If you’re thinking about refinancing your mortgage but your hand is still cramping from signing your home loan’s original closing documents, breathe easy. Refinancing your mortgage isn’t nearly as labor intensive as when you first bought your home. You’ll still have some really important things to consider and steps to take before you sign on the dotted line, but we’re here to walk you through all of it.
What Is Mortgage Refinancing?
Mortgage refinancing is getting a new loan for your home or revising your home’s original loan. The new mortgage loan then takes the place of the original—so you should still have only one loan and one monthly payment. You’re just re-financing it. Easy enough, right?
For a lot of folks, refinancing is a way to lock in a lower interest rate. That’s definitely one major plus! But there are actually a bunch of good reasons why you might want to refinance your mortgage.
Why Would You Refinance Your Mortgage?
That’s right, lock in that lower interest rate.
Whether you’re in a 15-year mortgage (what we recommend) or a 30-year mortgage, that’s a whole lot of time for the market to change. Chances are pretty good that at some point over the years, a better interest rate than your original one will become available. Cha-ching!
Reduce your loan term and become debt-free faster.
If you have a 30-year loan, mortgage refinancing can help you reduce your loan’s term and get down to that 15-year sweet spot. The sooner you pay off your home, the sooner you’re keeping every bit of income you earn to yourself. That means you’re saving more, investing more, and have more to give away. Plus, if you get a lower interest rate, then you can pay more toward your principal each month, accelerating your progress!
Get rid of your private mortgage insurance (PMI).
If your down payment was less than 20% of your mortgage when you bought your home, then your mortgage lender has required you to pay for PMI. Basically, it protects them if you can’t pay your mortgage and the home goes into foreclosure. PMI helps them cover the hit they’d take by having to sell your home at auction.
Pay off your home faster by refinancing with a new low rate!
But PMI stinks. It’s expensive and will slow you down from paying off your principal. So, if you’re looking into refinancing your mortgage and your new loan would be 80% or less of your home’s current appraised value, ask about having your PMI removed.
Switch your loan type.
We never recommend an adjustable-rate mortgage (ARM). That dreamy low interest rate you got in year one could easily turn into a nightmarishly high rate in year five. That kind of unpredictability is a recipe for disaster. But you can refinance your way out of your ARM and into a fixed-rate mortgage.
When Should You Refinance Your Mortgage?
The right time to refinance is when you have an opportunity to make your current mortgage better with a new interest rate.
Think about it. Let’s say you have a 15-year fixed-rate loan with a 5.25% interest rate on a $300,000 mortgage. But now, you can get that rate down to 3.5%. That would give you a savings of $3,200 a year or $265 each month—who doesn’t want that? Even better, if you keep paying the same amount as you did with the 5.25% loan each month, you’ll knock out $3,200 more on the principal each year! Your mortgage will practically melt away!
While that deal sounds like a no-brainer, refinancing isn’t always worth it, especially after you factor in closing costs. Yep, refinancing a mortgage comes with closing costs.
So, you need to run the numbers, starting with a break-even analysis. To do this, you’ll need three pieces of information: your estimated closing costs, your estimated new monthly payment, and how long you think you’ll stay in your house. Here’s an example:
If your closing costs come in at $3,000 and you’ve estimated that you’ll save $100 a month by refinancing, it will take you 30 months, or 2 1/2 years, to recover your costs. If you plan to be in your home at least that long, it’s probably worth it. But if you plan to move before then, it’s not a good idea.
However, there are lots of other ways to make money to cover closing costs. You could have a massive garage sale, drive for Uber, stop eating out for six months—you get the idea. Put in a little extra effort to cash flow your closing costs on the front end and then enjoy your savings once the mortgage refinancing is complete!
How Much Does It Cost to Refinance My Mortgage?
The big thing to consider is your closing costs. Expect your closing costs to be somewhere around 2–6% of the overall amount you’re borrowing. These vary by state and circumstance, but typically closing costs cover:
- Refinance application, a new home appraisal and title search
- Lender’s attorney review fee
- Origination fee
- Points fees
Compare your closing costs to how much your refinance will save you over time. If your closing costs will cost you more than you’ll save, then that’s a hard no on moving forward.
The good news is, during a mortgage refinance, you typically don’t have to pay the property taxes, mortgage insurance and homeowners insurance—like you did on your original closing—because they’re already set up.
And remember, you refinance to save money. You definitely don’t want to refinance if it’s going to cost you more. But you should expect some costs along the way.
How to Refinance Your Mortgage
Once you’ve decided you’re ready to refinance your mortgage, here are the next steps to take:
1. Shop around.
To find the best refinance rate, take some time to shop around and see what options you have.
2. Apply for a mortgage with two or more lenders.
You might not want to put all your eggs in one basket—or in this case, with one lender. This will be especially important if you’re debt-free and don’t have a credit score, because you’ll need manual underwriting.
3. Choose your lender.
Look for one that can give you the best bang for your buck, including your total closing costs.
4. Lock in your interest rate.
Once you’ve found your lender and a great rate, lock that puppy in so you can get to saving sooner!
5. Close your refi!
Boom! All that’s left to do is sign all your closing documents and pay your closing costs.
How to Find the Best Mortgage Refinance Rates
If you still maintain a credit score, it will play a role in the interest rates you’re offered. The higher the score, usually, the lower the rate. Shop around with different lenders to see who can offer you the best deal. Remember, the whole point of refinancing is to get a better rate and/or a shorter loan term than you’ve currently got!
But if you’re debt-free and don’t use credit cards, well, that probably means you don’t have a credit score. And that’s a good thing! Around here, we call a credit score an “I love debt” score. But since most mortgage lenders use a credit score as their primary way of setting interest rates for applicants, make sure to look for a company like Churchill Mortgage. Churchill provides manual underwriting for customers without a credit score, as well as the loan approval process for people with one.
If you’re ready to get the process started or just curious whether refinancing your mortgage could save you big bucks, then get connected with our trusted mortgage provider, Churchill Mortgage. They’re committed to keeping your budget top of mind and finding the best option for your home.