How Refinancing Works & When to Refinance Your Home

Refinancing your home isn’t as complicated as many think it is. When mortgage rates hit an all-time low, as they did recently, it’s hard not to call up your lender and declare that you’re ready to refinance. But how do you know that the time is optimal?

To pick the ideal opportunity to refinance your home, it’s crucial to understand the process so you’ll be ready when the time comes. Here’s how refinancing works and the best time for you to refinance.

What is Refinancing?

Refinancing is a lot like the original process you went through to take out your initial mortgage. When you refinance your mortgage, you are taking out a new loan to pay off your old mortgage. Although the process is similar, the reasons behind why homeowners refinance are as unique as the homes themselves.

Why Do People Refinance?

Some reasons that homeowners refinance is to get better interest rates, reset the timeframe of their payments (usually to shorten them), or switch from an adjustable rate mortgage to a fixed rate mortgage or vice versa.

Homeowners can refinance to tap into the equity in their home and finance home improvements or other big-ticket items. If you want to remodel your home or cover your child’s college education, you can cash out or refinance as needed instead of taking out a personal loan.

Some first-time homeowners have an FHA mortgage insurance included in their mortgage payments, which allowed them to purchase a larger home. However, if your credit score has improved, you may want to refinance to remove the insurance, decreasing your costs. To refinance an FHA loan, you will need to wait until you have 20% equity.

Refinancing your mortgage also resets the amortization process. If you originally had a 15-year loan and your refinanced mortgage lender outlines a 20-year loan, you will need to adhere to the new schedule.

Before you take the plunge and refinance, here are some details about these two types of loans, so you know what you’re agreeing to.

Fixed Rate Mortgages

With this type of mortgage, you pay the same interest rate for the life of your loan. In the beginning, most of your payment goes to paying off your interest, whereas, toward the end, the majority of your payment is applied against the principal.

Adjusted Rate Mortgage

A variable-state mortgage or an adjusted rate mortgage gives the homeowner the benefit of the changing interest rates. For an initial period, the mortgage rate is fixed. After this period, your mortgage interest rate will reset every month or year according to the terms of your loan.

Refinancing to Shorten Your Mortgage

Many homeowners want to shorten their mortgages’ length so they won’t be paying for as long a period and can reduce the total interest. Shortening your mortgage length is one of the primary reasons homeowners decide to refinance, followed closely by lower interest rates. Many homeowners take advantage of lower interest rates to shorten their loan length.

Refinancing to Change an ARM to a Fixed Rate Mortgage

When you first acquired your mortgage, watching the mortgage rates fluctuations may have convinced you to accept an adjusted-rate deal, especially if you expected to be in your home for a short period. But if mortgage rates have steadily decreased, it may make sense to consider refinancing to secure a fixed rate mortgage at a lower interest rate.

If interest rates are falling and you plan on staying in your home for the next few years, then refinancing to change specifically from an adjusted rate to a fixed rate mortgage makes a lot of financial sense.

Although you may initially have chosen an ARM, the fluctuation bill pattern may no longer fit your lifestyle and budget. When you have the same monthly mortgage, it’s easier to adhere to a household budget.

Refinancing to Merge Debt or Finance a Large Undertaking

It may be tempting to refinance your home to use some money to pay off other debts with higher interest rates, especially if the mortgage interest rates are exceptionally low. However, this can lead to a debt cycle that is hard to break.

If refinancing to conglomerate your bills and debt is your primary reason for wanting a new mortgage, you may want to rethink your plan, especially if interest rates are only average. However, if the circumstances are right and you can fiscally manage your refinanced mortgage payments, this plan of action may help you launch something you’ve always wanted to do, like getting an advanced degree or starting a business.

A home equity line of credit from T&I Credit Union lets you cover the costs of emergencies or finance a home renovation. With a current 3.25% APR financing available to those who qualify, you can borrow up to $125,000 on a 10-year plan.

What Do You Need to Do to Refinance?

Refinancing may cost between 2% and 5% or the loan’s principal, as it does with your original mortgage loan. To refinance your mortgage, you also must redo your appraisal and pay title and application fees and closing costs.

Your credit score affects the bank’s decision whether to refinance, so if you have a lower credit score, work on paying down any credit card bills and other loans you have before starting the refinancing process. Calculate how long it will take you to recover the 2% to 5% refinancing cost. If you plan on remaining in your home for longer than that, refinancing is a smart financial move.

How Do You Refinance?

At T&I Credit Union, we offer 10, 15, 20, and 30-year mortgage refinance loans, with varying minimum loan amounts and APRs. To qualify for a loan with us, there is a $500 application fee, which you can send with your supporting documents and information. To apply for a home refinancing loan, you need to send information about your employment background and your home, including your:

  • Credit score and credit history
  • Payment history on your existing mortgage
  • Employment and income history
  • Home’s equity
  • Home’s value
  • Other outstanding debts

Once our team receives your application, we will be in touch with our offer. Often, after regularly paying your mortgage on time, you will have a better credit score than when you first purchased your home, meaning you may receive a better interest rate offer.

When is the Best Time to Refinance?

The best time to refinance is a combination between your personal circumstances and the state of national mortgage rates. There are a couple of signs that make refinancing at one point more attractive.

  • The current mortgage rates are at least 1% under what you’re currently paying
  • You think you’ll be approved for the refinancing
  • You plan on living in your house for at least another five years

Refinance Your Home

Trust In Your Local Credit Union and Refinance Today

When looking for a great deal in refinancing, look for a competitive interest rate and a manageable length of time to pay off your debt from a trusted credit union.

At T&I Credit Union, we offer competitive interest rates for first-time borrowers and homeowners refinancing.

About Jeff Jacobs