Best Mortgage Refinance
To understand a mortgage refinance, the best place to start is with a simple definition of “refinance.” Refinancing refers to a borrower initiating a new loan to pay off an existing loan. So, a mortgage refinance involves getting a new mortgage to pay off your old mortgage.
Common Questions
What is a mortgage refinance and how does refinancing a mortgage work?
The cost to refinance your mortgage involves interest, closing costs, and possibly prepayment penalties. Lenders will base your interest rate on your creditworthiness and financial profile.
The closing costs can range from 3% to 6% of your mortgage amount, according to the Federal Reserve. So if your home costs $200,000, you are looking at $6,000 to $12,000 in upfront fees.
Here are just some of the fees that may be included:
• Application fee
• Appraisal report
• Attorney fee
• Closing fee
• Loan origination fee
• Document prep fee
• Courier fee
• Flood certification fee
• Title search fee
• Title insurance
• Recording fee
• And potentially many others
The prepayment penalty is a fee sometimes charged by lenders when you pay off your loan early. You’ll want to find out if you have one so that you can accurately calculate the cost vs. benefits.
When should you refinance your mortgage?
Being that there are so many fees involved with refinancing a mortgage, how do you decide if and when you should do it?
Laura Owens, Area Sales Manager for Wells Fargo Bank, says, “Whenever there is a benefit to the clients’ financial situation, they should consider refinancing. For example:
• Securing a lower rate and payment
• Reducing the term of the loan thus eliminating extra interest charges on the life of the loan
• Getting cash-out to help with other financial goals (debt consolidation, investments, etc.)
• There are also times where there would be a lifestyle benefit such as divorce, adding/removing a family member, or partner changing ownership
However, the benefit must outweigh the cost. Owens adds, “Homeowners should consider the costs to refinance in terms of fees that are involved, the impact refinancing will have on the loan payoff, and how refinancing will support overall financial goals.
We advise customers to consider the main reason they are thinking about refinancing (in relation to the costs). For example, how long they plan on staying in the home – if they plan is to stay for several years, the benefits that can be gained from lower monthly payments may make sense in a refinance.”
A “break-even calculation” is helpful here. Add up all the costs to see how long it will take you to break even and start saving. If you are reasonably confident you will remain in your house past the break-even point and long enough to save a considerable amount, refinancing your mortgage is a good idea. Many refinance mortgage calculators are available online to make this calculation easy.
What are the requirements to refinance a mortgage?
Are you eligible to refinance your mortgage? Here are the general requirements for most lenders:
• Sufficient income
• Good credit score
• Acceptable debt-to-income ratio
• Savings and assets
• At least 20% equity in your home
What if you don’t meet these requirements? Learn about the best mortgage options for people with bad credit.
Further, these government programs may be able to help.
What are the mortgage refinance rates today?
Ready to find the right lender for your mortgage refinance? Above, you will find a lengthy list of companies to review and compare. Learn about their offerings, starting rates, fees, and what past customers have to say about their service.
Once you narrow down your favorites, reach out to get quotes on the costs. Be sure to run the numbers to find your break-even point as well as how much you will save overall. Then, if it all makes financial sense, go with the lender who offers the best deal.