Refinancing a mortgage means taking out another mortgage to repay the first one. You may be able to get better terms – interest rates, length of term, and other benefits. However, refinancing may cost you more than it is worth in the long term.
If you are considering refinancing your mortgage but aren’t certain how to choose a mortgage lender or even if you really want to refinance, we can help. Before you sign the paperwork to refinance, let’s start with why to refinance.
Why Refinance Your Mortgage?
There are several reasons to refinance your mortgage.
- High Interest Rate – if you took out a mortgage when interest rates were higher, a refinance may be a fantastic option to lower both payments and overall interest rates.
- ARM – if you have an adjustable rate mortgage, definitely look into refinancing. Your initial interest rate is generally great, but the interest rates usually increase, sometimes drastically.
- Reduce Terms – if you have a 30-year mortgage and have more than than 15 years left, you can save a huge amount of interest payments by cutting your term in half. The sooner you refinance this type of loan, the more you will save in interest since the mortgage is structured with higher interest payments at the beginning of the loan.
- Private Mortgage Insurance – if your mortgage includes PMI or private mortgage insurance and the outstanding value of your loan is less than 80% of the home’s value, you can refinance and eliminate the PMI.
- Get Cash – a cash out refinance allows you to get a mortgage for more than you currently owe. You take the difference in cash and most people use it to pay off debt or make home improvements. A cash out refinance with bad credit may allow you to start repairing your credit by paying off outstanding debts.
- Lower Total Debt – Cash-in refinancing allows you to put cash against your mortgage without incurring any prepayment penalty fees. These can be common in divorces or other separation of assets.
to Refinance Your Mortgage?
There are also some very good reasons not to refinance. Make certain you look at all the fees and penalties you’ll incur. We’ll explain how to figure a break-even point in the next section. But first, why NOT to refinance.
- Old Mortgage – if you’ve had a mortgage for a long time, it probably doesn’t make any sense to refinance. You’ll end up paying more in interest than you’ll save.
- Prepayment Penalty – if your mortgage has a prepayment penalty, don’t refinance. If you look for a mortgage with your current lender, they may waive any prepayment penalty.
- Plans to Sell – if you plan to sell in a few years, it doesn’t make much sense to refinance. However, look at your break-even point to make certain.
- Fees Offset Savings – this is your break-even point. If it costs more to get the mortgage than you will save, it won’t be worth it.
Step 1: To figure out if it makes sense to refinance, figure out all the fees. These may include all or some of the following:
- Prepayment penalty
- Property appraisal
- Property inspection
- Flood determination assessment
- Application fee
- Credit report fee
- Origination fee
- Attorney fees
- Mortgage broker fee
- Prepaid interest
- Discount points
- Lender’s policy title insurance
- Owner’s policy title insurance.
- Private mortgage insurance
If you want a government backed mortgage, include these fees
- FHA or USDA upfront mortgage or annual mortgage insurance fee
- VA one-time funding fee
Step 2: Calculate your monthly savings if you get the lower mortgage.
Current mortgage payment – desired mortgage payment = monthly savings
Step 3: Divide total fees by monthly savings. The resulting number is how long it will take to break even.
$2500 (your loan fees) / $100 (monthly savings) = 25 months to break even. This means you won’t save money for two years.
Types of Mortgages
We’ll hit the highlights for refinancing using different types of mortgages. If you need more detailed information on mortgages, click here.
- Fixed 30-year loan: to lower your monthly payment, switch from an adjustable rate mortgage, or to cash out refinance. Your lender may let you recast your mortgage without refinancing.
- Fixed 15-year loan: You’ll pay off your mortgage sooner and with lower accumulated interest. You will pay more each month.
- Adjustable Rate Mortgage (ARM) Refinance – the rate will be lower, but the ARM can hurt you in the long run. Most people try to refinance out of ARM loans, not into one.
- Government Issued Refinance Programs
- Home Affordable Refinance Program (HARP) is for people with loans issued before MaY 31, 2009, have very little equity and are in financial distress.
- Federal Housing Administration (FHA) – if you have an FHA loan you do not have to refinance with FHA, but it makes sense if you have little equity or a less than good credit rating. You can also get a cash-out FHA refinance.
- US Department of Veterans Affairs (VA) – if you qualify (veterans, active military persons,
or surviving spouses of military persons) you can get a cash out refinance, pull out equity;
or reduce your interest rate/monthly payment
United States Department of Agriculture (USDA) – if you have an existing USDA loan,
consider refinancing with them. A USDA loan is for below average income households living in certain rural areas.
Before You Apply for a Refinance
- Calculate your break-even point
- Improve your credit score if needed
- Get prequalified with a mortgage company
- Don’t apply for any other loans or credit cards
- Know your home’s value – Zillow is a good source, although it is not exact
Choosing Your Mortgage Refinancing Lender
As you look at different lenders, ask yourself the following questions:
- What are the financing options?
- Is the interest rate the best for me?
- What are the closing costs and how do they compare?
- How satisfied are previous customers?
Keep in mind that low closing costs and higher interest rate (or visa versa) may wipe out your savings.
Best Mortgage Refinance Companies
These are some of the best mortgage refinance companies as ranked by JD Powers, among others. All data is accurate as of the time of publication.
|Best for||Re Loan type||Income to Debt Ratio||Equity||Origination Fee||FHA Refi||VA Refi||USDA Refi||Minimum FICO|
|Quicken Loans||Customer Satisfaction||15, 30, fixed ARM, jumbo||63%||varies||yes, varies||yes||yes||yes||580, 620 for most loans|
|Fairway Independent Mortgage||Adjustable-rate||Fixed, adjustable||Not disclosed||Varies||Not disclosed||no||no||no||580|
|Veterans United Home Loans||VA loans||Fixed, adjustable||Not disclosed||Not disclosed||Not disclosed||no||yes||620|
|Wells Fargo Mortgage||FHA loans|
|CitiMortgage||Long-Term loans||Long term (40 years)||50%||10.10%||$915- $1,115||yes||yes||no||620|
|Guaranteed Rate||15-Year Fixed-Rate||15- and 30- year fixed, adjustable, jumbo,||57%||2.25%||Yes||yes||yes||no||580|
|LoanDepot||Term Options||10-, 15-, 20-, 30- and 40-year fixed-rate options||Not disclosed||5%||Yes, waived for repeat customers||yes||yes||yes||580|
|PennyMac||USDA Loans||Fixed, adjustable||Not disclosed||Not disclosed||Yes||yes||yes||yes||not disclosed|
|PNC Bank||Jumbo Loans||$424,100 to $5 million. 15- to 30-year fixed, adjustable and interest-only||45%||0% with 660 FICO||$800 to $900||yes||yes||yes||620|
|BB&T||Cash-Out Refinance||Fixed||43%, can vary||Dependent on other factors||Not disclosed||yes||yes||no||620|
|Bank of America||Online Applications||15- and 30-year fixed, adjustable, jumbo, cash-out||55%||5%||yes, varies||yes||yes||620|
|Lenda||No origination fees or broker commissions||50%||varies||No||620|
|Rocket Mortgage||All Online Application||15- and 30-year fixed, adjustable, jumbo,||45-60%, depending on loan program||varies; as low as 0%||varies, but waived for some programs||yes||yes||yes||580; 620 for most loans|
|Capital One Mortgage||fixed, adjustable, cash-out||yes||yes||no||no|
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