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A mortgage refinance is the process of getting a new home loan to replace an existing one. You typically follow the same steps you did for your purchase mortgage, except your new loan pays off your old one.
A mortgage refinance typically leads to a lower rate, a shorter term or some extra cash in your pocket.
With rates expected to rise throughout 2022, it may not be the best time to refinance if you’re looking to lower your current rate. However, there are other financial reasons to refinance including:
Getting rid of mortgage insurance because your home’s value has increased. You may be able to reduce the cost of private mortgage insurance (PMI) on a conventional loan if you don’t have the 20% equity required to avoid it.
Lowering your monthly payment by replacing a 15-year mortgage with a longer-term, 30-year fixed-rate loan.
Paying your loan off faster by refinancing a 30-year term to a 10-, 15- or 20-year term.
Paying off an adjustable-rate mortgage (ARM) before the ARM rate and payment adjusts higher than current 30-year rates.
Tapping your home equity to make home improvements, consolidate debt or buy a vacation home.
Replacing a government-backed loan with a conventional loan, to get rid of lifetime FHA mortgage insurance required on loans backed by the Federal Housing Administration (FHA).
Follow these six steps to navigate the mortgage refinancing process:
A surefire way to find your best mortgage refinance rate is to shop around. Choose three to five mortgage lenders and gather quotes to compare refinance rates. Comparison-shopping with multiple lenders may save you thousands in interest costs over your repayment term.
Make sure you also compare the estimated costs and fees with each lender, which can be found on the loan estimate you receive after applying for a refinance. A super-low rate with super-high fees may not be the best fit for your financial plans.
The best way to determine whether a refinance makes sense is to calculate your break-even point. Just divide your total closing costs by your monthly savings.
For example, if a refinance saves you $150 per month on your payment but costs you $5,000 in fees, the breakeven would be just over 33 months ($5,000/$150 = 33.33). As long as you plan to stay in your home at least 33 months, the refinance saves you money. Try a mortgage refinance calculator to help you crunch the numbers on different refinance scenarios.
Because refinance loans require a credit check, the inquiry may drop your credit score between three and seven points. When you’re mortgage shopping, try to have your credit run within a 14-day period to avoid a bigger drop from multiple inquiries.
Conventional loan guidelines allow you to refinance at any time after you close, as long as you can prove there’s some financial benefit. Some government-backed refinance programs require proof you’ve made payments on your current mortgage for at least seven months. If you’re taking cash out, the waiting period may be up to a year if you want to use your home’s current market value.
You typically need at least 3% equity to refinance your mortgage, unless you’re eligible for a streamline refinance program through the FHA, VA or USDA. There are also programs available to homeowners to refinance an underwater home, meaning their outstanding mortgage balance is higher than their home’s value.
The most notable risks that come with mortgage refinancing include:
It can take 45 to 54 days to refinance a home, depending on the loan program, according to the December 2021 ICE Mortgage Technology Origination Report. Your lender might take more or less time to close a refinance, depending on how much business they have and whether they use a digital mortgage application process.
Yes, there are refinance closing costs. These costs range from 2% to 6% of your new loan amount, depending on your loan’s size. Don’t be fooled by advertisements for a no-closing-cost refinance. These aren’t “free” refinances — the lender covers your upfront costs at closing by charging you a higher interest rate or increasing your loan amount.
While it’s more difficult to refinance a mortgage with bad credit, it’s not impossible. For example, you may qualify to refinance an FHA loan with as low as a 500 credit score, provided you have at least 10% home equity. There’s no minimum credit score required for a VA refinance, although many lenders require a 620 minimum.
Mortgage refinance rates tend to mirror purchase mortgage rates. However, refinance rates differ from lender to lender, which is why it’s important to shop around and find a rate that’s competitive enough to replace your current mortgage.
If you’d like to buy down your mortgage rate to save even more on interest and shave a few dollars off your monthly payment amount, it may make sense to pay for mortgage points.
Be mindful that each point costs up to 1% of your loan amount. On a $250,000 mortgage, one point would cost you $2,500 at the closing table.