When Can I Refinance?

Now is the right time to refinance my mortgage, right?

Well, maybe. There are lots of good reasons to trade in your old mortgage for a new one, especially with increasing home values and the current mortgage interest rate environment. But whether or not it’s the right decision for you depends on your unique financial situation. Let’s take a look at the benefits of refinancing, as well as other factors you should consider before you make this major financial decision.

Here are some of the most common reasons homeowners choose to refinance and what you should consider

• Saving money
• Shorter loan term
• Access to more home equity through a cash-out refinance
• No future rate increases
• Elimination of private mortgage insurance (PMI)

Saving money

We already referenced today’s hot real estate market and low interest rates. If you can take advantage of them through a refinance and save money, great. A lower interest rate saves you money by translating to a lower monthly mortgage payment, lower interest payments over the life of the loan, or both. This benefit is maximized when you’re (1) in the early stages of your existing mortgage and your principal balance is higher, meaning that more of each payment is applied to interest or (2) when your new interest rate is a certain percentage below your existing interest rate, such that any finance charges are offset over the life of the loan. A Mortgage Refinance Calculator can help you determine how much you could save and if it is worth it for you to refinance. mad

Shorter loan term

Lower monthly payments are good, but you also have the option to keep your monthly payments the same or to even increase them – in order to shorten the term of your loan (aka, the number of years your mortgage is financed for). If you refinance from a 30-year to a 15-year mortgage, you’ve just cut many years off your mortgage and how long your required to pay the lender before you own your home ‘free & clear’. You may have higher monthly payments but the key benefits are you’ll pay your loan off much faster and you’ll spend less on interest over the life of the loan. You can even get a rate-and-term refinance, which allows you to take advantage of a lower rate and a new term without putting forth any new money.

Access to more home equity

A rate-and-term refinance differs from a cash-out refinance, because a cash-out lets take advantage of the equity you have in your home and convert that equity into money that can be used for large expenses. If you have equity in your home — meaning you owe less than the home is worth — you may be able to refinance and get some of the equity out in cash. Homeowners can use the cash for any reason, but common uses are paying for children’s higher education costs, consolidating high-interest debt, making home improvements or paying for a home addition or remodel, which may increase the value of the home and is a win-win for the homeowner. Use our cash-out calculator to determine how much money you might be able to access from the equity you have in your home.

No future rate increases

Refinancing allows you to change the type of loan you have. For instance, your existing loan may be an adjustable-rate mortgage (ARM) but now you want a fixed-rate mortgage (or vice versa). If you started with an ARM with a low rate that later went up, switching to a fixed-rate mortgage will protect you from future interest rate hikes. If you started with a fixed-rate mortgage but rates keep dropping and you want to take advantage of them, an ARM might be a good refinance choice, especially if you’re planning to move in a few years.

You can also consider moving to an FHA or VA streamlined refinance. These loans lower your monthly payments by giving you a lower interest rate. Get the advice of an AmeriSave mortgage banker, who can guide you through the types of VA refinance loans and help you determine if you qualify for a low interest VA home loan, and if not, help you find the loan type that best meets your needs.

Elimination of PMI

If you put down less than 20% on your original loan and have already accumulated 20% equity in your home, then you can avoid paying for private mortgage insurance (PMI) as part of a refinance. Your original loan type determines whether you must pay these mortgage insurance premiums (built into your monthly payment) for the life of the loan. If you have an FHA loan, you have to pay them unless you refinance to a different loan type. If you have a conventional loan, you can cancel PMI once you reach the 20% equity threshold. Check out this article for more information on private mortgage insurance.

Other Factors to Consider Before you Apply for a Refinance

All of these benefits are worth considering, but there are other factors to think through too, including personal financial goals and how many years you’ve been in your current home, along with the following:

Rates shopping

It’s important to compare rates from multiple mortgage lenders to ensure you are receiving the deal that’s best for your needs. Learn more about finding a lender for a refinance here. However, when comparing rates, keep in mind that in order to get the most accurate picture, you should compare rates for the same type of mortgage on the same day because the market changes daily. You will also need to review the costs of title insurance, closing/attorney and the appraisal. Your Loan Estimate will show a breakdown of those fees so that you can make a fair comparison. For more tips on rate shopping, check out ways you can compare offers from multiple lenders.

Calculating Costs to Get Ahead

You may qualify for a lower interest rate when you refinance, but you’ll need to balance this against the things like home repair costs and other unexpected expenses, as well as closing costs, original fees, appraisal fees, taxes and insurance. You want your refinance to be worth it, so you want to determine how long it will take to recoup those costs – known as the break even point. You can determine this by dividing the amount of your closing costs by the amount you’d save each month with the new mortgage. Ideally, your savings will equal or exceed the costs of the new loan. But if your break even point shows that you’ll need to stay in the (refinanced) home for, say, 48 months in order to break even, but you’re planning to move in less than 4 years, it doesn’t make good financial sense to refi.

Credit Score and Other Changes

You also need to consider how your credit score has changed (and hopefully improved) since you took out the initial mortgage. If you’ve kept up a solid payment history and have a high credit score, you can expect a better interest rate on the refinance loan. On the other hand, if you’ve had some financial woes and it’s affected your credit score, you may want to wait to refinance until you can get a better credit score or pay off some debt or a combination of both.

Maybe you’ve had a change in annual income, which could help you, but if you’ve acquired new debt, whether through a car loan, student loans or a major life event, your credit score may be lower than when you took out the original loan, meaning that a refinance at this time doesn’t make financial sense. Read more about buying a home with student loans here.

How about timing?

If you’re wondering how long you have to own your home before you can refinance, it depends on several factors, including the type of mortgage you have. Generally, you must be on title of the home at least 1 day prior to application to obtain a rate-and-term refinance. You must also be on the title of the home for 6 months prior to application before you can obtain a cash-out refinance. There are special circumstances that allow for a shorter period if no mortgage financing was used to purchase the home, known as delayed financing. Talk to your lender about timing relative to your situation.

If you’re wondering how long the refinance process takes, it’s typically 30 – 45 days, end to end. The good news is that you’re already living in your home, so there should be less need to close by a certain date, especially if you’ve taken advantage of an interest rate lock through your lender. Also, many lenders, including AmeriSave, offer a quick process that allows you to apply online. Not only that, at AmeriSave, our technology makes obtaining a mortgage easy and efficient. We offer in-house processing, underwriting, closing, and funding, so that we can offer our very best rates and minimize delays.

Refinancing your mortgage can be a very lucrative decision, but it’s also a big decision. So make sure you pick a lender that is going to offer you the best savings and meet all of your requirements.