Mortgage refinance: Everything you need to know

Mortgage rates are edging downward as the nation starts the long haul back to normalcy as the coronavirus pandemic abates.

That’s good news for U.S. homeowners looking to refinance their mortgages and save money on their monthly home payments.

If you're planning to refinance your mortgage now or in the near future, read on for a look at everything you need to know.

What are refinance mortgage rates today?

In the last week of May, 30-year fixed mortgage rates fell to just over 3.0 percent, according to Mortgage News Daily. Compare that figure to one year ago this month, when the same 30-year fixed mortgage rates stood at 4.25 percent.

When mortgage rates drop that low, lending experts say it’s a great time to dive into the refinancing pool – if you act fast. Don't forget to use Credible's free online tools to compare mortgage companies and see how much you could save right now.

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“Mortgage rates are still hovering near all-time lows achieved in April,” noted TheMortgageReports.com in its June 2020 real estate outlook. “Prudent shoppers aren’t betting on lower rates from here, though, even if we do think rates could go lower. The reason: the times are wildly unpredictable.”

“Rates could jump as easily as they could drop,” the report stated. “Your best move might be to lock in an ultra-low rate while it is available.”

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When should you refinance your mortgage?

In general, homeowners refinance to save on mortgage costs by transitioning to a lower loan interest rate – but that’s not the only reason to refinance. These reasons to refinance resonate, too.

You're looking for a big picture change

“Most homes are purchased with bank financing at an agreed upon interest rate, loan term and payment volatility,” said Caleb Liu, owner of House Simply Sold Refinancing, a home-flipping company based in Southern California. “Usually, a mortgage involves modifying at least one of these factors. Any one of them could make sense for homeowners looking to refinance.”

You want to take advantage of lower interest rates

Not only do you benefit from paying less interest, but the loan term and amortization schedule can be reset, Liu said.

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“This means you’re spreading out the lower remaining loan balance over a new term loan, for example 30 years out into the future,” he said. “This second aspect also reduces your principal payments on the new loan, the trade-off being that you are increasing the total loan period for the home. Overall, both factors combined can potentially save you hundreds of dollars per month.”

You want to move on from a variable rate loan to a fixed-rate loan

According to Liu, many homeowners originally opted for adjustable-rate mortgages (ARMs) to save money each month, but are worried that rates will rise in the future. “Refinancing into a fixed-rate mortgage removes any risk of future rate increases,” he said.

You want to pull equity out of the home as cash

You can borrow against your home's equity and be paid a lump sum of cash at the close of the refinance. “While your monthly payments will likely go up even if interest rates have dropped, you will get a large amount of cash all at once,” Liu added.

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What happens when you refinance a mortgage?

Homeowners preparing to apply for a refinanced mortgage loan need to do their homework first – and it’s best to start with the basics.

“Refinancing a mortgage involves taking out a new mortgage loan to pay off the original one,” said Katie Ross, education and development manager for American Consumer Credit Counseling, a financial education non-profit organization. “Homeowners usually refinance to take advantage of lower market interest rates or if their credit has improved, which allows them to get lower interest rates.”

Ross says the current environment, heavily influenced by the coronavirus and resulting economic downturn, is almost ideal for homeowners looking to refinance their mortgage.

“The pandemic has resulted in lower than normal lending rates,” she said. “In fact, a 30-year fixed-rate mortgage can start at 2.5% from some lenders right now.”

Several other factors come into play with mortgage refinancing, and borrowers need to get to know those factors quickly.

“For potential homebuyers, all costs associated with purchasing a home must be considered,” Ross said. “Even if interest rates are low, homebuyers should ask themselves if they can really afford the closing costs as well, which some consumers forget to take into account when calculating how much house they can afford.”

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Additionally, private mortgage insurance could add to refinancing costs in many instances.

"Private mortgage insurance is required when a buyer doesn't put down at least 20 percent on the loan,” Ross said. “If there isn't enough equity built up in the property it's likely that you would need to continue to pay PMI.”

Past those issues, Ross advises checking these “must-know” items off any refinancing list:

• Is the difference in your current rate at least one percentage point or more? If so, chances are you’re getting a great refinancing deal.
• What will be your monthly mortgage savings? The final number will differ based on the size of a mortgage. In general, if you can cut 5-to-10 percent (or more) off your monthly mortgage payment, refinancing is worth doing.
• What are the closing costs? By and large, home mortgage refinancing costs clock in at between two-and-five percent of the total amount of the loan. Thus, closing costs should definitely be factored into any loan refinancing decisions.
• How long will it take to make the difference in monthly savings up with the cost to refinance? Recouping closing costs with lower interest rates within a year is the name of the game here, especially for homeowners staying in the home for more than five years.

Where to find the best mortgage refinancing deals

You can start your hunt for the best deals with your local bank or credit union. Borrowers will already have a relationship and banks like working with existing customers, so the bank may work with borrower on lower rates and fees

One last tip – use an online refinance mortgage calculator to break down interest rate figures, and to assess the impact on fees and closing costs on your loan.

Having the numbers accurate before applying for a loan is a big help in the refinancing market – and will steer borrowers to the best deal possible.