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After you’ve lived in your home for a few years, it’s normal to start thinking about what’s next for you and your money.
Do you want to try your hand at DIY home improvements? Is it finally time to go back to school or maybe pay off student loans?
They’re all great ideas — but they all cost a truckload of money. Luckily, we may have a solution for you: refinancing your current mortgage.
Understanding a Mortgage Refinance
Have you ever thought about trading in your old car for a new one with fewer miles and, more importantly, a better sound system?
A mortgage refinance is pretty similar. You trade in your current mortgage for one with better terms. And you have the option of doing it with your current lender or a new one.
Cool, but why should I refinance my mortgage?
Great question! People usually refinance their mortgage for the following reasons:
- Reducing the monthly payment. This can be a great option for people who may be between jobs or just need a little breathing room to free up some extra cash for other expenses
- Saving money over the life of the loan. This can help all you serial savers out there lower your interest rates. (Because who doesn’t want to reward their future self?)
- Taking cash out of your home. If you’ve built up a nice chunk of home equity over the years, a cash-out refinance can free up a lump sum of cash to be used however and whenever you need it
All three options have their benefits. But be sure to choose the option that aligns with the financial position you’re currently in.
So, the moral of this story is that you can essentially choose your own adventure.
We can help translate
If you’re already thinking about diving headfirst into the world of mortgage refinancing, it pays to know the lingo. Here are some terms that are frequently used during the process:
- Closing costs: Fees for getting a mortgage or refinancing a mortgage
- No-closing-cost loans: Instead of paying closing costs upfront, the closing costs get rolled into your monthly payments
- APR (annual percentage rate): Interest rates and fees you pay each year to borrow money
- PMI (private mortgage insurance): If you put down less than 20% on your original mortgage, you are likely paying PMI, but refinancing can eliminate the fee
- Point: 1% of the cost of your mortgage
Tips to Finding the Best Refinance Rate
Refinancing your mortgage will typically allow you to get a better interest rate than the one you currently have, but that’s not really the end goal.
You want to find the best mortgage refinance rate possible.
Let’s go over the three ways you can make that happen:
1. Your credit score is king
(Or queen, or Duchess of Sussex, or Khaleesi of the Great Grass Sea. Whatever floats your boat!)
Like almost any loan, your credit score will go a long way in determining your interest rate and whether lenders will do business with you.
A higher credit score gives you lots of leverage when you’re negotiating with lenders. On the flip side, a lower credit score may require you to be a bit more open-minded.
The key is to know your credit score before talking to lenders about a mortgage refinance. It also helps to be well versed in your credit history, too.
If your score has gone up since you got your first mortgage, you could be in luck. Chances are you will qualify for a more competitive refinance rate.
But, if your credit score hasn’t budged or has gone down since you got your first mortgage, you’ll need some luck to get a reduction in interest rates. That luck can come in the form of outside factors, like the housing market’s current state. Let’s say, for example, that there are fewer homes on the market and fewer people applying for mortgages. That could mean, low credit score or not, your interest rates may go down.
Remember: you are not tethered to your current credit score. There are lots of ways to get a low score trending up:
- Make bill payments on time
- Don’t just pay minimums – wipe the slate clean every month
- Diversify the lines of credit you have
- Pay off existing debts
2. Shorter may be better for rates
In your quest to achieve the best possible refinance rate, look no further than the repayment period.
The mortgage repayment period is the total amount of time you have to pay back the full amount of the home loan plus interest to the lender. The most common mortgage periods are 15- and 30-year terms.
During refinancing, you’ll have the option of sticking with the number of years left on your original loan, extending the repayment period or shortening it.
To get the lowest possible interest rates, shortening the loan will typically get the job done. But depending on your financial situation, it may not always be the best option.
Using a 15-year term and a 30-year term as our examples, here are some features to consider for shorter- and longer-term loans:
|Lower interest rates
|Higher interest rates
|Own home faster
|Lower monthly payments
|Long-term interest savings
|Available with fixed and adjustable mortgage rates
|Typically fixed interest rate
|Option of paying more per month or falling back on lower monthly requirements, if needed
|Usually a 50% or more increase in monthly payments
|Larger tax deduction of interest — particularly in the early years of repayment
Switching over to a shorter-term mortgage will save you money in the long term and can help you get the lowest interest rate possible. Just know that if you take this route, you’ll sacrifice cash in the present and take on more risk.
Because this option offers less financial flexibility, you’ll want to be as sure as you can be that your current income is stable before signing on the dotted line.
3. Don’t settle
Ever wonder what it might feel like to have a heap of suitors desperately competing for your attention?
Shopping around to refinance your home with a high credit score in hand will get lots of mortgage lenders interested – and another accomplishment ticked off your wish list.
There is no limit on the number of quotes you can receive from lenders. And there is no rule that says you can’t use a quote from one lender to drive down the price of another lender. You are in control here. Doing your due diligence could make all the difference when it comes to saving money.
So get out there and create some good ol’ fashioned competition!
Pros and Cons of Refinancing Your Mortgage
There are two sides to every coin, and refinancing your mortgage is no different. Let’s go over the good and not-so-good aspects of refinancing.
Just do it: the pros
- Increase your monthly budget with lower payments
- Pay off your mortgage loan faster — saving you money in interest payments
- Get a better interest rate
- Tap into your home equity to get a lump sum of cash
Hold up: the cons
- Take on new closing costs
- May be better options out there to get cash quickly
- Saving on monthly payments doesn’t always mean long-term savings
The cost of doing business
Maybe the most important point we have to make before sending you off to refinance is to make sure your savings will be worthwhile — especially if your goal is to lower your monthly payments.
You will have to pay closing costs to refinance. Factoring in those costs against your potential monthly savings will tell you when you will start to see savings.
Let’s say you crunch the numbers, and after refinancing you will save $120 a month on your mortgage. Now, let’s say you pay $5,000 in closing costs. It will take you a little more than 3 years to get back the money you spent to refinance.
Over the long term, it may sound like a good deal. But if you aren’t planning on staying in your current home for longer than the time it takes to recoup the closing costs, you actually won’t be saving any money.
Phew! All right, we said our peace!
Should You Refinance Now?
No matter how you slice it, saving money is always a plus. While refinancing your mortgage is a great way to do that, it isn’t always the best option.
Before you start calling up potential lenders, ask yourself the following questions:
- Do the costs of refinancing outweigh the potential savings?
- How much longer do I plan to live in this home?
- Is my credit score better than it was when I got my current mortgage?
- Has my income increased or decreased since buying my house?
Bring it home
Whether you decide to refinance your mortgage now – or not quite yet – you’ve got everything you need to go out and not only get a great rate but also get the best refinance rate possible.
How’s that for a hype speech?!
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The Short Version
- Refinancing a mortgage can save you money
- A mortgage term’s length can affect the rate you get and future savings
- A good credit score can help you get the best possible rate