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Refinancing your mortgage means applying for a new mortgage to replace the current mortgage on your property. In many cases, homeowners refinance because they can secure a lower interest rate or lower monthly payments with a new loan. That can end up saving you thousands of dollars over the term of your mortgage or make it easier to balance your finances.
You can also borrow cash at the same time as you refinance your mortgage using a cash-out refinance. With this type of loan, you borrow more than the value of your existing mortgage and keep the extra money as cash. You can use the funds for a home improvement project, to pay off other debt, or for anything else you need money for.
Mortgage interest rates vary widely based on several factors, including your credit score, the amount of debt you want to refinance, your home’s value, and more. That said, interest rates for refinancing are typically very competitive among lenders, which is a good thing for you.
|Average 30-year fixed rate
|Average 15-year fixed rate
Source - YCharts
Keep in mind that the lowest rate isn’t always the least expensive loan when it comes to refinancing. There are fees associated with the refinancing process that could run into thousands of dollars. These charges stem from the appraisal process, application fees, and title insurance. It’s a good idea to compare the five-year cost of new mortgages when shopping around for lenders to get a sense of what you’ll end up paying.
A good rule of thumb for refinancing is that you should have at least 20% equity in your home. That means that you have paid down at least 20% of your original mortgage.
However, many lenders look at your loan-to-value ratio instead of your equity. Your loan-to-value ratio is the amount of debt you owe on your mortgage divided by your home’s market value. Most lenders want you to have a loan-to-value ratio of less than 80% to refinance your mortgage.
Refinancing your mortgage is a big financial decision. It’s essential to think carefully about what refinancing means for you and how much money you could actually save by refinancing. That said, if you are planning to stay in your home for several years or more, refinancing your mortgage could be a savvy financial move.
Right now is perhaps one of the best times to refinance your mortgage because interest rates in the US are at historic lows. The national interest rate is hovering around zero, and it’s likely to stay that way through most of 2021 due to the economic effects of the COVID-19 pandemic. While that doesn’t mean you’ll pay an interest rate of zero, it does mean you could pay a significantly reduced rate.
The COVID-19 pandemic upended the US economy, and that’s had major ramifications for homeowners thinking about refinancing. First, it has pushed interest rates to all-time lows, even as home values continue to skyrocket. By July this year, home values were up an average of 5.5% compared to 2019. That’s great news for homeowners, since it means the ratio of debt you owe on your mortgage to your home’s value is shrinking.
However, the current economic conditions have also encouraged some lenders to reduce their financial risk. Many mortgage lenders have tightened requirements for borrowers seeking to refinance. As a result, you may need a higher credit score to qualify or to get the lowest available interest rates. So, it’s worth spending some time shopping around to find a lender who will offer you a good deal on your mortgage refinance.
Choosing the right lender for your refinance is key. Your home is on the line with any mortgage, so you want your lender to be highly responsive and easy to work with when you need them.
It’s also important to shop around to find a lender that matches your needs as a borrower. Ask yourself what your goals are for refinancing your home mortgage. Do you simply want a lower interest rate? Or do you want to change the term of your mortgage to lower your monthly payments? If you’re looking for a cash-out refinance, you will want to shop for lenders that specialize in this type of loan.
You should also take stock of your own financial situation. If your credit score is less than perfect, be honest with yourself about that fact and look for lenders that work with homeowners with poor credit. If COVID-19 has impacted your employment or financial situation, you may need to look for a lender that is willing to suspend payments for several months.
Finding the right lender for your mortgage refinance requires a lot of upfront preparation. Assess what you need out of your refinanced mortgage, along with your strengths and weaknesses as a potential borrower. Then use this information to narrow your search for lenders that might be a good fit.
The process of applying for a mortgage refinance typically varies by lender. The process may be completely digital, it may be mostly online with some mailed documents to sign or require a fully paper application.
Still, the documentation you will need to complete your refinance application is typically the same across lenders. Lenders will typically want to see:
In addition, almost every mortgage lender will want an appraisal of your property. However, during the COVID-19 pandemic, you may be able to skip the appraisal process or complete it via a virtual tour if your home has been appraised in the past five years.
You absolutely do not have to use your original lender when refinancing. If you like your current lender, you might ask them for a refinance offer as part of your search process. In some cases, lenders will offer preferential rates to existing customers. In any case, you should always check if you can get a better deal with another lender, especially if your financial situation has changed significantly since you took out your original mortgage.
Having good credit makes it easier to refinance your mortgage, but it’s not essential. The better your credit is, the more likely you are to be approved and to qualify for the lowest possible interest rates. However, you can find lenders that specifically work with homeowners who have poor credit. You might also consider government-backed mortgage lending programs, such as those offered through the Federal Housing Authority or the Department of Housing and Urban Development.
How long it takes to refinance your mortgage varies by lender. Some online lenders process your application and roll over your mortgage within a week. Other lenders may take considerably longer. Expect the process to take around 30 days on average.