When and How to Refinance Your Mortgage
A home is more than just a place to hang your hat; it’s one of your biggest investments. Refinancing through a bank or credit union is one way to tap into that investment. You may know why you want to refinance but are unsure of the best time or how to go about it.
Let’s explore more about why, when, and how to refinance your mortgage so you know what to expect.
Why Should I Refinance My Mortgage?
Owning a home can be one of the best financial investments you make. A home not only serves as a source of pride but can be a great asset to use for future financial purposes. The five primary reasons people refinance are:
- Reduce monthly payments.
- Access equity.
- Pay off the loan faster.
- Switch to a fixed-rate loan.
- Remove insurance such as Private Mortgage Insurance (PMI).
Private Mortgage Insurance
When you buy a home with less than a 20% down payment, you may have to add private mortgage insurance (PMI) to your loan. This is not your typical homeowner’s insurance. PMI protects the lender if the homeowner defaults on the loan or goes into foreclosure. PMI can add hundreds of dollars to a monthly home mortgage payment. The good news is you do not need this insurance forever.
After you have 20% equity in the home or property, you can remove PMI from your mortgage. One way you can accomplish this is through a refinance. The specific steps involved to cancel PMI will vary depending on your current insurance. You can contact your lender for more details.
When Refinancing Might Not Be a Good Idea
Refinancing is not always a good idea. It’s important to remember that refinancing does cost you money. Sometimes closing costs and fees are so high that a homeowner could end up paying more for their home over the long run. Here are additional reasons refinancing might not be a good option at this time.
- No substantial savings is found with a refinance.
- You won’t stay long in the home.
- Unaffordable closing costs.
- High long-term costs. For example, you could refinance into another 30-year mortgage and reduce your payment, but the long-term costs would remove all savings.
When is the Best Time to Refinance?
Generally, the best time to refinance is when interest rates are at their lowest. But, even if rates are not at their lowest, it still could be a good time to refinance if it will save you money. Talking with a mortgage lender will help you determine if now is a good time to refinance. Additionally, taking the time to work on your credit score could save you thousands of dollars on the life of the loan.
What Are the Steps to Refinance My Mortgage?
You’re certain that a refinance is in your best interest. Consider these next steps when refinancing your home mortgage.
- Ask yourself why you want to refinance. It’s crucial to answer this; it will help you make clear goals and avoid potential debt risks.
- Check credit history and score. A good credit score will raise your chances of getting an outstanding loan at a competitive rate. Before going into a refinance, take the necessary steps to improve your credit rating.
- Get all of your paperwork in order. A refi isn’t as involved as buying a home, but it does require a lot of paperwork. This includes income verification, pay stubs, tax returns, and bank statements.
- Find out how much home equity you have. Use online home equity calculators or contact your lender.
- Shop around for the best loan. Look for low-interest rates and closing costs. Not all lenders and financial institutions offer the same deals. We recommend you compare refinance packages with at least three different lenders. A credit union may have mortgage packages with more competitive rates than traditional banks.
- Prepare for appraisal. Lenders will require a new home appraisal and will verify the home value. Underwriters will then review the appraisal and offer approval for your new loan or give a conditional offer.
- Closing time! Expect lots of signing of documents, so be sure to bring proper identification and ask questions if anything seems amiss.
Further Resources for Refinancing Your Mortgage
Here are some further resources on how to refinance your mortgage:
- Consumer Financial Protection Bureau (CFPB): The CFPB provides a guide to refinancing your mortgage, including tips on when to refinance, how to compare loan offers, and how to avoid scams. Their website also has tools and calculators to help you understand the costs and savings of refinancing.
- Federal Reserve Board: The Federal Reserve Board offers a publication called "Refinancing Your Mortgage: A Consumer's Guide," which provides information on the refinancing process, the types of loans available, and how to compare offers from different lenders.
- Bankrate: Bankrate is a financial website that offers a variety of resources on mortgage refinancing. They have articles on different types of refinancing, tips for finding the best rates, and calculators to help you determine your savings.
Next Steps
A refinance is not one-size-fits-all. You’ll need to determine what’s best for you, your finances, and the future. The process of refinancing can be bewildering with so many options available. Your local community credit union can guide you through the process. Use the Credit Union Matcher tool, and search for a credit union to help you refinance.
