Refinancing a mortgage gives homeowners the opportunity to save money or access equity. Keep reading to understand the process and start setting your home refinancing goals.
What does it mean to refinance a mortgage?
A mortgage refinance is the process of replacing your current home loan with a new one.
Oftentimes this is done to get a mortgage with a lower interest rate or reduce monthly payments. Other times it’s so people can pay off a loan faster or switch from an adjustable-rate to a fixed-rate loan.
How to refinance a mortgage
When you first buy your home, you get a mortgage to pay for it and all of that money goes directly to the home seller. The process of refinancing a home, however, is when you get a new mortgage and that money goes to paying off the balance of your old home loan instead of to the home seller.
To get started, research which lenders near you offer the best loan terms compared to your existing mortgage. Go with the lender that will best improve your financial situation. Then, you’ll just need to qualify for the loan the same as you would have done when applying for the original mortgage.
Simply fill out an application with a lender, and go through what is called an underwriting process (a.k.a. when an individual takes a financial risk for a fee). Once approved, you’ll close on the house the same as you would have when you first bought it.
When to refinance your mortgage
The goal of refinancing is always to save money, or at least tap into equity. We’ve listed a few common reasons below as to why someone might want to start the process. See if these fit with your own personal goals!
- Reduce your monthly payment. You’ll be able to pay less each month if you refinance into a loan that has a lower interest rate. This typically results in big savings as time goes on.
- You could pay off the loan faster. If you refinance for a 15-year instead of a 30-year mortgage, you’ll end up paying off the loan in half the time. Plus, you’ll pay less interest over the life of the loan. But on the downside, 15-year mortgages tend to have higher payments.
- Leverage equity. Refinancing allows you to borrow more than you currently owe on your loan, so a lender will give you a check for the difference. This process is called a cash-out refinance, and people often get them alongside a lower interest rate.
- Go from an adjustable-to a fixed-rate loan. The advantage of this is fixed-rate loans stay the same over time, unlike adjustable-rates which can increase and fluctuate. This can provide helpful financial stability since you can plan for paying the same payment amount each month.
How to calculate your break even point
Before you begin the refinancing process, you should figure out if it makes sense for you financially. Do so by calculating your break-even point to determine how long it will take for the savings from refinancing to be greater than the costs.
Calculating your break-even point is simple math: divide your monthly savings into the costs it would require to refinance:
Number of months to break even = Closing costs / Decrease in monthly payments
If your break point is relatively close to the time you start refinancing, it would probably be worth the costs. A shorter refinancing timeline allows you to see the benefits for a greater length of time before you sell or refinance again. If your calculation shows it would take a long time, consider how long you even want to live in the house to actually reap the savings.
How to find today’s mortgage refinance rates
Most financial institutions, such as Wells Fargo or Bank Of America, list current mortgage refinancing rates on their websites. You will also find this out when comparing different lenders.
According to Bankrate.com, here are the current mortgage refinance rates:
|30-Year Fixed Rate||3.100%||3.250%|
|20-Year Fixed Rate||3.000%||3.170%|
|15-Year Fixed Rate||2.390%||2.610%|
|10/1 ARM Rate||3.140%||4.030%|
|7/1 ARM Rate||2.990%||3.880%|
|5/1 ARM Rate||3.000%||4.030%|
|30-Year VA Rate||2.660%||2.860%|
|30-Year FHA Rate||2.800%||3.650%|
|30-Year Fixed Jumbo Rate||3.110%||3.170%|
|15-Year Fixed Jumbo Rate||2.390%||2.450%|
|7/1 ARM Jumbo Rate||3.080%||3.810%|
|5/1 ARM Jumbo Rate||2.740%||3.870%|
Frequently Asked Questions (FAQs)
How long does it take to refinance a mortgage?
It normally takes between 30 – 45 days to complete a refinance. That said, no lender will be able to give you a precise timeline. Things like appraisals, inspections, and other third parties can delay the process. A refinance could also be longer or shorter depending on the size of your property and the complexity of your finances.
Can you refinance a reverse mortgage?
A reverse mortgage is a loan for older borrowers who want to tap into their home equity. It’s different from a standard mortgage because instead of a borrower making direct payments to a lender, a reverse mortgage allows for a lender to make payments to the borrower.
You can refinance a reverse mortgage, but it only makes sense in specific situations.
We’d give a thumbs up to a reverse mortgage refi if:
- It’s been a long time since you closed on your home and interest rates have lowered
- You want to switch from an adjustable to a fixed rate
- Your home has appreciated in value and there’s extra equity you can tap into
- You want to add your spouse to the loan because they aren’t on the original loan
We’d give a thumbs down to a reverse mortgage refi if:
- The interest rate would be higher than your existing mortgage
- You’d end up paying more in closing costs and other fees such as mortgage insurance premiums, appraisal fees, credit report fees, pest inspection fees, survey fees, and loan administration fees. And that’s just naming a few.
Can I still refinance with late mortgage payments?
If you miss a payment or the payment is received 30 days or more after the due date, you will be disqualified from the refinance process. This indicates to the lender you may have financial trouble or are unable to manage your mortgage payments.
Can I refinance my mortgage without a job?
Most times lenders won’t approve unemployment as proof of income, but there are a few ways to get around not having a job when planning to refinance.
- Find a co-signer. This is someone who will pledge to pay the lender any mortgage payments you can’t afford. Having one assures the loan will be repaid and greatly increase your chances of being approved by a lender without having any income.
- Speak with a housing counselor. If you’re completely lost at where to begin, turn to a professional. They can guide you through what the process would look like, and the U.S. Department of Housing and Urban Development offers low-cost or free advice.
- Show other documentation. Prepare to show your lender you’re financially responsible in other ways. This could be showing them documents including bank account information, tax returns, proof of insurance, proof of unemployment, and proof of any additional income (like freelance work or investment income).
- Communicate with your lender. Be honest with them about your goals and see if they can offer a different repayment plan. It never hurts to ask!
What documents do I need to refinance my mortgage?
Most lenders will require you to provide all your financial details and account information, including your credit report. You’ll also need to show any account statements for your mortgage, home equity lines of credit, car loans, and student loans you might have.
A lender will also need to see a few documents showcasing your proof of income, including your W-2s, tax returns, 1099s, employment history, income history, and any recent pay stubs.
After providing all of that information, your lender will want to see you have a homeowners insurance plan that will be enough to cover their requirements. Which means a lender might order a refinance appraisal on your home. Plus, if you have title insurance, your lender will want to see that too.