Before filling out the paperwork, take the time to find out how much you will save. (iStock)
Record low interest rates are driving homeowners to refinance mortgages en masse. If you are eager to start refinancing a mortgage in order to take advantage of the low rates, take the time to do some research before proceeding.
But you don’t want to wait too long or the mortgage refinancing window may close. It is always a good idea to use a market like Credible to learn more about refinancing and to determine if it will actually save money in the long run (in addition to easing any financial burden in terms of monthly payments).
What do you need to know before refinancing?
While refinancing 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 rate?
All new home refinances sold to Fannie Mae and Freddie Mac will incur an adverse 0.5% market rate. This cost is added to any charges from the lender for the loan. The fee does not apply to loans below $ 125,000. Refinancing a $ 250,000 loan would come with an adverse market rate of $ 1,250.
Fortunately, Credible simplifies the comparison of mortgage rates. Click here to see the refinancing rates presented today and view APR-based real estate loans, fees and monthly payments, depending on the loan amount.
WHO IS EXEMPT FROM THE NEW MORTGAGE REFINANCE FEE?
2. What is the value of the home you own?
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 choose to refinance with less than 20%, you will be able to pay higher rates and probably still have to pay PMI.
If your goal is to reduce your monthly payments or save money, you will need to use an online mortgage calculator to determine whether refinancing your home is a good option. You can also access Credible to analyze the numbers and determine your estimated monthly payments and more.
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3. What is your break-even point for making a refinance worth the cost?
Since refinancing your home means replacing your old loan with a new one, you will have to pay loan fees that can include origination, appraisal and filing costs. Typically, a lender can charge up to 1.5% for a loan origination fee. The additional fees increase the total cost of the loan.
For example: If you refinance a $ 300,000 loan, your fees may include:
- Adverse market rate of 0.5%: $ 1,500
- 1.5% loan origination fee: $ 4,500
- Evaluation 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 an interest rate of 3.9%. If the owner of our sample owed only $ 300,000 for the house and refinanced on a 2.9% 15-year loan, his new monthly payment would be $ 2,057. This represents savings of $ 80 a month. The owner would need to stay on the property for 7.7 years to tie.
These numbers are just an example. Visit Credible to get in touch with experienced lenders who can answer your mortgage questions.
HOW TO REFINANCE YOUR MORTGAGE
4. What’s more important: save money now or pay off the loan faster?
Before refinancing, make sure you know whether you want to save more money each month or if you want to pay off the loan more quickly. Opting for a 15-year refinance can increase your monthly payments, but it allows you to repay the loan more quickly. Refinancing on a long-term loan can reduce your monthly payment and free up extra money each month.
HOW REFINANCING YOUR MORTGAGE CAN REVOLVE MONEY IN YOUR POCKET
How to get the best refinancing rates
By deciding that a refinance is the right choice, you can maximize your savings by getting the best rates possible. Some ways to get better rates are:
- Looking for creditors
- Increasing your credit score
- Choosing a 15-year loan
1. Find creditors
Take the time to get estimates from several lenders. Potential creditors should be able to tell you the estimated fees and an estimated monthly payment before you agree to work with them. Don’t just assume that your current lender will offer the best rates. Often, a company is willing to offer better rates or repayment terms to stop 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 has announced that rates may remain low until 2023. While rates may rise before that, you will probably 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 / revenue ratio), removing errors from your credit report and keeping old accounts open.
If you want to obtain prequalified rates without affecting your credit score, Credible allows you to check the possible rates of several creditors without withdrawing your credit.
3. Choosing a 15-year loan
The interest rate on 15-year fixed-rate loans is usually lower than the average rate on a 30-year fixed-rate loan. For example, in the 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 for shorter loans because the risk is less.
Refinancing a mortgage can save you money, but if you’re not sure you’ll be home for a few more years, do the math to make sure it’s a good deal for you.
HOW YOUR HOME REFINANCING CAN COLLECT MONEY IN YOUR POCKET