Once you’ve fulfilled your dream of homeownership and settled into your new home, you may take a closer look at your finances and find that your current mortgage is no longer ideal for your financial goals.
A dip in interest rates is typically a great time to refinance your mortgage. However, besides saving money, there are several other benefits to replacing your current mortgage with a new one.
Get a Lower Monthly Payment
Most homeowners refinance their mortgages to take advantage of low-interest rates. When you lock in a lower rate, this can save you thousands of dollars over the life of the loan because, in many cases, a lower interest rate also means a lower monthly mortgage payment.
The savings you make on your monthly mortgage payment can be added to your savings, set aside for a college fund, or be used to pay down credit card debt or student loans.
Lock in a Fixed Rate
When you first purchased your home and considered your loan options, an adjustable-rate loan may have been a great choice, especially if interest rates were low and you had planned to live in your home only for the period of the adjustable-rate mortgage (ARM), which is typically 1, 5, or 10 years.
Since purchasing your home, your circumstances may have changed, or you are approaching the end of the adjustment rate period and want to lock in a fixed interest rate for better financial security.
An adjustable-rate mortgage is typically tied to the market index. Although caps limit how much the rate can change, your monthly payment can fluctuate once the adjustment rate period expires. Locking in a fixed rate allows you to budget your monthly expenses with confidence because your interest rate won’t change from year to year.
Remove Private Mortgage Insurance
PMI allows lenders to accept the risk of smaller down payments, enabling more people to become homeowners. Unless you have a VA loan, most loan programs may require paying private mortgage insurance (PMI) if you finance more than 80% of your home’s value.
Refinancing allows you to eliminate this expense which can be 0.58% to 1.86% of a conventional mortgage loan. Your credit score and loan-to-value ratio determine the interest rate you pay.
Your mortgage lender is required to cancel your PMI for free when your mortgage balance reaches 78% of the home’s value. But you can also refinance if you want to eliminate the PMI payment sooner and your new loan balance is less than 80% of the home’s value.
Tap into Your Home Equity
You build up equity in your home each time you make a mortgage payment and pay down the principal loan. As a borrower, you can do a cash-out refinance, which allows you to access the equity in your home. This money can be used for home improvements, a milestone event, college tuition, or to pay off debts.
Cash-out refinancing allows you to use your home as collateral for a new loan and cash, so your new mortgage is larger than your current one. A cash-out refinance loan typically has higher interest rates than a conventional loan refinance because of the elevated risk to the lender. This cash is paid to you at closing, usually 45-60 days after applying.
A cash-out refinance can be as much as 80% of your home’s equity. The amount above the old mortgage payoff is issued in tax-free cash at closing.
Like other refinancing options, you have to pay closing costs on a cash-out refinance, but it is possible to roll them into your loan balance, so you don’t have to pay upfront. Rolling your closing costs into the loan means you will pay interest on them over the life of your loan, so determine the best option for you based on your financial situation.
A home equity loan is another great way to tap into your home equity without the high-interest rate and fees associated with cash-out refinancing.
Pay off Your Loan Early
Lower interest rates allow you to reduce your loan term from a 30-year mortgage to a 15-year loan or another term without significantly changing your mortgage payments. Typically the shorter the loan term, the higher your monthly payments. But you pay less interest over the life of the loan because it is for fewer years.
What are the Different Types of Mortgage Refinancing?
Not all mortgage refinancing options are the same, and the best one for you depends on your financial goals and situation. Here are some common types of refinance loans for mortgages:
This type of mortgage refinancing allows you to change your interest rate and terms from an adjustable-rate mortgage to a fixed rate or change the loan length. You may also want to switch your mortgage from a fixed rate to an adjustable-rate if you want to take advantage of lower interest rates to pay down your principal quicker, if you know you will only live in your home for a few years.
This alternative to a home equity loan can also change the interest rate and terms, but you’ll increase the amount you owe on your loan. If you have enough equity in your home, you can get cash at closing.
This option is less common but allows you to bring cash to the closing table to help you get a lower interest rate or shorter loan term.
With this refinancing option, you roll your closing costs into the new loan but are charged a higher interest rate. Essentially you forego paying the closing costs upfront but pay more interest over the life of the home loan.
Although the exact qualification varies between the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the Department of Veteran Affairs (VA), qualified homeowners may be eligible for more affordable terms when refinancing through these government programs.
Mortgage Refinance Qualifications
To refinance your home, you’ll need to prove your creditworthiness just as you did for your original loan. To ensure loan approval, before submitting your loan application, put yourself in the best position for good interest rates and terms by checking your credit report for errors and paying down debts.
Mortgage brokers typically require a minimum credit score of 620 for conventional loans. If you have a lower credit score, you may qualify for refinancing with government-backed loan programs.
You’ll also need a sufficient and steady income. Most loan specialists won’t approve a loan application if your monthly mortgage payment is more than 30% of your gross monthly income.
To determine the risk of lending you money, lenders assess your loan-to-value ratio (LTV), which measures how much you owe on your home compared to your home’s market value. A mortgage broker typically looks for an LTV ratio of up to 80% and at least 20% equity in your home.
How Much Does it Cost to Refinance?
Like your initial home buying process, you can expect to pay fees when refinancing your mortgage. Your closing costs are about 2-3% of the loan. This includes loan origination fees and third-party fees like appraisal and inspection of your home.
The Best Place to Refinance Your Home
Home loan borrowers have a range of loan options for refinancing their mortgage. Before starting the refinancing process, you should do your homework when comparing lenders and their loan types.
The best mortgage company for you offers a refinancing loan type that meets your needs and financial goals as well as competitive rates. The eligible loan types can include:
- 30-year, fixed-rate loan
- 15-year, fixed-rate loan
- Adjustable-rate loan
- FHA loan
- USDA loan
- VA loan
- Jumbo loan
You can refinance with your current mortgage company if you’re happy with the service, and it offers competitive rates and terms.
However, a credit union’s nonprofit structure makes them an excellent choice for competitive home loans. Because they aren’t motivated by profits, they can provide lower rates. At a local credit union that serves a specific geographic area, you can work with a loan officer who understands the local housing market.
You can turn to your local credit union for refinancing loans no matter where you get your existing mortgage. Credit unions can even work with FHA and other government-subsidized mortgages.
Even if you have less than stellar credit and don’t meet the minimum credit score requirement, your local credit union will work with you to help you refinance your home. An experienced loan officer can help you through the entire loan application process, from income loan requirements to other loan eligibility requirements like a low debt-to-income ratio.
Whether providing financial counseling or suggesting you wait a few months to raise your credit score before submitting your loan application, a credit union loan officer can coach you through your options.
Community-Based Financial Services
T&I Credit Union is a leading provider of loans and other financial services in the Detroit Metro area. We serve a seven-county area with no fees or additional restrictions on membership.
Since we are a credit union, we are governed by an elected board dedicated to serving our members with the best rates possible.
We offer a range of personal, home and auto loan types and standard checking and savings accounts. Call us today to talk to a loan officer about your home loan refinancing or becoming a member.