It doesn’t matter how long ago you purchased your house, whether it’s been just a few years or several decades. Consider re-evaluating your current mortgage and living situation to determine whether or not a refinance could benefit your wallet.
The process is almost as in-depth as getting a new mortgage, so we’ll show you exactly when you should consider refinancing and how to complete the process.
Table of Contents
- 1 When should you refinance your mortgage?
- 2 How soon can you refinance your mortgage?
- 3 What is a HARP refinance?
- 4 How does it work when you refinance your house?
When should you refinance your mortgage?
Before you jump into the refinance process, it’s wise to think about your goals. There are many times when it’s a good idea to look into refinancing, but you always have to look at the big picture as well.
For example, if interest rates are lower than when you got your mortgage or your credit has improved recently, you may qualify for a lower interest rate. That may save you money over the long run and can also lower your monthly mortgage payments.
But here’s the catch.
If you lock into that lower interest rate and refinance for another 30-year mortgage, you’re adding time to the loan term. This might not be a big deal if you’ve only been paying off your mortgage for a couple of years. On the other hand, you may end up paying more interest over time, even with the lower rate, if you’re already several years into your current term.
Get your lender to crunch some comparisons for you, or do it yourself using a refinancing mortgage calculator. That way you know for sure whether you’re really saving money or not.
Another time to look into refinancing your mortgage is if you’re paying private mortgage insurance and have reached 20% equity in your home’s value. At that point, you may be able to refinance and drop that PMI contingency.
Since PMI typically costs up to 1% of your loan amount each year, you could save yourself some serious money, especially since it’s not going towards your principal or interest.
As always, be sure to also consider the closing costs that come along with refinancing as well as how much of your loan you’ve already repaid. The financial benefits of the refinance should always outweigh the expenses.
How soon can you refinance your mortgage?
When it comes to refinancing, lenders typically look more at the amount of equity you have in your home than the length of time you’ve owned it. This is especially true of cash out refinances, which require 20% equity in the home. If you just want to change your interest rate or length of the loan, then you’ll need somewhere between 5% and 10% home equity.
If you’ve already refinanced your home once after the original purchase, your lender might make you wait before doing it again. The industry standard is usually six months, so as long as you’re over that threshold, you shouldn’t have an issue.
One issue to be aware of, however, is the potential for a prepayment clause in your existing home loan. Although it’s rare these days, this penalty can charge you a large fee if you pay off your mortgage early.
When you refinance, that’s exactly what you’re doing: paying off your old mortgage (and lender) with a new mortgage that could very well be through a new lender. Check your existing loan contract to make sure a refinance won’t come with any unexpected penalties.
How much could you end up paying?
Some prepayment penalty clauses are structured so that you pay 80% of the interest you would owe over the next six months. That can easily amount to thousands of dollars, especially if you’re early in your mortgage with interest-heavy payments.
What is a HARP refinance?
HARP is a government-sponsored program that has been extended through 2018 and is designed to help homeowners refinance, even if you don’t have a lot of equity in your house.
There’s no minimum credit score for this specific program, but you do have to be current on your mortgage payments. Additionally, you can roll closing costs into the new loan amount so you don’t need to have a lot of cash upfront. There’s also usually no appraisal ordered for a HARP refinance.
What are the other requirements?
Your mortgage must be owned by either Fannie Mae or Freddie Mac. That doesn’t mean your loan was necessarily originated by either of these agencies, just that your initial lender sold the loan to one of them for servicing. This is a fairly common practice.
You can check whether your mortgage qualifies through the Fannie Mae and Freddie Mac lookup tools. The HARP program has been extended to December 31, 2018, so you have until that time to take advantage of this kind of refinance.
How does it work when you refinance your house?
Refinancing your home doesn’t happen overnight. In fact, there are several steps involved. Here’s a play by play so you know exactly what to expect.
Determine the Type of Refinance You Want
We’ve talked about setting a goal for your refinance and this is a huge part of starting the process. You may want a standard refinance that merely adjusts your interest rate. Or perhaps you want to cash out some of your equity. Alternatively, you may wish to refinance out of an adjustable rate mortgage to a fixed rate or switch the length of your term.
Check Your Credit Score
Once you know the type of loan you want, it’s time to start preparing for the process. Knowing your credit score lets you know a bit more what you can expect in terms of loan qualification and interest rates.
Some loan types have absolute minimums, while others are more flexible. Check your credit score upfront so that you can get an idea of whether or not you meet basic refinance requirements.
Estimate Your Home’s Value
Next, you need to get an idea of how much your home is currently worth. The best way to do this is to look at comps in your neighborhood.
Check websites like Zillow and Realtor.com to find out what current sales prices look like, as well as properties that have been recently sold. Take a look at the price per square foot for these homes and apply that number to the square footage of your own home.
Of course, that’s not an absolute. Your home’s true value depends on a number of factors, including upgrades and lot size. But you can take these things into consideration to get a general idea of what your appraisal value could be.
You don’t have to refinance with your existing mortgage lender; in fact, it’s smart to shop around to find the best new loan terms. Compare all of the details of your refinance offer. Getting a lower interest rate is definitely important but you also want to consider potential closing costs and origination fees.
How a lender structures the new loan is also important and can influence your decision. If you’re trying to save on how much cash you spend upfront, you might prefer a lender who lets you incorporate your closing costs into the loan amount. Alternatively, low interest rates may be the most important factor when choosing a lender.
Prepare for Your Application
After you pick out a lender with the rates and terms you like, it’s time to start gathering your documentation for your refinance application. You’ll likely need things like bank statements, tax forms from the last two years, and pay stubs.
Getting all of this paperwork together in advance can save time during the application and underwriting processes.
Get Ready for the Appraisal
Part of the refinance process is to get a professional appraisal on your home. Your lender typically orders this and the fee is usually included in your closing costs. Make sure your home is clean and presentable. You don’t need to make major changes but picking up ahead of time can create a good impression on the appraiser, as can a freshly mowed yard.
Anticipate Your Needs for Closing
Closing on a refinance is similar to when you originally closed on your home. You should be prepared to pay any closing costs or other fees you’re responsible for.
Typically, your lender will arrange a meeting with a public notary so you can sign all of your paperwork. You can make this at a time and place that is convenient for you. If the refinanced loan is in both your name and someone else’s, like your spouse’s, then you’ll both need to be present to sign.
Once the paperwork is complete, you’ll start making payments to your new lender as scheduled in your closing documents. Any new terms or rates will also apply so you can start paying down your newly refinanced home loan.