How to Refinance Your Mortgage Loan When Rates Are Low

If you are reassessing your finances, refinancing your mortgage can be a great way to free up cash in your monthly budget. With mortgage rates at record lows, now may be a great time to refinance your home. According to ICE Mortgage Technologies, the average time to close on a refinance loan in March 2021 was 52 days.

Here’s what you need to know about refinancing your loan and when it might be a good idea.

What is Mortgage Refinancing?

Refinancing your mortgage means you get a new loan to replace your existing home loan. If you can refinance using a lower interest rate, you can save money on your monthly mortgage payment and the interest you pay over the life of the loan. You also have the option to withdraw a portion of your home’s equity as cash when you refinance your mortgage.

When is the Best Time to Refinance Your Mortgage?

The best time to refinance is when interest rates are lower than your current rate. If you plan to remain in your home for a few years and lower your interest rate by at least half a percentage point, it is worth considering refinancing your home.

If your credit has improved since you purchased your home, you may also want to consider refinancing your mortgage to see if you can get a better rate and a lower monthly payment.

Why Does Refinancing Make Financial Sense?

  • Reduce your monthly payment
  • Switch from an adjustable-rate mortgage to a fixed rate
  • Reduce the term from a 30-year mortgage to a 15-year, so you can pay it off faster and pay less interest
  • Eliminate mortgage insurance once you have 20% equity in your home
  • Take advantage of the cash-out option if you have equity in your home

Establish Clear Financial Goals

Determine the reason why you want to refinance your mortgage. Every homeowner’s situation is unique, whether to lower your monthly payment, use the equity to pay off your credit cards, or shorten your loan term.

Check Your Credit Report and Credit Score

You need to qualify to refinance your home, so the higher your credit score, the more likely you will be approved by the underwriters and receive a lower interest rate.

Determine How Much Home Equity You Have

Your home equity is the value of the home minus what you owe the mortgage lender. You can find this number on your monthly mortgage statement. Also, check online home search sites like Zillow to see the estimated current value of your home, which may increase the equity.

Collect Your Financial Paperwork

Your lender will need to know your net worth, so collect your pay stubs and bank statements for your financial disclosure paperwork. Lenders may request additional documentation depending on your credit score to get a better picture of your assets and liabilities.

Compare Mortgage Lenders and Shop the Best Refinance Rates

Get Loan Estimates from several mortgage lenders. Each potential lender has three days to issue the estimate after receiving your information. This three-page document outlines the loan terms, estimated closing fees, bank costs, title fees, third-party costs, and escrow charges, as well as the projected payment.

Choose a Refinance Lender and Lock in Your Interest Rat

To pick the best offer, compare the Loan Estimates you received from each lender. Pay attention to costs like closing fees to see if you have to pay them upfront or roll them into the new mortgage. Also, decide if it is better for you to have no-closing costs but a higher interest rate.

Lock in your interest rate, which can’t be changed for a specified period, typically 15-60 days. You and your lender try to close on the loan before the rate lock expires, although you can extend it for a fee.

Get Your Home Appraised

Your mortgage lender will need a mortgage refinance appraisal to determine your home’s current market value. Let the lender know if you have made home improvements since the original purchase, which may increase its value. The appraisal is an out-of-pocket expense.

Bring Your Checkbook to the Closing

The closing disclosure lists any out-of-pocket money you need to pay at closing. This figure should also have been listed on the Loan Estimate. Although you may be able to roll these expenses into the loan, it makes more sense financially to pay these costs upfront, especially if your primary goal was to get a lower interest rate and mortgage payment. Financing these costs typically results in a higher interest rate for your loan.

Stay Current on Your Mortgage

To ensure you have the opportunity to refinance again in the future, set up auto-payments with your lender to deduct your monthly mortgage payment from your bank or credit union account.

Refinance Your Mortgage Loa

Benefits of Refinancing

Refinancing your mortgage loan can have immediate and long-term home benefits.

Get a Better Loan

If you are in a better financial position now than when you took out the original mortgage loan, refinancing allows you to lower your interest rate.

Increase Your Short-term Cash Flow and Personal Finances

Day-to-day financial pressure is reduced when refinancing lowers your monthly payment.

Improve Your Long-term Net Worth

When you refinance at a lower interest rate or opt for a shorter-term mortgage, you can improve your long-term net worth by investing the money you save on your mortgage payments.

Pitfalls of Refinancing

Although there are many benefits for refinancing your home mortgage to a lower interest rate, there are some risks.

Less Equity

When you pay your monthly mortgage, you chip away at the interest and increase the equity you have in your home. If you do a cash-out refinance, roll the closing costs into the new loan or extend the life of the loan, you might end up making more mortgage payments and paying more in interest over the life of the loan.

Negatively Affect Your Long-Term Worth

While refinancing can lower your mortgage payment, it can make the loan amount more expensive if you extend the life of the loan.

Break-even Point

Before refinancing, you need to determine when you would break even, which is when you start saving money. In other words, your accumulated savings are more than the costs of the new loan. If you don’t remain in your house long enough, you won’t reach the break-even point.

Why Choose T&I Credit Union?

Refinancing should benefit the borrowers by lowering the monthly payments and shortening the term. At T&I Credit Union, our approval process is simple. We offer competitive refinancing interest rates and lower fees than traditional banks.

If you think your credit score is an obstacle to refinancing, we can help you raise your credit score with low-cost secured loans, debt management advice, and credit counseling.

If you are considering refinancing to pay off debt, for home improvements, or a special event, we offer a range of personal loans, such as our home improvement loan or a home equity line of credit, so you don’t have to tap into your home equity through cash-out refinancing.

T&I Credit Union is a member-owned, not-for-profit financial cooperative. We are dedicated to providing our members with exceptional financial services. Contact a member of our team today to discuss your refinancing solutions and other loan options.

About Jeff Jacobs

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