Refinancing a mortgage loan can have many benefits, but homeowners often delay this step because they may be comfortable with their current mortgage, don’t know how to proceed, or don’t understand the right times for refinancing.
Why, When, and How to Refinance Your Mortgage Loan
Why Refinancing a Mortgage Loan Could Be Beneficial
People have many different reasons for refinancing a mortgage loan, but the main goal, one form or another, is always to save money. Of course, with so many variables involved in real estate financing, the seemingly-simple goal of saving money can be complex. However, you can usually identify a few basic reasons why you should consider refinancing.
Generally, most people will refinance when they can get a lower interest rate. As the economy grows, interest rates will be increased, but if you took out a mortgage loan when rates were higher, you may be able to get a lower monthly payment by refinancing. How much do interest rates need to climb to make refinancing worth the effort? That depends on your specific situation, but the traditional number has been 2%. If you can drop your total interest rate by 2% when refinancing, it will likely be worth the effort. However, some experts are now recommend refinancing if you can lower the rate by 1%.
It also may be good to refinance if you can shorten the timeframe of your loan. If interest rates have fallen since you took out the loan, you may be able to get a shorter term without a significant boost in your total monthly payment.
Many people who initially used an ARM loan could also benefit from refinancing into a fixed-rate mortgage. ARM loans, or Adjustable-Rate Mortgages, have rates that will change every year based on the current standards. Initially, they offer lower payments than many other programs, but they can also be more expensive as time goes by. Converting to a fixed-rate mortgage may be a sound strategy, especially in a market where interest rates are rising. However, if interest rates are dropping, you may be able to save by refinancing from a fixed to an ARM loan, as you’ll be able to take advantage of future drops in interest. (As of writing this article, interest rates are expected to climb. If you have an ARM loan, it will likely be beneficial to learn about refinancing options.)
You could also benefit from refinancing if your credit score has gone up. When your credit is low, you’ll often be punished with a higher interest rate. However, if you have spent the last few years making timely payment, managing debt wisely, and lowering your debt load, you may have reduced your score enough that you’ll be rewarded with a better interest rate.
How to Refinance?
If you have determined that refinancing would be right for you, you’ll need to prepare your paperwork and takes specific steps to start the process. The first step will be to contact your current mortgage company and ask about the options available for refinancing the loan. You’ll also want to talk with other lenders to see if there are options available for refinancing. (Whether you have worked with us in the past or not, we’d encourage you to contact our team for honest information on our refinancing options.) At the very least, contacting lenders will help you understand the steps needed to make refinancing worth your time.
If you haven’t already, take the time to check your credit. Having average credit is not a deal-breaker, but if you find your credit has gone up significantly, it may be a sign that you need to refinance. Bring this information with you to the lending office.
If you settle on a program, the next step will be to fill out the application for a new loan. During this step, you’ll likely need to provide a wide range of paperwork, including verification of income and assets. This will also be the time when you need to submit all of your documents, including driver’s license, tax returns, W-2 forms, and other information.
Part of the refinancing process will include an appraisal on the home. The lender will usually order the appraisal, and this can actually bring a strong benefit to your loan. If the appraiser finds an increase in home value, the terms of your loan could be adjusted in your favor because you’ll have more financial equity in the home.
Is There a Bad Time to Refinance?
We’ve talked a lot about when to refinance, but is there ever a bad time to refinance? Are there any risks that people should understand before they decide to refinance a mortgage loan?
One of the largest risks for refinancing is the potential for penalties that may come from paying off your current mortgage loan. In many mortgage agreements, there is a clause that allows the lending company to charge a fee for early payoff. These fees can equal thousands of dollars, so be sure to understand this potential cost and factor it into your refinancing discussion.
There will also be additional costs that come with the new mortgage. Just like your first, there will be fees and costs for generating a mortgage loan, so be sure that these costs are counteracted by the new payments.
If you expect mortgage rates to become lower or stay level in the near future, it may not be beneficial to refinance. Consult with a professional and do plenty of research on the future of the markets before you make this decision, as it may be wise to wait.
Expert Advice Before, During, and After Refinancing a Mortgage Loan
Mortgage rates are expected to rise, so many experts are recommending that people refinance as soon as possible, before mortgages get any higher. Some have even claimed that it’s already too late to refinance, but you should always research the issue to see if refinancing could be right for you.
With a common-sense approach to mortgage approval, we can help increase your chances of refinancing your loan in a way that improves your financial future. Contact us today to learn more about our mortgage expertise!