Refinancing your mortgage essentially means replacing your old mortgage with a new one. Your credit union or bank pays off the old debt with the new mortgage, allowing you to benefit from lower mortgage interest rates, shorter repayment terms, or to turn equity earned on your home into cash.
Refinancing is similar to the original mortgage process. The first step typically involves visiting various lenders for proposals and comparing interest rates. If mortgage rates have dropped or your credit score has improved since you received approval for your original loan, you may qualify for better terms, enabling you to save money.
However, it’s important to pay close attention to the terms and fine print. Before deciding whether refinancing is a wise financial move, homeowners should consider the application and home appraisal fees, and other refinancing costs and determine how long they will remain in their home.
Types of Mortgage Refinancing
If you plan to refinance your mortgage, two main options are cash-out refinancing or rate-and-term refinancing.
Cash-out Refinance
Cash-out refinancing involves replacing your existing mortgage with a new one to take advantage of equity you have built on your home due to timely mortgage repayments or an increase in your home’s value.
Through a cash-out refinance, you can renegotiate a lower interest rate, adjust the repayment term of your loan, and also withdraw a cash sum, typically up to 80% (less what you owe on the mortgage) depending on the amount of equity you have in your property.
The amount of cash you withdraw is added to your new mortgage balance and must be paid off under the new loan terms.
Cash-out refinance is a popular choice if there is a reduction in market interest rates or if the value of a property increases. It allows borrowers to benefit from lower interest rates and fund a home improvement project such as an extension or renovation.
Rate-and-Term Refinance
Rate-and-term refinance allows you to change your existing mortgage’s interest rate, term, or interest rate-and-term. Homeowners are usually prompted to apply for rate-and-term refinance because of a reduction in market interest rates.
With a rate-and-term refinance, the primary aim is to secure a mortgage with lower interest rates and an improved loan term. The principal repayment balance remains unchanged. With an affordable repayment structure, borrowers can enjoy more financial freedom and higher monthly savings due to a lower mortgage payment.
Whether you decide to extend the loan term to lower your monthly repayments or elect to take advantage of reduced interest rates by shortening the loan term, rate-and-term refinance allows you to create a mortgage plan that fits your needs and financial situation.
When You Should Consider Refinancing Your Mortgage
Mortgage refinancing isn’t always the best choice. Just like your original mortgage, lenders charge closing fees to cover the costs of mortgage refinancing. These charges may include:
- Loan organization fees
- Home appraisal fees
- Title services
- Credit report fees
- Underwriting fees
- Taxes
- Insurance
- Attorney fees
Depending on the lender, closing costs can vary and may be as high as 3% to 6% of your home’s purchase price. However, at T&I Credit Union, our closing costs are below the industry average when you refinance a home loan.
You can roll these costs into the loan, but it will cost you more over the life of the loan because you will be paying interest on the closing costs.
In some circumstances, refinancing makes sense, particularly if you plan to stay in your home in the long term. Here are five situations where you should consider refinancing your mortgage.
Mortgage Rates Have Dropped
Mortgage rates can change significantly year-to-year due to several factors such as the US Federal Reserve monetary policy, inflation, the economy, and other global influences. If mortgage rates drop significantly (more than 1% or 2%), you can save a significant amount on your loan if you refinance.
Use a refinance calculator or contact a mortgage expert to determine whether refinancing is beneficial for you.
Your Credit Score Has Improved
Your credit score is one of the biggest influencers in determining what mortgage rate offers you’ll receive. A high credit score qualifies you for lower interest rates. Lenders will check your FICO score to assess your creditworthiness.
According to a Forbes report, a FICO score of 760 or higher qualifies mortgage applicants for the best rates.
If you’ve improved your credit score through timely mortgage repayments and debt management, you may be able to reduce your repayments through refinancing. Increase your credit score by paying utility bills on time, managing credit card payments, and clearing existing debt.
You Want a Shorter Term Home Loan
How long you plan to repay your mortgage greatly impacts the total interest you’ll pay. One of the most popular reasons for refinancing a mortgage is to shorten the 30-year loan term. Whether you’re in a more financially stable position than you were when you first applied for your mortgage or you’ve changed your mind about the repayment period you want, lower interest rates can allow you to renegotiate a shorter term.
Although this usually means increasing monthly payments, you can reduce the total interest payments. Ensure your new rate is sustainable in the long term, or you’ll risk defaulting.
The Value of Your Home Has Increased
If the value of your home has increased due to economic prosperity in your area, borrowing rates, improved infrastructure, and new amenities, refinancing can help you benefit from reduced rates.
A cash-out refinance may allow you to receive a large cash sum from the equity you’ve built on repayments. While this cash amount must be repaid, it will be at your newly negotiated rate. This is a useful option for families who need extra cash to pay for their child’s education or renovate their home.
You Want to Switch From an Adjustable to a Fixed Rate
If you’re currently contracted to an adjustable rate mortgage, fluctuating interest rates can be a constant stress and a financial burden. Refinancing allows you to switch to a fixed rate mortgage, ensuring stability in your monthly payments.
While fixed rate loans are usually more expensive initially, they are often a better long-term choice. The consistency of payments for a 30-year fixed rate mortgage makes financial planning and budgeting more convenient for many homeowners.
Refinance Your Mortgage With a Reputable Lender
T&I Credit Union is a trusted lender in Michigan, providing competitive mortgage rates and other financial services in the Detroit Metro area and the seven surrounding counties.
As a local credit union, we are governed by an elected board, and our primary goal is to serve the members of our community by providing the best rates possible. This earned us an award of “Best Mortgage Lender in 2018” from a local poll.
Pending a credit check, we provide rate-and-term services at competitive refinance rates with a low application fee and below average closing costs.
Becoming a member of T&I Credit Union has benefits beyond competitive refinancing rates. Our membership services include access to eStatements, a mobile app, wire transfers, debit or ATM cards, credit score analysis, and financial counseling.
If you’re interested in refinancing your mortgage, contact T&I Credit Union today.
