How to Refinance a Home with Ease
The first time I tried to refinance my home I was not approved. I’d owned my house for two years, but I did not qualify because my debt to equity ratio was not at least 80/20.
Three years later I tried again and here’s what happened.
The process started just like before. My lender kept sending me letters in the mail suggesting I refinance to take advantage of lower interest rates and lower monthly payments.
At the time the real estate market was hot. It was a great time to sell or refinance. I looked up the estimated value of my home and not only had it increased, but the homes around me were selling at high prices too.
My husband and I talked it over and I decided to contact our lender and see what they were offering. Honestly, I thought it was another gimmick to pull my credit just to say no. But this time was different. This time I did qualify to refinance.
As soon as they ran my credit I started to get phone calls from other lenders. Competitive lenders tried to convince me to fill out an application to see if they could beat my lender’s rates.
Since the goal was to pay less for my mortgage each month I felt I had nothing to lose by shopping around. So, I researched banks’ refinance rates and contacted mortgage lenders too. I spent almost two hours on the phone with one company just to find out they could not do my loan because of their company’s lending limits for my state.
I was starting to get frustrated. Didn’t the company representative know I wouldn’t be able to work with his company before running my credit?
After a few more days of research and several phone calls with potential lenders, I decided to stick with my current lender for my refinance.
But I wish I knew about Refily when I started my home refinance process. Now my husband and I are in the process of refinancing a rental property. This time the experience has gone much smoother. We used Refily to get us started and I have saved tons of time in the process. Refily is a comparison search engine that allows you to compare multiple lenders with just submitting one form and makes the search the second time a lot easier.
I’ll share more about my experience using Refily in a second, but this article will outline reasons why you may want to refinance your home and things to keep in mind while you go through the refinance process.
What It Means to Refinance Your Home
Simply put, refinancing is when you get a new loan to pay off your original loan. You might do this to save money or to take advantage of better terms. You can refinance a home, car, or even student loans.
When it comes to refinancing a home loan, you may refinance your home to lower your interest rate or to change your mortgage from a 30-year mortgage to a 15-year mortgage.
3 Reasons to Refinance Your Home or Rentals
Everyone assumes when you buy your forever home you’ll make monthly payments to the same lender until it’s paid off. In reality, you might have your loan sold a few times during ownership or you may decide to refinance at some point during the repayment phase.
Legally there is no limit to how many times you can refinance your home. However, it’s not recommended you refinance unless it makes financial sense for you. Here are some reasons to consider refinancing your home or rental property.
Eliminate Private Mortgage Insurance (PMI)
Depending on your housing market, down payments for a new home can be pretty hefty. Some mortgage lenders want you to pay 20 percent of the home value as a down payment.
A large down payment gives a lender assurance that you have skin in the game. You want this house as much as they want to give it to you and you’re willing to prove it with more money down. However, not everyone can afford to put 20 percent down. Lenders will still give you a loan, but they may require you to pay for mortgage insurance too.
Private mortgage insurance (PMI) is a mortgage insurance a lender may require if your down payment is less than 20 percent of your home’s value. Although you pay PMI, its purpose is to protect the lender. PMI does not protect you from foreclosure and if you default on your loan, the lender–not you–get paid.
The cost of PMI varies, but it will always be in addition to any taxes, homeowners insurance, or other fees paid. So, you’ll definitely have a higher monthly mortgage payment with PMI than with a loan without PMI. That’s why some homeowners will refinance as soon as their home value rises giving them an 80/20 debt to equity ratio.
Eliminating a couple of hundred dollars from your mortgage could put more cash in your pocket for other things.
Reduce Your Interest Rate
There are very few people who can purchase a home with cash. I’ve done it once in my life and afterward regretted using my money when I could have gotten a loan and kept my cash.
Nevertheless, when you get a home loan the goal is to get approved for the lowest interest rate.
Your interest rate is based on several factors such as your credit score, down payment, loan term, loan type, and your home’s location, price, and loan amount.
Your financial situation could change from when you first purchase a home and a few years into ownership. If your income, cash flow, and credit score have increased since you bought your home, it might be a great time to refinance and see if you can pay off your home faster or pay less interest. You could refinance to lower your interest rate, which also lowers your monthly payment. A lower interest rate also reduces the amount you pay for your home in the long run.
For example, imagine if your home loan was for $250,000 and you were offered a 3% interest rate or a 5% interest rate. Here is what you’d pay for a 30-year mortgage. The 2% drop in your interest rate saves you over $100,000 over the course of your loan!
The real cost of buying a $250,000 home with a 30-year mortgage
Total Amount Paid
3% Interest Rate
5% Interest Rate
Change Your Loan Term
Also, you could refinance to own your home faster. For example, you could refinance to change your home loan from a 30-year mortgage to a 15-year mortgage. You’d have to discuss the numbers with your lender but in some cases, you can pay a few more hundred dollars a month, but own in less time. Shaving five, ten, or 15 or more years off your mortgage will definitely save you money.
For example, imagine if your home cost $275,000 and you were offered a 3% interest rate. Let’s say you put a down payment of $25,000 so your loan was for $250,000. Here is what you’d pay for a 15 or 30-year mortgage.
The real cost of buying a $250,000 home with a 3% interest rate
Total Amount Paid
15 Year Mortgage
30 Year Mortgage
As you can see paying your loan off in 15 years will cost you an extra $700 a month but it saves you almost $70,000. What would you do with that kind of money?
If you have the extra cash flow and you plan to remain in your home, it might be worth it for you to change from a 30-year mortgage to a 15-year mortgage. As you can see in the chart above, a shorter mortgage can save you thousands of dollars in interest.
Another benefit to a shorter loan term is that you own your home faster. For example, if you want to pay off your house before retirement, but you purchase your home later, a 15-year mortgage can get your house paid off before you retire. In retirement, the fewer bills you have the better.
You can also increase your loan term from a 15-year mortgage to a 30-year mortgage if you want to pay a lower monthly payment. The extra cash flow can help you save and invest more each month.
Access Your Home Equity
Equity is the difference in the amount of money you owe on your mortgage and what your home is currently worth. If home values in your area are much higher than when you purchased, it might be a good time to put the cash in your home to good use.
If you owe $250,000 on your mortgage and your home is appraised for $350,000, you have $100,000 in equity. But here’s the catch. In order to access the equity in your home, you must refinance, sell your residence, or get a home equity line of credit (HELOC).
If you’re not ready to move, refinancing is a great way to pull cash out. You can use the cash to make repairs or upgrades to your home, purchase another asset like a rental property or pay for whatever you like.
When you decide to do a cash-out refinance you will repay back the equity you turned into cash on a monthly basis. In this scenario, when you refinance your home loan would be for $350,000, the new value of your home, instead of the $250,000 you originally paid. But look on the bright side you have $100,000 on hand for your needs. When interest rates are very low, you might be able to invest that money and make more than the low interest rate you are paying. Make sure to speak with a financial professional to understand the full terms and conditions and the risks involved.
Reasons Not to Refinance Right Now
Refinancing your home can be financially beneficial. But it’s not free. So, before you do it consider these other costs and hurdles involved.
You Pay Closing Costs (Again)
You’ll pay closing costs anytime you buy or refinance a home loan. Closing costs are fees paid when you ask for a mortgage. They can be as much as three to six percent of your loan amount.
When you buy a home the closing costs are normally paid by the buyer. On the other hand, when you refinance a home the closing costs are all your responsibility once again. However, most lenders will give you the option to roll the closing costs into the new loan.
Therefore, you may not physically pay to refinance your home, but you will pay for it over time. When you refinance and roll the closing costs into the loan, you end up paying interest on the closing cost too. So, that could add up to more money paid in the long run.
Your Credit Score Is Checked
It’s definitely true the better your credit the more lenders want to give you access to more credit. Before you refinance make sure your credit score and debt to income ratio are acceptable for your lenders. You’ll also need to provide the same documents (think pay stubs, proof of cash reserves) you did qualify for the original loan.
If your credit score has significantly dropped or you are in between jobs, it’s not a good time to refinance your loan.
Your Employment Will Be Verified
In the event you need a lower mortgage payment due to financial hardship it’s better to contact your lender and see if your loan can be restructured. If you’ve missed payments, ask if your outstanding payments can be added to the end of the loan.
It’s always better to communicate with your lender than to hide from them. Trust me you don’t want to end up foreclosing when you could have asked for help first.
As you look to refinance, understand your employment situation and how it will impact your loan. If you have gone from a W-2 job to self-employed, making less money than before, or are in between jobs, you may face challenges getting your refinance completed.
Time Required to Shop Rates and Apply
Remember the beginning of my story, my biggest gripe about my first refinance experience was the time it took to shop mortgage rates. Refily can help you shorten the time used to research estimated rates and connect you to potential lenders.
However, the time required to apply and close depends on your lenders’ processing time, staff, and other loans in the queue. The process can take as long as 30 to 45 days or longer. A year ago when I started the process to refinance my home it took six months to complete the process. Crazy I know, but it was at the height of the booming housing market.
The good news is Refily shares an estimated time to close on their site as well. So, you can pick a lender based on the estimated interest rate and loan processing time.
What Is Refily
Refily is a refinance lender comparison marketplace tool. I used it to see what estimated interest rates could be available for my rental property. It took five minutes to use and I didn’t have to give up my social security number or run my credit to get results.
I only had to answer a few questions like where is your home located? What is the current value? What is the remaining balance on the loan? What’s the interest rate? And how much longer did I plan to own it?
I entered my contact info and boom I had a list of potential lenders. On the list, Rocket Mortgage was the best fit given interest rates, but I was able to compare them to others.
Then, about five minutes after I entered my information, Rocket Mortgage called me to chat.
The process couldn’t have been easier and the rate offered was lower than my lender’s initial offer.
Although my husband and I are still going through the refinance process for our second property, by starting our lender comparison process with Refily we shaved hours off the research phase. Plus, Refily connected me to a lender that was not on my radar. If you’re looking to refinance your home consider using Refily to compare estimated lender’s rates too.
Because I strongly believe you should never pay more for something than you have to, I am always considering how to lower my debt and monthly payments. When I refinanced my home our monthly savings went up to $700. I got a lower interest rate, paid off my home equity line of credit, and lowered my monthly mortgage payment.
As my husband and I go through the process of refinancing our rental property, we estimate saving at least $300 a month. Since it’s a rental that means more cash flow for us. In addition, we don’t have to start over with a 30-year mortgage. We can get a mortgage for 20 or 25 years (the amount of time we have left on the loan) and still save money.
Look at your finances and your home value and see if now is a good time for you to refinance. If you’re not sure, contact a mortgage professional, ask questions, and always compare mortgage interest rates.
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