4 questions to ask yourself before refinancing your mortgage
Before you fill out the paperwork, take a little time to know how much you’ll save. (iStock)
Record low-interest rates are drawing homeowners to mortgage refinance in droves. If you’re eager to get started on a mortgage refinance so you can take advantage of low rates, you’ll want to make time for a little research before moving forward.
But you don't want to wait too long or the mortgage refinance window could close. It's always a good idea to utilize a marketplace like Credible to learn more about refinancing and determine if it'll really save you cash in the long-term (as well as ease any financial burdens in terms of monthly payments).
What do you need to know before refinancing?
While a refinance can benefit many people, it may not be the best choice for everyone. Here are some things to consider:
1. Will you have to pay an adverse market fee?
All new home refinances sold to Fannie Mae and Freddie Mac will incur an adverse market fee of .5%. This cost is in addition to any your lender charges for the loan. The fee does not apply to loans under $125,000. Refinancing a $250,000 loan would come with an adverse market fee of $1,250.
Luckily, Credible makes it simple to compare mortgage rates. Click here to view today's featured refinance rates and view home loans based on APR, fees and monthly payments depending on your loan amount.
WHO'S EXEMPT FROM THE NEW MORTGAGE REFINANCE FEE?
2. How much home equity do you have?
Ideally, you should have at least 20% equity in your home to refinance. Refinancing with at least 20% allows you to potentially eliminate any private mortgage insurance and qualify for lower rates. If you opt to refinance with less than 20%, you could pay higher rates and likely still have to pay PMI.
If your goal is to reduce your monthly payments or save money, you’ll need to use an online mortgage calculator to determine if refinancing your home is a good option. You can also head to Credible to crunch the numbers and determine your estimated monthly payments and more.
REFINANCE YOUR MORTGAGE BEFORE RECORD LOW RATES DISAPPEAR
3. What is your break-even point to make a refinance worth the cost?
Since refinancing your home means replacing your old loan with a new one, you’ll have to pay loan fees that could include loan origination, appraisal and filing costs. Typically, a lender can charge up to 1.5% for a loan origination fee. Additional fees increase your total loan cost.
For example: If you refinance a $300,000 loan, your fees could include:
- .5% adverse market fee: $1,500
- 1.5% loan origination fee: $4,500
- Appraisal fee: $400
- Title insurance: $1,000
For this sample, the total cost is $7,400.
Let’s assume an original loan of $450,000 with a monthly payment of $2,135 and a 3.9% interest rate. If our sample homeowner only owes $300,000 on the home and refinances into a 15-year loan at 2.9%, their new monthly payment would be $2,057. That is a savings of $80 per month. The owner would need to stay in the property for 7.7 years to break even.
These numbers are just an example. Head over to Credible to connect with experienced lenders who can answer your mortgage questions.
HOW TO REFINANCE YOUR MORTGAGE
4. What’s more important: saving money now or paying off your loan faster?
Before you refinance, make sure you know whether you want to save more money each month or if you want to pay your loan off faster. Opting for a 15-year refinance could increase your monthly payments but allow you to pay your loan off more quickly. Refinancing into a longer-term loan could reduce your monthly payment and free up extra cash each month.
HOW REFINANCING YOUR MORTGAGE CAN PUT MONEY BACK IN YOUR POCKET
How to get the best refinance rates
When you decide that a refinance is the right choice, you can maximize your savings by getting the best rates possible. Some ways you can get better rates are:
- Shopping around for lenders
- Increasing your credit score
- Choosing a 15-year loan
1. Shopping around for lenders
Take the time to get estimates from multiple lenders. Potential lenders should be able to tell you estimated fees and an estimated monthly payment before you agree to work with them. Don’t just assume your current lender will offer you the best rates. A company is often willing to offer better rates or repayment terms to snag your business.
To make shopping easier, Credible allows you to view loan options from multiple lenders with less paperwork.
WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW
2. Increasing your credit score
If you want better rates, improve your credit score. The Federal Reserve announced that rates could remain low through 2023. While rates could go up before that, you likely have some time to improve your credit score to qualify for better rates. Simple ways to increase your score include paying your bills on time, reducing consumer debt, increasing credit lines (to reduce your debt-to-income ratio), remove errors from your credit report and keep old accounts open.
If you want to get prequalified rates without affecting your credit score, Credible allows you to check possible rates from multiple lenders without pulling your credit.
3. Choosing a 15-year loan
The interest rate on 15-year fixed-rate loans is typically lower than the average rate for a 30-year fixed-rate loan. For example, at publication, the average 30-year fixed-rate loan was 2.77%, while the average interest rate on a 15-year fixed-rate mortgage was 2.21%, according to Freddie Mac. Lenders offer lower rates to shorter loans because their risk is lower.
A mortgage refinance can save you money but if you’re not sure you’ll stay in the home for more than a few years, do the math to make sure it’s a good deal for you.