Mortgage refinancing involves replacing your existing home loan with a new mortgage. The process is similar to applying for a standard mortgage loan. Rather than using the loan money to pay for a home, you use it to pay off the remaining balance on your existing mortgage. You can continue to pay down your mortgage at more favorable terms by refinancing, saving you a significant sum of money in the long term.
Like a standard mortgage, borrowers can take specific actions to earn more favorable rates. If you’re struggling to make your monthly mortgage payments or want to take advantage of low market rates, mortgage refinancing can be a sensible financial decision.
Study Your Credit Report
A credit report is a document published by national credit bureaus like Experian, Equifax, and TransUnion. This report contains detailed information about your credit and payment history. Mortgage providers and other lenders use these reports to determine your creditworthiness when you apply for a loan.
Critical information contained in your credit report includes:
- Open credit accounts and existing loans
- Total loan amounts and related credit limits
- Current balances on all accounts
- Loan repayment history
- Dates when you opened accounts, took out loans, and completed loan
- Bankruptcies, missed payments, and repayment issues
- Personal identification information
As a borrower, you should know what information is in your credit report. Occasionally, credit reports contain errors that could negatively impact your chances of getting a competitive rate. Study your credit report to ensure it doesn’t have mistakes. Common problems to look out for include:
- Closed accounts listed as open
- Incorrect account information
- Duplicate information (same account listed more than once)
- Account information that you don’t recognize
Most errors in your credit report are administrative. However, they can also indicate fraudulent activity or identity theft. Contact the credit bureau that issued your report and dispute the error if you notice any false information.
Previously, U.S. residents were entitled to one free copy of their credit report from each of the three major bureaus every year. The Federal Trade Commission now reports that you can obtain a free credit report every week through December 2022.
Improve Your Credit Score
One of the primary reasons for refinancing a home loan is lowering monthly mortgage payments. Your credit score is one of the most critical factors in getting a mortgage approved and significantly influences the interest rates offered by lenders. The mortgage lender will likely offer the lowest rates to loan applicants with high credit scores and a solid financial track record.
To make your mortgage refinance worthwhile, focus on increasing your credit score before beginning the application process. Raising your score by 100 points or more could save you thousands of dollars over the term of your mortgage. While banks and major financial institutions may have minimum credit score requirements, a credit union like T&I is happy to work with members looking to build on their credit.
We can help you prepare for the application process by maximizing your chances of credit approval. Some of the most effective strategies to quickly improve your credit score include:
- Paying all bills on time
- Maintaining a credit utilization ratio of 30% or less
- Limiting hard inquiries on your credit score in the lead up to your mortgage applications
- Keeping old accounts open to keep the average age of your credit high
- Paying rent and regular monthly payments using a credit card
The FICO scoring system is one of the most widely used credit algorithms in the U.S. FICO score creditworthiness is weighted as follows:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800 to 850
Gain Control Over Your Debt
Having a small amount of revolving debt can positively impact your credit score. For example, paying off a credit card debt each month demonstrates financial responsibility and an ability to pay bills. However, your credit score can take a serious hit if you consistently max out your credit cards or allow unpaid debts to stagnate. A high debt-to-income ratio diminishes your chances of getting the lowest interest rates.
If you’ve struggled with debt for an extended period, there are several strategies to regain control. The most crucial type of debt to combat first is high-interest debt. High-interest debt is cumulative, meaning it builds on itself and keeps you trapped in a cycle of increasing debt.
Tips for reducing debt include:
- Asking your lender for a reduced interest rate
- Transferring debt to a low rate credit card
- Increasing monthly payment amounts to reduce the principal debt
- Budgeting and cutting expenses
At T&I Credit Union, our primary goal is to improve the lives of our members from a financial perspective. We offer free financial counseling and credit score analysis to help you eliminate debt, raise your credit score, and lower your long-term payments. We can help you manage your debt more efficiently, helping you qualify for the lowest mortgage rates.
Choose the Right Type of Mortgage Refinance
There are three main types of mortgage refinance approaches. Depending on your goals and the current refinance rates, one of these three options may save you the most money.
A rate-and-term refinance allows you to adjust your loan’s term, interest rate, or both, creating a repayment structure that works best for you. For example, you can renegotiate a 30-year fixed mortgage with a 6% interest rate to a 15-year fixed-rate mortgage with a 4% interest rate. Securing a significantly better annual rate is mainly dependent on an improved credit score, credit history, and debt utilization ratio.
A cash-out refinance lets you tap into the equity of your home. Your home equity is essentially the portion of the property you own from making on-time monthly mortgage payments. To turn equity into cash, you have to perform a cash-out refinance, which involves taking out a loan against the current value of your home (collateral).
The new loan is usually more considerable than the old mortgage with cash-out refinancing. You will also need to pay closing costs and additional fees. The bank adds closing fees to your new mortgage balance, so you don’t need to pay the upfront cost. However, higher loan amounts and added fees typically increase refinance rates. If your main goal is to reduce your mortgage rate, perhaps a cash-out refinance isn’t the best option.
With a cash-in refinance, you can pay a lump sum during the refinancing closing process, reducing the total amount owed to the lender. Therefore, your lender replaces your old mortgage with a lower principal balance loan. The main reason for choosing a cash-in refinance is to secure a lower refinance rate, a shorter term, or both.
If you’ve managed to save some extra cash before a mortgage refinance, consider using it to lower the principal balance of your loan.
Opt for a Fixed Rate Mortgage
An adjustable-rate mortgage (ARM) is an excellent option if you want to take advantage of low-interest rates. An adjustable-rate loan may be particularly advantageous for a 15-year mortgage or if you don’t plan on living in your new home permanently. However, an ARM comes with an element of risk, and you may end up paying above-market interest rates within a few years of securing the loan.
If you want to add stability and predictability to your budget, consider refinancing to a fixed-rate mortgage (FRM). When market interest rates are lower than your current ARM payments, refinancing to an FRM allows you to lock in this lower rate for the remainder of the term. This protects you from sudden interest rate fluctuations and market instability.
Shorten the Loan Term
A shorter loan term typically results in increased long-term savings, regardless of your current mortgage rate. Since you pay off your mortgage faster, your compound interest reduces significantly. What’s more, many lenders also offer reduced rates for a shorter term.
However, it’s important to note the risks associated with a shorter loan term. Despite paying less interest in the long-term, your monthly payment amounts are likely to be significantly higher. Higher monthly costs increase affordability risks, so ensure your income and employment are stable before agreeing on a shorter refinance.
At T&I Credit Union, we offer our lowest mortgage rates on shorter-term refinancing. A 15-year refinance loan is currently available at 4.0% APR with a minimum loan amount of $25,000. Current rates for a 30-year refinance loan are as low as 4.75%.
Consider All Costs
While you should strive to get the lowest refinance rates, it’s more important to understand the actual cost of refinancing. Ensure your refinance lender isn’t using competitive mortgage interest rates to disguise hefty closing costs and additional fees.
Closing costs are essentially the additional fees involved in closing a deal. Refinance closing costs cover the underwriting of the mortgage, taxes, mortgage insurance fees, the loan origination fee, title changes, and the application fee.
A closing fee can be as much as 3% to 6% of the outstanding principal cost. Ensure that your lender is upfront in closing costs, disclosing all additional fees.
T&I Credit Union charges minimum closing fees, allowing you to gain maximum benefit from our actual rates. Our standard refinance loans include a $500 application fee, a $1,499 closing cost charge, and no escrow. Although our fees vary depending on the loan type, you can expect transparent payment disclosures with every agreement.
For information on a home improvement loan or the processing fee for a home equity line of credit, get in touch with a T&I loan officer. We can work with you to offer the lowest rate possible. Personalized rates are dependent on a mortgage review and credit approval.
Invest in Your Future With a Mortgage Refinance from T&I Credit Union
At T&I Credit Union, we don’t want you to spend more than you need to on mortgage repayments. Whether you want to reduce the term, earn an improved interest rate, or both, we can help you save in the long term. We offer competitive rates on 15 and 30-year mortgage refinance packages. We are proud to provide well below industry average closing costs, helping you save even further.
Refinancing with T&I also comes with a variety of member services. Our members benefit from online banking services, eStatements, an easy-to-use mobile app, debit cards, wire transfers, and free financial counseling. Our Money Manager system is a digital finance tracker, allowing you to seamlessly monitor your accounts, payment days, loans, and other debts. It is a perfect system for maintaining control over your newly refinanced mortgage.
At T&I Credit Union, we’re committed to providing excellent mortgage refinancing services. Anyone who resides or works within the seven counties in the Detroit Metro area is eligible to join and use our services. Start your refinance journey by contacting our mortgage loan officers at (248) 588-6688.