The refinancing process aims for most homeowners to save money by obtaining a lower interest rate on their mortgage. By refinancing, you will replace your current mortgage with a new one that has a different loan amount and interest rate.
What You Should Know First
During the COVID-19 pandemic, cash-out refinancing was the most popular. Homeowners swapped out old mortgages for new ones with interest rates ranging from 2% to 3% while being able to pull cash from their homes at the same time. However, a continuous increase in mortgage rates has led to a decline in refinancing activity. Unless you purchased a home in the last year, you are unlikely to secure a mortgage at a lower rate. Mortgage rates soared once the Federal Reserve raised the short-term interest rate 11 times since last March to combat inflation, curb consumer spending, and make borrowing more expensive. Improved economic data prompted the Federal Reserve to halt interest rate hikes. During its meeting earlier this month, the central bank chose to keep the federal interest rate steady and indicated that it may stay there for a while. However, even if the Federal Reserve does not implement another interest rate increase, it is unlikely to begin actually lowering rates until next year.
Reasons to Consider Refinancing
There are many good reasons to refinance when the conditions are right. Some of the most common scenarios include:
– Lowering monthly payments: Monthly payments can be reduced when switching to a new loan with a lower interest rate or a longer repayment period. The amount you will save each month depends on the size of your mortgage and how much lower the new interest rate is compared to the previous loan. Most experts recommend refinancing if you can reduce your interest rate by 0.75%.
– Paying off your mortgage faster: If your original mortgage is a 30-year loan, you might refinance to pay it off faster. With the low interest rate, you may be able to switch to a 15-year loan and still have an affordable monthly payment. Reducing the duration of the mortgage also decreases the total amount of interest owed over the life of the loan.
– Getting cash from your home: With cash-out refinancing, you apply for a new loan that exceeds the amount owed on your old loan — and take the difference as cash. Many homeowners use cash-out refinancing to pay for home improvements.
– Switching to a fixed-rate loan: If you have an adjustable-rate mortgage, switching to a fixed-rate loan might be a good move. Refinancing can help you reduce future risks, according to Jason Fink, a finance professor at James Madison University in Harrisonburg, Virginia. A fixed-rate mortgage provides predictability and protection against future increases in interest rates.
– Changing banks: If you’re not satisfied with your current bank, refinancing is a way to move your business elsewhere.
– Eliminating private mortgage insurance: Most loans require private mortgage insurance if you put down less than 20% when buying a home. As home values increase, you may have surpassed the 20% equity threshold, giving you the opportunity to refinance without private mortgage insurance. (You can also ask your current bank to remove the private mortgage insurance without refinancing.)
ReasonsRefinancing
– Fees are too high: Although refinancing can save money in the long run, you will need to pay closing costs that can amount to thousands of dollars.
– Interest rates are high: If interest rates have risen and the repayment term remains the same, your payments will increase, and you won’t save money.
– Planning to move soon: It may take a few years to recoup your refinancing fees. If you expect to move in a few years, it may not make sense to refinance now.
– Mortgage repayment is almost finished: Mortgages are designed so that the highest interest payments occur in the early years. The longer the mortgage lasts, the more monthly payment goes toward paying down the principal. If you refinance later in the loan term, you will primarily be paying interest again instead of building equity.
Different Types of Refinancing
– Rate and Term Refinancing: Rate and term refinancing replaces your existing mortgage with a new one aimed at one of two goals: saving money or paying off the loan more quickly. For example, you might decide to refinance a 30-year mortgage at a 7.5% interest rate with a new 30-year mortgage at a 6.5% interest rate to reduce interest costs. Or you might have 20 years left on a 30-year mortgage and decide to refinance to a 15-year mortgage – ideally at a lower interest rate – to accelerate your repayment schedule.
– Cash-Out Refinancing: Cash-out refinancing replaces your current mortgage with a new mortgage that is larger than the current one. The goal of cash-out refinancing is to leverage your equity and borrow money at a low rate to cover significant expenses such as renovating your kitchen or paying for college costs.
– Streamlined or Simple Refinancing for FHA or VA Loans: If you have a mortgage backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), you may qualify for streamlined refinancing. This process is simplified by eliminating some of the extra paperwork involved, including a new home appraisal or proof of income documentation. Streamlined refinancing for VA loans is commonly known as a VA IRRRL, or Interest Rate Reduction Refinance Loan.
How to Get the Best Rate for Refinancing
Getting the lowest available refinancing rate is similar to getting the lowest possible rate on a new purchase loan: it starts with personal finances. Review your credit report at least 30 days before applying for refinancing; if there is any incorrect information, dispute it. Lenders have 30 days to verify the accuracy of the information or remove it from your report. Removing incorrect information from your credit report can improve it and potentially help you qualify for a lower interest rate.
Taking steps to improve your credit, including paying down credit cards, can reduce the risk associated with your new loan. It is also important to compare options from multiple lenders. In addition to securing the lowest rate, shopping around can help you find options with lower fees to help reduce your closing costs.
Frequently Asked Questions
– Do refinancing rates differ from purchase rates?
They may
There is usually a slight difference between the average refinance rates and the average rates for purchase loans (the first mortgage taken out on a home). The biggest difference between buying a new home and refinancing your current mortgage tends to be in the closing costs. Closing costs for refinancing are lower, averaging less than 1% of the total loan amount. There are some exceptions, however, in New York, Pennsylvania, and Delaware, where closing costs are significantly higher.
– How much does refinancing cost?
Refinancing involves paying closing costs, although these costs are typically lower compared to a new purchase loan. You should expect to pay between 2% to 5% of the total mortgage value depending on the size of the loan, although you may be able to roll the closing costs into your loan balance. In 2021, the average closing costs for refinancing a mortgage on a single-family home were $2,375, according to data from ClosingCorp. However, this figure does not include any local taxes, which can add thousands of dollars in some parts of the country.
– Is refinancing worth it?
To determine if refinancing is a financial overhaul, you need to identify your break-even point, meaning when your expected savings will exceed the costs associated with refinancing the loan. It ultimately depends on how long you plan to live in the home. For example, if you will pay $6,000 to refinance the mortgage at a lower rate, you need to determine if you will live in the home long enough for your total monthly savings to exceed $6,000.
Written by
David McMillin
Catherine Watt
Alex Langone
Source: https://www.cnet.com/personal-finance/mortgages/refinance-interest-rates-today/
Leave a Reply