Helping you understand how mortgage refinancing works
While there are a number of reasons you might be looking into mortgage refinancing, from lowering your payment to using equity to make repairs to your home, you likely have questions about whether it’s right for you and how the process can affect you financially.
Knowing whether you should move forward with refinancing depends on many factors, including:
- Your current interest rate
- Whether you plan on moving in the next year or two
- Your current mortgage type, whether it’s adjustable or fixed-rate
- Your reasons for wanting to refinance
We’ve got answers to the most common questions people have about the mortgage refinancing process. If you’re thinking about refinancing, read on to learn more.
How do I know when to refinance a mortgage?
If or when you refinance your mortgage depends upon your personal situation. Some of the most common reasons to refinance include:
- Reducing your monthly payment: If your mortgage payment is straining your budget, getting a new loan with a lower interest rate or changing from a 15-year mortgage to a 30-year mortgage can help you lower your monthly payments.
- Updating your home/making large purchases: Using the equity in your home to get a new loan for more money than you currently owe allows you to perform cash-out refinancing, which gives you access to funds you can use to fix up your home or for other large purchases.
- Pay off your loan more quickly: By refinancing from a 30- to a 15-year loan, you can cut your interest payments long term by raising the amount you pay monthly in the short term.
- Eliminate FHA mortgage insurance: Unlike Private Mortgage Insurance (PMI), Federal Housing Administration (FHA) mortgage insurance premium (MIP) can only be removed by refinancing to a non-FHA loan.
- Change from an adjustable to a fixed-rate loan: Because the interest rates on adjustable loans can increase, changing to a fixed-rate mortgage can make it easier to budget for your mortgage payments over the life of your loan.
What are the pros and cons of refinancing?
Although refinancing a mortgage can have a number of benefits, every item in the “pro” column has a possible “con” you want to take into consideration:
Lower interest rates
Pro: A lower interest rate can mean lower payments and less interest paid out long-term.
Con: Getting a new mortgage with a lower interest can cost you more money in the long run because you’ll have to pay refinancing fees. And, quite often, refinancers go from having 25 years left on their mortgage to having 30 again.
Lower monthly payments
Pro: Creating a lower monthly payment by taking a longer loan or lower interest rate can free up more money in your budget.
Con: Obtaining a new 30-year mortgage will likely mean you’ll pay more interest in the long term.
Shortening your loan term
Pro: Going from a 30-year mortgage to a 15–year mortgage will save you money in interest payments.
Con: Your monthly payments will be higher during the remainder of your mortgage.
Pro: This gives you the ability to pay for schooling or improve your home, possibly at a lower cost than a personal loan.
Con: Taking out money in this manner lowers your home equity and will cost you more interest long-term.
Switch from adjustable rate to fixed-rate mortgage
Pro: Having a fixed rate means you’ll more easily be able to budget for mortgage payments long-term.
Con: If interest rates drop again, you’ll have to refinance to take advantage of them.
How much lower interest rate is worth refinancing my mortgage?
A common rule for refinancing your mortgage is that you need to be able to lower your interest rate by 2%, and no less than 1%.
It’s also important to consider factors like the length of your mortgage and whether you have any plans to move in the future. If you refinance and then sell your house in two or three years, you might not recoup your closing costs.
How does refinancing affect my credit score?
The simple answer is: Mortgage refinancing affects your credit very little and not for very long.
The longer answer is: Refinancing your mortgage counts as a credit application, which means that your credit score is likely to drop five to 10 points for a period of roughly 12 months. However, if you make multiple inquiries into refinancing while “shopping” for a mortgage over roughly a 30-day period, they will all be considered “one” refinancing attempt.
Once you start paying off your mortgage, as long as your payments continue on time, your credit score should return to its original number.
The only way to truly affect your credit score would be to refinance your mortgage multiple times over the course of a few years.
What are the steps for mortgage refinancing?
Before you can start the refinancing process, determine which type of loan you’re looking for:
- Rate-and-term refinance loan: This loan allows you to lower your interest rate or loan term or change from an adjustable mortgage to a fixed one while keeping the loan amount the same.
- Cash-out refinance loan: This loan involves cashing out part of your home equity. It allows you to raise money for a high-priced need but typically creates a higher monthly payment and interest rate.
Once you know what kind of loan you wish to secure, your refinancing journey will typically follow these steps:
- Shop for lenders: Greater Alliance is happy to offer you the opportunity to pre-quality for a mortgage refinance.
- Compare rates and terms: Find the best possible rate and closing costs.
- Apply for the loan and supply any needed documents: This varies by lender, but Greater Alliance requires:
- A copy of your deed
- Two years of W-2 forms (for each borrower) or two years of tax returns
- One month of pay stubs (for each borrower)
- Payoff balance of your current mortgage
- Proof of assets
- Abstract of Title
- Lock in the interest rate: Locking in your interest rate as soon as possible can prevent you from ending up with a higher rate. At Greater Alliance, we have no rate lock-in fees!
- Close on the loan and pay any necessary costs: Unless you’ve opted for a no–closing cost refinance and rolled your costs into your new mortgage, you will have to pay all resulting fees.