Home mortgage loans are one of the most common types of debt for people to have. As most people can’t afford a home without one, taking out a mortgage is almost a rite of passage to buying your first ever home. After a few years, though, your original mortgage may not be the best for you.
Refinancing your mortgage comes with many advantages when done in the right situation. For some, lower interest rates are attractive while for others, the ability to extend their loan another ten years or so takes a weight off their shoulders. No matter what your situation, refinancing your mortgage may be the best personal finance decision you can make.
That being said, there is a lot to know before you dive into a refinance.
What is a Mortgage Refinance?
Refinancing a mortgage is simply the act of taking out a new loan to pay off your original mortgage. You can choose to go through the same lender or refinance to a reverse mortgage and you may even choose to change the type of loan you take out, but the idea behind it is the same: You take out a new loan and use it to pay off the original loan.
Many people choose to refinance their mortgage because they’re eligible for a loan with lower interest rates. Some people do it to adjust their monthly payments or to pull equity from their homes. If your original loan had PMI or MIP requirements, a new loan may not.
How Do You Refinance a Mortgage?
The process of refinancing a mortgage is similar to applying for any other loan. You’ll be expected to provide a myriad of documents and be approved by a lender, but you’ll have a couple more options available to you. When you do start to consider a mortgage refinance, here are some steps to keep in mind.
#1. Shop Around
Many homeowners feel obligated to refinance their mortgage through their current lender, but this isn’t true. When you refinance, you can choose a completely different lender for any reason you want. Maybe you didn’t like your original lender, maybe you found a better deal. Whatever the case, make sure to shop around for mortgage refinance options before committing.
#2. Apply
Once you make your decision, it’s time to apply. Before your appointment, make sure to take a look at this refinance checklist to make sure you have all the documents you may need. If you show up without something, your application may be delayed or even rejected.
#3. Get an Appraisal
Just like when you applied for your initial mortgage, you’ll need to get a home appraisal before the lender will make a decision. This is so that they can estimate the value of your home and determine whether to approve your request or not. If you applied for a cash-out refinance, then the amount of cash you’re able to take out of the new loan may be affected depending on the appraisal results.
#4. Closing
If you’re approved, all that remains is to close. Your lender will send you any final documents to sign and request you pay any remaining closing costs. For cash-out refinances, you’ll receive the money a few days after the closing documents have been processed.
Is a Mortgage Refinance Worth It?
Sometimes, refinancing your mortgage is not worth it, but many people don’t realize this. There are certain situations where a refinance will be a worse decision than keeping your current mortgage. If you don’t know what to look for, though, then you won’t know whether it’s worth it or not.
When is Your Break Even Point?
With every refinance, there will be a break-even point. If you plan on staying in your home for the foreseeable future or at least until you pass this point, then a refinance is worth it. However, if you plan on moving in a couple of years and you won’t reach the break-even point, then it’s better to stick with your current mortgage.
Can You Afford the New Monthly Payment?
Most people refinance in hopes of lowering their monthly payments, but some loans won’t do much to save you money. Even if there’s a lower interest rate, you may end up spending the same amount or more every month. Using a refinance calculator to help you determine if the new payments will be affordable can help you avoid making a mistake.
Are You Able to Get a Better Loan?
If your credit score has changed for the worse or you hold a lot of debt, you may not be able to get a better loan. Refinancing can hurt your loan prospects if your credit or DTI has changed dramatically.
If you can get a better loan, then it could be worth it. Even if your new loan term is another 30 years, crunch the numbers to see if it will save you money. Lower interest rates, no PMI payments, and the ability to switch to a fixed-rate loan are all indicators that a refinance may end up being a much more affordable way to pay for your home.
Can You Afford the Costs of Refinancing?
Many people get caught up thinking about interest rates and PMI payments that they forget to think about the fees involved with a refinance. In some cases, the fees alone will make a refinance not worth it. If you have to pay higher closing costs on your new loan or if you have a penalty fee for closing out your original loan early, the cost of a refinance could be troublesome.
Take the Time to Think it Through
Refinancing your mortgage can be a great financial decision, but you’ll need to think a lot of things through before you can be confident that it’s worth it. You’ll also want to keep in mind the process of refinancing your mortgage and your future goals. Before making your decision, take the time to crunch the numbers and speak with several lenders to be sure that you’re making the best financial decision possible.
