Refinancing an existing mortgage to lower your interest rate and/or change the term can help lower your monthly payments making it a great way to save money and manage your monthly bills a whole lot easier.
At the same time, refinancing could also cost you more money since you'll be going through the closing costs process again (like you did the first time with financing your home). So, before you jump in and refinance, it’s important to weigh all of the pros and cons.
Let's start with the basics. Mortgage refinancing is the process of using a new mortgage loan to replace an existing one. This can be done either with the same lender that issued your original mortgage or with a new lender altogether.
When applying for a refinance, your application will go through a review process by a mortgage underwriter, during which they will assess your credit history, income, and debt-to-income ratio. The underwriter will also conduct appraisals and inspections of your house to ensure that its value has not changed significantly since you purchased it.
This process may take anywhere from a few days to several weeks, depending on factors such as appraisal difficulty and third-party services required during the application process. Regardless of the length of time, it takes to get approved for a refinance, this is a necessary step to ensure that you are able to secure affordable financing for your house or other housing needs.
advantages and disadvantages of refinancing a mortgage
You may be able to lower your interest rate, meaning lower monthly payments! (You can typically secure lower interest rates when refinancing since lenders view equity as a sign of financial stability.)
By lowering your interest rate or loan amount, you could pay it off in less time.
Refinancing could get rid of mortgage insurance premiums (PMI)
You could get cash back from some of the equity that's in your home. Those extra funds could help pay down any extra debt. Or if you need to make large purchases like a new car or remodeling project since there’s no requirements for how you use your cash back.
You're taking out a new loan to pay off an old one
Refinancing may end up increasing your monthly payment if you receive a higher interest rate or refinance into a shorter term
It costs money to refinance. Meaning you must pay for the closing costs again. This includes origination fees, title insurance, application fees and more. Here's a better look at the costs that come with a home.
Your credit will be checked again which means a hard credit pull.
when does it make sense to refinance a mortgage?
Many homeowners decide to refinance their mortgage because they want:
A lower monthly payment or interest rate - change the loan term.
To get cash back to make for any renovations or home repairs
Lower their interest and reduce their debt
Before you refinance, ask yourself these questions…
Do you have equity in your home?
When it comes to mortgage refinancing, one of the most important factors to consider is equity. Typically, you should consider refinancing if you have at least 20% equity in your home, as this is an indication that the investment is solid and can support the costs associated with a refinance.
How long will you be in your home?
Another important factor to consider is how long you plan on staying in your home. If you only plan on living there for a few more years, it may not make sense to refinance since the costs associated with refinancing (closing costs, appraisal fees, etc.) may outweigh the potential savings.
Can you afford the closing costs?
While refinancing can save you money in the long run, there are often costs involved in the process. These can include appraisal fees, title insurance, and loan origination fees, among others. So, it's important to make sure that you have the cash on hand to cover these costs before proceeding with a refinance.
do you know your debt-to-income ratio?
Yes, you already have a mortgage but it's possible you've incurred more debt where lenders may require you to have a maximum debt-to-income (DTI) ratio of 43%. This means that your monthly debts shouldn't exceed 43% of your gross monthly income. Psst...At Skyla, we ask that borrowers have a DTI no higher than 45%. For nonconforming loans , this includes FHA, VA, and USDA loans, DTI must be up to 50%.
Want to learn more about DTI and how to calculate it? here's how.
What are the current interest rates?
Interest rates play a big role in the decision to refinance. If rates have gone down since you originally obtained your mortgage, it may make sense to refinance in order to take advantage of the lower rate and save money over the life of the loan. If you like to get a sense what the interest rates are - you can check Skyla's interest rates or speak to one of our Mortgage Loan Officers who will be happy to answer any question you have.
Psst...The mortgage term plays a role here too. Often times borrowers who want to pay off their mortgage quickly look for mortgages with the shortest term. This could result in a higher monthly mortgage payment. Make sure you refinance with a mortgage term that gives you peace of mind without breaking your budget.
ANOTHER GOOD RULE OF THUMB...
If you can recoup your mortgage refinancing costs in 2 years or less, it’s generally a good idea to move forward with your refinance.
does refinancing hurt your credit?
A little bit but it could benefit you down the line. The lender will conduct a credit check but it's temporary. If you refinance you could receive a mortgage with a lower loan amount, lowering your monthly payment which will put more cash back into your pocket or better yet savings account. After a while, your score will bounce back and more than likely will increase as long as you don't miss a payment.
If you decide to refinance your mortgage more than once, it may be best to wait a few years before you refinance again. That way there won't be several credit inquiries piled up on top of each other which will be a huge impact on your credit score. Plus, I'm sure you wouldn't want to be paying more toward closing costs. Remember, refinancing means you're going through the mortgage process again and paying closing fees.
Want some insight on credit scoring and tips that will help you boost it? Here's what'll help.
ready to refinance?
If refinancing is a good move then make sure you've done your due diligence. Determine how much equity is in your home, be prepared to cover closing costs, and above all else, remember that your main priority should always be finding a mortgage that works for your unique financial situation and long-term goals.
can I refinance with Skyla?
We sure hope so!Even if your mortgage isn't originally with us, you can refinance with us. Take a look at what you'll need to get started.
Proof of Current Income
Proof of Identity (current driver’s license or state-issued ID)
Social Security Number
Information on your current mortgage and second mortgage (if applicable)
As always, if you have any questions, our Mortgage Loan Officers are here for you. You can send an email, give us a call at 704.375.0183 x 1525, or visit any of our branches.
As the Content Specialist and author of the Learning & Guidance Center, Yanna enjoys motivating others by uncovering all that's possible in the world of finance. From financial tips and tricks to ultimate guides and comparison charts, she is obsessed with finding ways to help readers excel in their journey towards financial freedom.
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