If you’re thinking about refinancing your mortgage but your hand is still cramping from signing your original closing documents on your home loan, breathe easy. Refinancing your mortgage isn’t nearly as labor intensive as when you first bought your home. You’ll still have some really important things to consider and steps to take before you sign on the dotted line, but we’re here to walk you through all of it.
Does the Coronavirus Mean It’s a Good Time to Refinance?
As most of the global economy comes to a screeching halt in the face of the novel coronavirus, or COVID-19, it’s important—really, really important—to stay calm. Never let fear drive your decision making. Stay on a budget, make sure your immediate needs are met, and don’t freak out. OK, rant over! Here’s how the coronavirus is affecting interest rates and mortgages.
The federal government doesn’t set mortgage rates. But decisions they make in other areas of the Federal Reserve—like dropping interest rates to nearly 0%—can affect them. Couple that with wild day-to-day changes in the stock market and it can start to look like pure chaos out there.
Relax. Breathe. And maybe refinance.
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With both 15- and 30-year mortgage rates hovering nearly 1% lower than this time last year, this could mean a silver lining for you. Today’s lower rates have caused a jump of more than 400% in applications to refinance mortgages. That means people are taking advantage of this economic turn to lock in lower rates and reduce the length of their loans. Before you join the 400%, read on to see if it’s the right time for you to refinance.
What Is Mortgage Refinancing?
First things first: When you refinance your mortgage, you’re revising your original loan. You’re re-financing it. Easy enough, right? But why would you refinance your mortgage?
For a lot of folks, refinancing is a way to lock in a lower interest rate. That’s definitely one major plus! But there are actually a bunch of good reasons why you might want to refinance your mortgage.
1. Yes, lock in that lower interest rate.
Whether you’re in a 15-year mortgage (what we recommend) or a 30-year mortgage, that’s a whole lot of time for the market to change. Chances are pretty good that at some point in those chunks of time, a better interest rate than your original one will become available.
2. Reduce your loan term and become debt-free faster.
If you’re in a 30-year mortgage, refinancing can help you reduce your loan term and get down to that 15-year sweet spot. The sooner you pay off your home, the sooner you’re keeping every bit of income you earn to yourself. That means you’re saving more, investing more, and have more to give away. Plus, if you get a lower interest rate, then you can pay more toward your principal each month, accelerating your progress!
3. Get rid of your private mortgage insurance (PMI).
If your down payment was less than 20% of your mortgage when you bought your home, then your mortgage lender has required you to pay for PMI. Basically, it protects them if you can’t pay your mortgage and the home goes into foreclosure. PMI helps them cover the hit they’d take by having to sell your home at auction.
But PMI stinks. It’s expensive and will slow you down from paying off your principal. So, if you’re looking into refinancing and your new loan would be 80% or less of your home’s current appraised value, ask about having your PMI removed.
4. Switch your loan type.
We never recommend an adjustable rate mortgage (ARM). That dreamy low interest rate you got in year one could easily turn into a nightmarishly high rate in year five. That kind of unpredictability is a recipe for disaster. But you can refinance your way out of your ARM and into a fixed-rate mortgage.
When Should You Refinance Your Mortgage?
The right time to refinance is when you have an opportunity to make your current mortgage better with a new interest rate.
Think about it. If you’ve got a 15-year fixed rate loan with a 5.25% interest rate on a $300,000 mortgage and you can get that down to 3.5%, you’re looking at a savings of $3,200 a year! Who doesn’t want an extra $265 in their pocket each month? Even better, keep paying the same amount each month, and you’ll be knocking out $3,200 more in principal each year! Your mortgage will practically melt away!
But refinancing isn’t always worth it, especially after you factor in closing costs. Yep, refinancing a mortgage comes with closing costs.
So, you need to run the numbers, starting with a break-even analysis. Will you be in your home long enough to benefit from the savings you’ll get with a lower interest rate and payment? Then, factor in how long it will take to break even on your closing costs.
Here’s an example. If your closing costs are coming in at $3,000 and you’ve estimated that you’ll save $100 a month by refinancing, it will take you 30 months, or 2 1/2 years, to recover your costs. If you plan to be in your home at least that long, it’s probably worth it. But if you plan to move before then, it’s not a good idea.
How Much Does It Cost to Refinance My Mortgage?
You refinance to save money. So you definitely don’t want to refinance if it’s going to cost you more. But you should expect some costs along the way.
The big thing to consider is your closing costs. These will vary by state and circumstance. Compare your closing costs to how much your refinance will save you over time. If your closing costs will cost you more than you’ll save, then that’s a hard no on moving forward.
Expect your closing costs to be somewhere around 2–6% of the overall amount you’re borrowing. Your closing costs cover:
- Refinance application, a new home appraisal and title search
- Home inspection fee
- Lender’s attorney review fee
- Origination fee
- Points fees
The good news is, during a refinance, you typically don’t have to pay the property taxes, mortgage insurance and homeowner’s insurance—like you did on your original closing—because they’re already set up.
How to Refinance Your Mortgage
Once you’ve decided you’re ready to refinance your mortgage, here are the next steps to take:
1. Shop around.
To find the best refinance rate, take some time to shop around and see what options you have.
2. Apply for a mortgage with two or more lenders.
You might not want to put all your eggs in one basket—or with one lender, in this case. This will be especially important if you’re debt-free and don’t have a credit score, so you’ll need manual underwriting.
3. Choose your lender.
Look for one that can give you the best bang for your buck, including your total closing costs.
4. Lock in your interest rate.
Once you’ve found your lender and a great rate, lock that puppy in so you can get to saving sooner!
All that’s left to do is sign all your closing documents and pay your closing costs.
How to Shop for the Best Mortgage Refinance Rates
If you still maintain a credit score, it will play a role in the interest rates you’re offered. The higher the score, usually, the lower the rate. Shop around with different lenders to see who can offer you the best deal. Remember, the whole point of refinancing is to get a better rate and/or a shorter loan term than you’ve currently got!
But if you’re debt-free and don’t use credit cards, well, that probably means you don’t have a credit score. And that’s a good thing! Since most mortgage lenders use a credit score as their primary way of setting interest rates for applicants, make sure to look for a company like Churchill Mortgage who can provide manual underwriting.
If you’re ready to refinance or just want to talk to someone who can help you decide if it’s the right move for you, then get connected with our friends at Churchill Mortgage today. They’ll keep your budget in mind and find the best option for you.