Refinancing a Mortgage
Mortgage refinancing is all about saving money, and reducing your monthly payments. Find out if mortgage refinancing makes sense for you, and what you need to know.
What is refinancing your mortgage?
Refinancing your mortgage is when you pay off the existing mortgage with new mortgage funds and increase the mortgage balance. If the mortgage balance remains the same as before, and you just change lenders, it is called a switch. Refinancing can be done with your current lender or a new one. Most people opt to go with a new lender to take advantage of lower rates.
Mortgage refinancing is the process of replacing an existing mortgage with a new one that has different terms. There are many reasons why homeowners might choose to refinance their mortgages, including to lower their monthly payments, pay off their mortgages faster, or to take advantage of lower interest rates.
To refinance a mortgage, homeowners must go through a similar process to the one they went through when they initially obtained their mortgages. This includes submitting a new mortgage application, providing financial and credit information, and potentially paying closing costs. If the homeowner is approved for the new mortgage, the existing mortgage is paid off and replaced with the new one.
It’s important to carefully consider the pros and cons of refinancing before proceeding, as there may be costs associated with the process and refinancing may not be the best option in all cases. For example, refinancing may not be a good idea if the homeowner does not plan to stay in their current home for a long period of time, as the costs of refinancing may not be recouped over a short time frame.
What is involved in refinancing a mortgage?
To refinance a mortgage there are two options. You can talk to your current lender and see if they will give you a larger mortgage, or seek the help of a mortgage broker who will have access to many lenders. Usually, your current lender will not give a competitive rate on a refinance, compared to a new lender, but it is always good to find out what they are offering. Once you have decided which route to take, the process is similar to applying for any other mortgage. You will be required to show proof of income, debts, and the home may need to be appraised. If you are changing lenders there will be some legal costs, however, these are usually more than offset by interest savings. If your current mortgage is not up for renewal, there will be costs and penalties associated with switching lenders. You should check with your current lender and get a payout amount before talking to a broker as it will be required to access whether or not moving makes sense.
What are the benefits of refinancing your home?
The main benefit of refinancing your home is to save money on interest. Mortgages usually have the lowest interest rate of any debt, therefore, moving higher-interest debt into your mortgage will save you money. Many people also refinance to access the equity in their homes for various purchases including renovations.
Benefits of mortgage refinancing include:
- Lower monthly payments: One of the main reasons homeowners choose to refinance their mortgages is to lower their monthly payments. This can be achieved by obtaining a new mortgage with a lower interest rate, or by extending the loan term (for example, from a 15-year mortgage to a 30-year mortgage). However, it’s important to note that while lower monthly payments may be desirable in the short term, they can also result in paying more in interest over the life of the loan.
- Pay off the mortgage faster: Some homeowners may choose to refinance their mortgages to a shorter loan term in order to pay off their mortgages faster. For example, a homeowner with a 30-year mortgage might refinance to a 15-year mortgage. This will result in higher monthly payments, but the mortgage will be paid off more quickly, and the homeowner may pay less in interest overall.
- Take advantage of lower interest rates: Interest rates on mortgages can fluctuate over time. If interest rates have dropped significantly since the homeowner obtained their original mortgage, refinancing to a new mortgage with a lower interest rate can result in significant savings over the life of the loan.
- Costs: There are costs associated with refinancing a mortgage, including closing costs and potential fees for breaking the existing mortgage contract. It’s important to carefully consider these costs and weigh them against the potential benefits of refinancing before proceeding.
- Other factors to consider: In addition to the factors mentioned above, homeowners should also consider whether they have enough equity in their homes to refinance, and whether their credit scores and financial situations have improved since they obtained their original mortgages. These factors can affect the terms and interest rates that are available when refinancing.
How much of the value of your home can you refinance?
Typically most lenders will allow refinancing up to 80% of a home’s value. This 80% represents the total of all financing secured against the property including lines of credit, whether they are used or not. The existing mortgage, and any secured financing, would need to be paid out from the new mortgage funds. Secured lines of credit would need to also be paid out and closed if refinancing to the full 80%. Get more information on equity and refinancing here.
What does refinancing a mortgage cost?
The cost to refinance a mortgage can vary depending on the situation, but there will be legal fees and possibly an appraisal. Legal fees can be around $1,000 – $1,500 and appraisals cost $300 and up depending on the location and size of the house. If you are not looking for the full 80% of the home’s value, an appraisal can often be automated which reduces the cost. When the amount being refinanced is below 65% of the home’s value an appraisal is sometimes not required. If you are breaking the term of your existing mortgage there will be additional discharge costs and penalties. It is always a good idea to ask your current lender what these costs will be. You don’t have to tell them why you want to know, but try to get the payout amount in writing with a payout date. More detailed refinancing costs are here.
Does refinancing hurt credit?
When you apply for mortgage refinancing, the lender will perform a hard inquiry into your credit. A hard inquiry is a request for information from a lender that may affect your credit score. Hard inquiries are recorded on your credit report and can be seen by other lenders when you apply for credit in the future.
The impact of a hard inquiry on your credit score depends on several factors, including your credit history and credit score. If you have a strong credit history and a good credit score, the impact of a hard inquiry is likely to be minimal. However, if you have a lower credit score or a history of missed payments, the impact of a hard inquiry may be more significant.
In general, the impact of a hard inquiry on your credit score is likely to be temporary. Most credit scores will recover from the impact of a hard inquiry within a few months. However, if you have several hard inquiries in a short period of time, the impact on your credit score may be more significant.
It’s important to keep in mind that refinancing is just one factor that can affect your credit score. Your credit score is determined by a variety of factors, including your payment history, the amount of debt you have, the length of your credit history, and the types of credit you have. Maintaining a good credit score requires consistently making on-time payments and using credit responsibly.
What are the requirements for mortgage refinancing?
The requirements to refinance a mortgage are basically the same as applying for a mortgage to purchase a home, besides the 80% loan-to-value limit. You will have to income qualify, and the house may need an appraisal. There are some lenders who will qualify solely based on the equity you have in your home, but the rates will be higher than if your income qualifies with an “A” lender. Qualifying based on equity is not a good long-term plan as the interest costs are higher, but if you are just needing some money to fix and sell the property, it can be a viable solution.
What are mortgage refinancing rates?
Mortgage refinancing rates are slightly higher than the insured purchase rates you may see advertised. Since refinances are not insurable, the lender has to take on more risk, which is reflected in the interest rate being charged. A sample rate at the time of writing was 0.5% higher than an insured/insurable purchase rate.