Mortgages are a long-term expense. Although they’re often seen as “good debt”, your financial situation may not look different compared to when you originally took out your loan. You may be wondering if there’s anything you can do to adjust your mortgage several years down the road.
With a home loan refinance, you could find yourself with more money in the bank and a lower monthly payment if you find a mortgage refinance rate that’s lower than your original loan rate. Refinancing isn’t always the right answer, but we’re here to give you the details if you’re thinking about when to refinance a mortgage and what options are available.
What is a Mortgage Refinance?
When you refinance a mortgage, you take out a new home loan in place of your existing one. Typically, the new loan pays off the old one, closing out the old loan entirely. You then make a monthly payment towards your new home loan instead.
In other words, you’re trading your current mortgage for a new one with a new principal payment amount and different interest rate. As your lender pays off the old mortgage when you take out the new loan, you’re still only paying one home loan payment each month.
Reasons to Refinance a Mortgage?
Change Your Interest Rate
One of the most common reasons for people to refinance their mortgage is to secure a lower interest rate on the loan. If you’re wondering whether or not you should refinance your mortgage due to interest rates, the general rule is if you can lower your loan rate by 1-2% or more, it’ll be worth refinancing.
If current mortgage rates are now higher than when you first started your mortgage, it may be worth waiting for rates to go down. You can also look at changing the length of your mortgage term to help lower your interest rate.
You can use a mortgage refinance calculator to work out what your new mortgage monthly payment would be if you did refinance.
Change Your Term
By shortening your loan term length, you can pay off your mortgage faster. But if you choose to extend your term, you could lower your monthly payment and have more money back in your monthly budget.
Switch Loans
Some variable-rate mortgages have introductory rates that make them more enticing to home buyers, offering a lower interest rate for a set number of months before converting to a market-informed variable rate.
Refinancing your mortgage just before your introductory rate ends and converting to a fixed rate mortgage can keep you at the same interest rate for the rest of your loan and removes any concerns about a future interest rate increase.
Cash Out Your Home Equity
When you’ve accrued enough equity in your home to convert some of it to cash, you can get a new loan with a cash out refinance. This means that you can take out a new mortgage for a higher amount and gain some cash to use for renovations or other big expenses.
This is often a more cost-effective way of paying for larger home expenses than a high interest credit card balance. If a refinance isn’t what you want to do, you can also consider a home equity line of credit (HELOC) or a home equity loan.
How Soon Can You Refinance a Mortgage?
How quickly you can refinance a mortgage depends on the type of home loan you originally took out.
- Conventional loans: Most conventional loans allow you to refinance whenever you want. Sometimes you’ll have to wait six months before refinancing with the same loan provider, but you can move to a different lender whenever you want. For cash out refinancing, you will likely need to wait 12 months from your original mortgage origination date.
- FHA loans: For cash out loans, you’ll have to wait 12 months like a conventional loan. A simple refinance, where you move from one FHA loan to another, doesn’t require any waiting period. Using an FHA streamline refinance, you’ll need to have had your mortgage for at least 210 days and made six monthly payments.
- VA loans: You’ll have to wait at least 210 days from your first monthly payment before you can refinance a VA loan.
- USDA loans: Regardless of if you have a guaranteed loan or direct loan, you’ll need to have made on-time payments for at least 180 days before refinancing a USDA loan. If you’re looking for a streamlined assist refinance, you’ll need to have made on-time mortgage payments for the last 12 months.
How Does the Mortgage Refinance Process Work?
Wondering how to refinance a mortgage for the first time? Just like when you took out your original mortgage, you’ll have to follow the same process for your refinance loan. First, you’ll need to submit an application, including:
- The payment history on your current mortgage
- Your home’s current market value (usually completed via an appraisal)
- Your income and employment history
- A credit report and your current credit score
- Your current equity in your home
- Any other debts or financial obligations you have
From there, the underwriter at your lender will review your application and once approved, your interest rate will be secured for a set amount of time before you close on the loan. This usually happens once your home has been appraised. You’ll then be able to close the loan, pay off your current mortgage, and move to your new loan’s monthly payments.
How Much Does It Cost to Refinance a Mortgage?
Just as there were costs associated with taking out your original mortgage, there are also costs that come along with refinancing. You can expect to pay:
- Application fee: $75-300+
- Loan origination fee: 0.5-1.5% of the loan amount
- Underwriting: Around $500
- Appraisal fee: $300-400 (or more for a bigger home)
- Title insurance: About $1,000
- Credit check: Around $25
- Attorney fees: $500+
Closing costs in total around 2-5% of your total loan amount. So, on a mortgage of $300,000, you’d be looking at around $6,000 in costs at a 2% rate. Where you live and the size of the property will impact how much you’ll pay to refinance.
Is Mortgage Refinance Worth It?
If the fees to refinance your mortgage are going to cancel out or be more than the potential savings, switching to a new loan likely isn’t worth the time or money.
For those looking to refinance to lower the monthly payment, you’ll need to factor in the time you plan to stay in your home—you’ll need to stay in the property long enough to benefit from the savings. The same is true for those looking to lower their interest rate.
If you’re shortening the term of your loan to save on interest long-term by increasing your mortgage payment, you also need to be sure that you can afford a higher amount each month. Look at your budget carefully to ensure this is the right decision for you.
Similarly, if you’re lengthening the term of your loan to lower your current monthly payment, you’ll need to think about how long you’re planning to extend the loan for and if you’ll still be able to pay the monthly payments later. This is especially true if you’re planning to retire or change your work situation during the length of your new home loan.
Talk to a Mortgage Lender to Discuss Your Refinancing Options
CS Bank is a lender, specializing in home loans. Talk to a lender to explore your refinancing options and find a new home loan that’s right for you. Whether you’re looking for a refinance, a home equity loan, or want to discuss other options, contact our team today. You can also stop by one of our convenient locations in Northwest Arkansas and Southwest Missouri to talk with a lender.