All About Mortgage Refinancing

If you are considering refinancing your mortgage, you should know that it involves applying for a new loan and using the new loan to pay off the balance on your existing mortgage. Mortgage refinancing allows homeowners to choose new mortgage terms and save money in the process. By taking advantage of this option, you can meet your financial goals and reduce your monthly payments. Several advantages of mortgage refinancing make it a worthwhile option for many homeowners. Lower interest rate If you can find a lender that offers a lower interest rate, you should consider refinancing your mortgage. The lower interest rate will reduce your monthly payments and save you money in the long run. However, you must take into consideration the closing costs and the interest rate reduction. While a 1% reduction might sound great, this amount may not make sense if you plan to sell your house within a year. Refinancing your mortgage to save one percent can save you hundreds of dollars a month. A rate reduction of just one percentage point is substantial and can result in meaningful savings in monthly payments. On a $250,000 loan, for example, a reduction of a single percentage point can save you $250 per month. A 20 percent reduction can be used to help pay your monthly bills, put money into an emergency fund, or invest the extra money. You can even pay this money back into your mortgage, making it easier to pay off your loan early. 30-year term The interest rate on a 30-year term mortgage refinancing is determined by lenders based on your credit score, income and debt to value ratio. Lower interest rates are possible with lower credit scores, but the minimum credit score is still 500. For borrowers with lower credit scores, a cash-out refinance is possible. You will need a minimum of 10 percent down payment, though. Loans under VA and USDA programs require no credit score requirement. Another benefit to refinancing a 30-year mortgage is a lower monthly payment. Whether it is a lower interest rate or a reduced monthly payment, a 30-year term mortgage refinancing can give you extra cash to use for other purposes. You can use the cash from a refinance to pay off high-interest debt, consolidate debts, or save for a vacation home. Application fee Mortgage refinancing is not free. The application fee charged by the lender is usually nonrefundable, and can range from $50 to $500. The cost of this fee is not refundable, so it is vital to check your credit report before deciding to apply for a mortgage. If your credit score is excellent, look for a lender with a low application fee, or none at all. This may save you hundreds of dollars. Before you start shopping around, be sure to ask about the application fee. This fee is usually 1% to 2% of the total loan amount and may cover document preparation, notary fees, lender's attorney fees, and more. This fee is often referred to as an administrative fee, and you should clarify its purpose before agreeing to pay it. It is also possible to have the fee waived, so ask about it when you make an application. Calculator When it comes to the math involved in refinancing your mortgage, using a calculator can make the whole process much simpler. Refinancing is a great way to save money on monthly payments and overall interest over the life of the loan. However, the math is not quite that simple, and timing is everything. Here is how to use a calculator to calculate the savings you could receive. There are several factors you'll want to consider when deciding whether to refinance your mortgage. One of them is the closing costs. Using a mortgage calculator is a great way to make sense of these costs and avoid math headaches. Make sure you input the current value of your home. The lender may charge 1% of the total loan amount. Another common fee is the home appraisal. An appraisal is usually a few hundred dollars, and it is required for mortgage applications. Lenders also charge a loan origination fee, which is one to two percent of the loan amount. Document preparation fees can be a few hundred dollars, as well. Drawbacks Generally speaking, there are benefits to mortgage refinancing, but the actual benefit will depend on the new loan terms and your personal circumstances. You can lower your monthly payments by refinancing your mortgage, but you'll have to pay new closing costs each time the rate decreases, which can exceed the savings you'll realize. Rather than refinancing when rates drop below your current loan, wait until rates are a full percentage point below your current interest rate before you refinance. You'll have more savings this way, but you'll also face higher closing costs. One of the most common drawbacks of mortgage refinancing is the loss of your equity. Usually, lenders will not give you a better deal than what you already owe on your existing mortgage. In addition, refinancing can decrease your credit score in various ways. Performing a hard inquiry on your credit report can result in a small drop in your score. However, paying off your old debt may not negatively impact your credit score.