Mortgage rates are finally on the rise, and the historic lows we saw in 2020 appear to be gone for now. But the 30-year fixed rate mortgage is still hovering a little above 3%, which means it’s not too late to lock in a lower monthly mortgage payment for potentially the next decade or more if you move quickly.
But the mortgage refinance process can be complicated, with a lot of moving parts and confusing terms that can lead even experienced homebuyers to throw up their hands in exasperation. If you’re going to work fast, you need to be smart about it and know what to expect.
So before you start down the road to refinancing, let’s go through the basics on how to refinance your mortgage and look at a few time-saving tips so you can quickly get today’s low rates locked down before they go up again.
Refinancing is the process of paying off your existing mortgage with the funds from a new mortgage. While most people refinance to take advantage of a lower interest rate on a new loan, other reasons to refinance include switching mortgage companies, changing the terms of your loan or ending a private mortgage insurance requirement (also known as PMI, more on this below). Refinancing is also a good way to acquire cash to use for home improvements, buy another house or pay off credit card debt.
The process of refinancing is very similar to applying for a mortgage. You’ll need to contact a bank, credit union or mortgage broker and discuss your options, which include a new loan’s terms and costs. But in the interests of speed, some online services like LendingTree can help automate this process for you by reaching out to multiple lenders at the same time so you can see your options all at once.
Click here to compare offers from refinance lenders at LendingTree, an online loan marketplace.
When it comes to refinancing, there are a number of words and terms that you should become familiar with. Many of them are key variables that you’ll want to take into consideration to determine whether refinancing makes sense for you.
Here’s a glossary of the most important refinancing terms:
Interest rate: This is the amount of money that your bank or credit union charges each year for lending you money in a mortgage. It’s expressed as a percentage (i.e: 3%, 4.25%, 5.76%). The lower your interest rate, the less you’re paying in interest.
Annual percentage rate (APR): This is the actual cost of a loan to a borrower. It differs slightly from the interest rate as it includes not just interest, but also additional costs charged by the lender. Again, it’s expressed as a percentage, and lower is better.
Points: These are optional fees paid to the lender to lower your interest rate, which will make your monthly payment smaller. Each point typically costs 1% of your total mortgage amount and reduces your interest rate by 0.25%. So if you’re refinancing a $200,000 mortgage at a new interest rate of 4.25%, you could pay $2,000 for 2 points and reduce your rate to 3.75% on the new mortgage.
Closing: The very last step in a refinance. This is when you will sign all the final legal documents accepting responsibility for the new mortgage, and the funds from your new lender will be transferred to your old lender so your existing mortgage can be paid off.
Closing costs: The fees you’re charged to finalize a mortgage — whether it’s for a new home or a refinance — which you must pay at closing. Sometimes a lender might offer a “no closing costs” refinance option, but you’ll likely pay a higher interest rate for it.
Equity: The difference between your home’s current market value and the amount you owe the lender. This is how much of your home you actually own. For instance, if your home is currently worth $300,000 but you have $175,000 left to pay on your mortgage, your equity in your home is $125,000.
Cash out refinance: Refinancing for an amount higher than what you owe on your current mortgage and keeping the extra money. This reduces your equity, but allows you to get cash that can be spent on other necessities, such as home improvements, credit card debt and so on.
Related: Know the pros and cons before you take cash out of your home with a refinance.
iStockYou may be able to get cash from your property when you refinance.
Fixed-rate mortgage: A type of mortgage in which the interest rate does not change for the entire length of the loan. A 15 or 30-year mortgage will almost always be at a fixed-rate.
Adjustable-rate mortgage (ARM): A type of mortgage in which the interest rate is initially set for a fixed number of years and then can fluctuate periodically after that set time period expires.
These mortgages are referred to with a set of numbers such as “3/1 ARM” or “10/1 ARM.” The first number is the length in years during which the rate is fixed. The second number is how often the interest rate can be adjusted after that fixed time period is over, again stated in years. So a 5/1 ARM will have a fixed rate for the first five years of the mortgage, and then the interest rate can be adjusted once every year after that. Adjustments are usually tied to a public benchmark interest rate such as the prime rate, so they can go up or down depending on financial conditions.
Private mortgage insurance (PMI): When you first buy a house, if you pay less than 20% of the purchase price from your own existing funds, your lender will typically require you to pay for additional ongoing insurance on the mortgage, or PMI. This is because the mortgage must cover more than 80% of the price, making it a riskier investment to the lender. PMI is added to your monthly payment and is non-refundable.
Related: Does it still make sense to put down 20% when buying a home?
There are many free refinance calculators readily available online which can help you determine if refinancing will save you money. With a refinance calculator, you can enter your current mortgage terms, the new proposed mortgage terms and any fees for refinancing. You can try this refinance calculator at LendingTree to see how it works.
A refinance calculator will help you figure out how much money you’ll save on a monthly basis and over the life of your loan, and whether it’s worth the costs of acquiring a new mortgage.
Related: 3 reasons you shouldn’t wait to refinance your mortgage.
There are many benefits to refinancing, but they will vary based on your current situation and financial goals. Typically, the number one benefit is saving money, but there are many others as well.
For instance, with a refinance you can potentially get a better interest rate, lower your monthly payments, shorten the length of your loan, build equity faster, consolidate other existing debts by combining them all into a new mortgage, get rid of your mortgage insurance (if you’re refinancing for less than 80% of the value of your home) or even remove a person from the mortgage.
Save money and get cash from your home with refinance offers at LendingTree.
Although there are many benefits to refinancing, it isn’t right for everyone. As with any financial transaction, you’ll want to make sure the math works in your favor.
Normally, you’ll be charged closing costs to refinance. These costs can often be folded into your new mortgage, but doing so will add to your monthly payments. Therefore, you’ll want to fully understand these charges and take them into account to ensure that your monthly savings from a refinance will more than offset the costs.
To calculate how long it will take before the monthly savings from your new mortgage outweighs its closing costs (the “break-even” point), use a refinance calculator and enter the basic information about your current mortgage and the new mortgage.
If you find that the break-even point on your new mortgage is 7 years, but you only plan on staying in your house for another 5 years, then refinancing might actually be more costly than just k
It’s not too late to refinance your mortgage — here’s how
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