eligible for a streamline refinance due to the high risk involved for the lender.
Freddie Mac Enhanced Relief Refinance (FMERR) and Fannie Mae High LTV Refinance Option (HIRO)
Do you currently have a conventional mortgage but don’t qualify for a typical rate-and-term refinance? Then you may benefit from considering a FMERR program or a HIRO program. These programs are designed to provide refinancing opportunities to borrowers that have less than 3% equity in their home, and for borrowers that owe more than what their home is worth. These programs are currently paused so check back to see if they bring it back!
How to Refinance a Mortgage
The mortgage refinance process can be broken down into essentially six steps!
Step #1: Make Sure You Consider All of the Above Information
It’s extremely important to understand your current financial situation, credit score, motivation for refinancing, etc. before you decide it’s time to start the process. Make sure you take the time to think about why you want a mortgage refinance, what you hope to achieve, and your break even point so that you can see if it is worth refinancing a mortgage now or if you would benefit from waiting.
Step #2: Compare Mortgage Lenders
Even if you are happy with your current lender, it can still benefit you to compare what other lenders may be better. Each lender is different and one may be able to benefit your financial situation more than others. When comparing different lenders, make sure to keep it within a two week time frame. You want to try to minimize the impact of hard inquiries to your credit score.
Step #3: Submit an Application
After successfully preparing and reviewing the best mortgage refinance lenders, it is time to submit an application. You will need to provide documentation specified by the lender but this can include income verification, identity verification and paperwork of your current mortgage.
Step #4: Confirm Your New Interest Rate
If approved for the refinance, you will likely be able to confirm your interest rate. When you lock in this rate, you can have a clear idea of your new monthly payments. Your rate will not rise or fall when you confirm your rate.
Step #5: Get a Home Appraisal
The mortgage refinance process is very similar to the homebuying process. That is why you will likely need to have the property appraised to make sure it has enough value to finalize the mortgage. The appraisal is usually paid for by the homeowner but that fee is accounted for with closing costs. You can see if your lender is willing to waive the fee, it doesn’t hurt to ask!
Step #6: Finalize the Loan and Close the Deal!
Now it is time to close the loan officially! It is best to prepare by bringing documentation that you may need. You will also need to be ready to handle the closing costs depending on the type of mortgage refinance you get. Then bada boom bada bing, you have just refinanced your mortgage!
Who Has the Best Home Mortgage Refinance Rates?
As stated above, an important component of a mortgage refinance is finding the right lender. That is why you will want to compare your options so that you pick one that works for your current financial situation.
There are countless options out there when it comes to finding a mortgage lender. What may be a good fit for you, may not be a good fit for someone else. That is why researching your different options is a great place to start.
The minimum credit score for Alliant is not disclosed to the public but it is estimated to be between 580 to 620. This lender also requires a minimum down payment of at least 3%! Borrowers that like the online process typically choose this lender because they also offer a variety of refinance options and have opportunities available to those with as little as 5% equity. Unfortunately, this lender does not offer some government backed refinance options like FHA, VA, or USDA mortgage refinancing.
Another name-brand that borrowers are familiar with, Bank of America is a popular option for people looking to refinance their home. This lender has a minimum credit score requirement of 620 and provides a variety of refinance options, has an easy online application process, and may be able to provide additional discounts compared to their competitors. One downside to specifically keep in mind is the fact that they do not offer home renovation loans.
Many Americans are familiar with Chase Bank. This is a lender that is available nationwide and requires a minimum credit score of 620. Borrowers like this option when they want a name-brand lender that may be able to provide lower interest rates and fees than their competitors. There are plenty of customizable refinance options, but a drawback is the fact that the borrower will need to speak to a home loan advisor in order to finish the application process.
This is another lending option that requires a minimum credit score of 620. This lender is available across the nation and provides borrowers the ability to handle their documentation electronically while providing sample information for their refinancing options. On the flipside, one fee that you may encounter is an application fee so that is something to be aware of.
This lender not only requires a minimum credit score of 620, but they also require a minimum down payment of at least 3%. Borrowers choose this lender when they want an online refinance. Benefits of this lending option include the fact that it has a bunch of electronic capabilities from documentation verification to applying, etc. Not only do they have electronic capabilities but they provide up to date refinance rates and generally have fees and rates that are lower than their competitors.
This lender requires that the borrower has a minimum credit score of 620. There isn’t anything super exceptional about this lender other than the fact that borrowers like to use it for the online refinance capabilities. Some pros of this lender are the fact that documentation can be verified digitally, there are a lot of loan options, and there are options for people to choose in-person affiliated loan stores across the nation. Unfortunately, just as there are pros, there are some cons to be aware of as well. You are not able to review mortgage rates online. Instead, the borrower will need to contact a loan officer to get that information. This lender also doesn’t offer home equity loans or home equity lines of credit.
Past and current military members choose Navy Federal as their lender when they want to have a low or no down payment and have a minimum credit score of 620. The benefit of this lending option is the fact that there are a variety of refinance products available, conveniently online. Unfortunately, there are no customized rates that can provide insight before you submit an application.
Reali Loans is a regional lending option that requires a credit score of at least 620. This is a great option for borrowers that want an online refinance application. Benefits of this lender include up to date mortgage rates that are available, as well as easily accessible customized rate quotes online. Unfortunately, this lender does not offer some government backed refinance options like FHA, VA, or USDA loan products, and is only available in 12 states.
The minimum credit score requirement here is 620. This national lender is great for borrowers that want to refinance their home online. Many people don’t realize that Rocket Mortgage is powered by Quicken Loans, which may sway some borrowers to consider this option even more. There are plenty of benefits associated with this lender. Borrowers like that they have plenty of refinance options, personal customization, and easy to use technology. On the other hand, drawbacks of this lender include a lack of human interaction with the refinance process and the fact that pre-approval will require a hard inquiry that can negatively impact your credit score.
This is a national lending option that requires a minimum credit score of 620. Borrowers choose this lender when they are looking for rate-and-term refinances, cash-out refinances, or VA IRRRL refinances (amongst many other types of refinance products). They have an easy to use online application tool and provide sample rates and fees on their website. Unfortunately these sample rates are not customizable until the application process is started. While it is a national option, branches are generally limited to the Southeast.
This is a specialized lender that requires a minimum credit score of 640. This lender specializes in providing veterans, active-duty servicemen, and qualifying reservists refinancing options. These refinances can either be VA or non-VA loans. Military borrowers like this option because they offer flexible refinance options, have a great customer support team that’s available 24/7, and provide free credit counseling. All of these benefits are attractive to borrowers, on top of the fact that applications can be done easily online. Unfortunately, Veterans United is not available across the nation and only has physical branches in 18 states. Not only do they have limited availability compared to some other lenders on this list, but they also may charge higher rates and fees than some other lending options.
Just like a bunch of other lenders, the minimum credit score required for this national lender is 620. This is a great option for homeowners that do not mind handling their refinance online. Benefits of this lender include the fact that it is easy to navigate as a user, has a human help team that is responsive, and provides pre-approval letters in as little as 24 hours. Unfortunately, this is not a good option for borrowers looking to get a VA or USDA loan as this lender doesn’t allow those.
Commonly Asked Questions
Understanding a mortgage refinance can be difficult, especially when it comes to the application process, comparing lenders, etc. That is why reviewing commonly asked questions may be able to help you get a better idea of what a mortgage refinance may entail.
How Do I Find the Best Refinance Rate?
It can be hard to find the best refinance rate. Luckily, there are ways that you can improve your chances of getting the best rate possible. Just because a lender may advertise the best rate, it may not be applicable for your current financial situation. However, you can improve your chances of getting the best rate for your refinance if you:
- Know the minimum credit score required.
- Correct errors on your credit report.
- Keep your credit utilization below 30%.
- Choose your type of refinance wisely.
- Comparison shop lenders.
Know the Minimum Credit Score Required
It is important to know the minimum credit score required of your loan so that you can properly prepare. When you know these loan guidelines, you can make sure your financial standing matches what is required.
Correct Errors on Your Credit Report
Many individuals are surprised to find out that there can be errors on their credit report. These errors can be disputed and removed from your report which then takes away the negative impact that they could be having on your credit score. A better credit score can mean an improved refinance rate.
Keep Your Credit Utilization Below 30%
This is another way to quickly improve your credit. Make sure you get your credit utilization down to between 20% to 30%. This will translate to a better credit score which can mean a better refinance rate!
Choose Your Type of Refinance Wisely
You want to make sure you choose your type of refinance wisely. Some lenders advertise “no closing cost” refinances which are actually refinances that have no closing costs upfront. Instead lenders get rid of these costs whether through rolling them into the loan or with an increased rate.
Comparison Shop Lenders
This is super important when it comes to finding the best interest rate. Not every lender is the same, so some may be able to provide better rates than others. When you compare lenders make sure to keep the process within 14 days to minimize the impact you could have on your credit score.
Is it Cheaper to Refinance with the Same Bank?
Potentially. Depending on the lender, you may be able to save some money with lower fees. A lender that already has an established relationship with you as an individual, may be more willing to waive fees or reduce them. While that may not be true for your specific lender, it is worth checking. Not only could you benefit from an existing relationship and lower fees, but you may be able to benefit from a faster refinance. Your refinance process may take less time compared to if you were going to a completely new lender.