Refinance mortgage. If you’re a homeowner who’s re-examining your mortgage in 2022, you may find yourself considering refinancing it. Before you dive into the process, there are some things you should know. To refinance a mortgage, homeowners first pay off their current loan and replace it with a new mortgage.
This may allow homeowners to lower their mortgage rates, which can be especially beneficial if you entered a mortgage agreement with a high interest rate. These rates fluctuate based on market conditions, so if you bought a home during a period of high interest rates, you may be able to lower the rate with a refinance.
By committing to a mortgage with lower interest rates, you can also lower your monthly payments. Over time, even saving $50 a month can add up to thousands over the life of the loan.
Refinancing a mortgage means that your current mortgage will be paid off. In return, the homeowner obtains another mortgage, usually with a lower interest rate that will simultaneously lower the monthly payments.
The two major reasons many homeowners will consider refinancing is to seek a lower interest rate or to obtain a fixed-rate mortgage because their current adjustable-rate (ARM) mortgage is set to end soon.
Still, there are pros and cons to refinancing, and you should be familiar with the costs and benefits before making adjustments to your existing mortgage. Below is a guide to help you decide whether refinancing your home is the right choice for you and your household.
Mortgage rates are benchmarked to the 10-year Treasury note, which is a longer-term rate. One misconception that many people have is believing that mortgage rates are tied to the Fed funds rate, which is a short-term rate.
“Many people don’t take advantage of the opportunity to refinance,“It’s always a good idea to really understand what your interest rate is and the terms of mortgage are so you can be aware of opportunities to refinance.”
As part of obtaining a new loan or mortgage in refinancing, you will restart the payment period all over again. For instance, if you are getting a 30-year fixed mortgage, the countdown to when your mortgage is paid off is reset to that point 30 years from closing on the refi.
Refinancing is very similar to the process that you undertook when you received a mortgage. It can take several weeks or longer to be approved because the lender will check your credit score and other financial information such as your income, even if the process is conducted online. Refinancing is not inexpensive and you will have to pay several fees that can add up to be several thousand dollars. Expect to pay 3% to 6% of your outstanding principal in refinancing fees, plus prepayment penalties.
Why would consumers choose to refinance?
There are a number of reasons why homebuyers choose to refinance their homes. They include:
- Lower interest rate. By refinancing, consumers have the opportunity to lower their mortgage interest rates. If your credit has improved since your initial home mortgage, or if market interest rates have fallen in that time period, you may be able to get a mortgage with a lower interest rate during the refinancing process.
- Cut monthly payments. By lowering your interest rate through a home refinancing, you can also lower your monthly mortgage payments. Monthly payments are directly correlated with your home loan’s interest rates, so when you are able to adjust your interest rates lower, you’ll also save money each month.
- Adjusting length of mortgage term. When refinancing a home, you can also opt to adjust the length of the mortgage term, either by increasing or decreasing it. For example, you can switch from a 30-year mortgage to a 15-year mortgage or vice versa. By adjusting to a longer mortgage, you’ll reduce your monthly payments. However, by prolonging the life of the loan, you’ll ultimately pay more for the total cost of your loan as interest rates add up over time. You can also choose to decrease the term of your mortgage. By changing from a 30-year loan to a 15-year loan, you will increase your monthly payments, but you’ll pay off the loan more quickly, thus reducing the interest costs over the course of the loan.
- Change from adjustable-rate mortgage (ARM) to fixed-rate. You may be able to switch from an ARM to a fixed-rate mortgage when refinancing. With ARMs, mortgage payments change periodically as market interest rates shift. When refinancing, you can change from an ARM to a fixed-rate mortgage, giving you a more stable, locked-in payment plan.
Refinancing as rates are rising
Mortgage rates are not stagnant. They fluctuate over time, sometimes sharply. If you purchased a home during a time when mortgage rates were higher than they are currently, you can lower that interest through a successful refinancing.
Mortgage rates were on the rise throughout 2021 and have been predicted to remain the same or move higher in 2022. With market uncertainties ahead as rates possibly hit a high of 5.8% this year, you’ll need to look closely at refinancing your mortgage.
If you entered a mortgage agreement with a lower interest rate than those in the current market, refinancing may not be right for you unless you’re opting to change the length of the mortgage term. On the other hand, if you currently have an ARM and are worried interest rates will continue to rise, you may consider refinancing in 2022.
What are the costs?
Because all lenders charge different rates for their refinancing fees, it is a good idea to shop around and find out which lenders offer discounts.
Homeowners should only seriously consider refinancing if they can lower their current mortgage rate by at least 50 basis points, or 0.50%, to compensate for some of the fees they will have to pay
“People should definitely always keep in mind that there is an opportunity to improve your financial profile through refinancing,” he said. That can include setting up a lower payment amount or reducing your interest expenses.
The fees involved in refinancing include costs for origination, application, points, attorney/closing, appraisal, inspection, title search and title insurance.
The loan origination fee is the fee that the lender or broker charges to evaluate and prepare the mortgage loan. The cost is typically a maximum of 1.5% of the loan principal.
The application fee is not refundable, and usually ranges from $75 to $300. This includes the cost of checking your credit report and score and processing your loan. Even if you are not approved for a mortgage, you likely will have to pay this fee.
The points are fees paid to lower the interest rate of the mortgage. They are also known as a loan discount point. One point is equal to 1 percent of the amount of your mortgage.
An attorney fee is charged by the lender to pay for an attorney or title company to conduct your closing. This fee is typically $500 to $1,000.
When your current home is appraised as part of this process, the lenders will know its value is at least the same as the amount of the loan. This fee is sometimes part of the application fee, depending on the lender or broker you choose. If your home was appraised recently, the lender might consider waiving their requirement to undergo another appraisal. The cost usually is $300 to $700.
The inspection fee is the cost to check if a home has pests, such as termites, or other problems. This could include a more in-depth analysis of the structural condition of the home. In some states, the lender will also want to inspect and test the septic system and well and water system, if applicable. The inspection fee is $175 to $350.
The title search and title insurance fees cover the cost of researching the title on the home from property records. The lender wants to ensure that you are the owner of the home and to see if there are any liens against the property. The title insurance protects the lender in case any mistakes emerge when it is conducting a search for your title. The cost is typically $700 to $900.
While many lenders will offer “no-cost refinances,” it does not mean all your fees are waived. Instead, these lenders allow the upfront fees to be paid throughout the term of your loan, either by giving you a higher interest rate or increasing the amount of the loan.
The higher interest rate is paid throughout the entire term of the loan, often 15 or 30 years. This option usually means the homeowner spends more money in the long run because interest is being accumulated for the duration of the loan.
When the refinancing fees are included in your new mortgage, they are “rolled into” or “financed into” the principal amount. Even though you will not have to pay thousands of dollars of fees right now, you will be repaying the fees along with interest for the next 15 or 30 years.
Unfortunately, refinancing isn’t free. You may find yourself already familiar with some of the costs associated with refinancing, as they are similar to the ones you encountered when first taking out a mortgage. You may have to pay loan-origination fees, points on the principal, closing fees, appraisal and inspection fees, attorney fees and others.
Be prepared to pay between 3% to 6% of the remaining principal during the course of refinancing a home to pay for the above expenses, as well as any prepayment penalties you may incur from your lender.
These fees may cancel out the savings you would incur by refinancing your home.
Calculate potential savings from refinancing
Doing the math to see whether fees and other associated costs add up to more than the savings will help you see if you could benefit from when you refinance a home. You may find that it’s better to pay off your mortgage quicker by increasing your monthly payments rather than entering a refinancing agreement.
If your main goal with a refinancing is to shorten the term of your loan, you may be able to do so by paying more toward your principal each month. Even increasing monthly payments by $50 each month can add up to thousands saved in interest costs and reduce the life of your loan by a few years.
When deciding whether to carry out a home refinancing, tally up the costs, any penalties and other fees to calculate the break-even point for your new loan. Before entering a new loan agreement, you can estimate how long it will take you to break even between refinancing costs and your new, lower mortgage rate.
Cash-out refinancing vs. traditional refinancing
There are a few different ways to refinance your home. Namely, there are the options for a cash-out refinance or a traditional refinancing.
- Cash-out refinance. A cash-out refinance allows you to replace your current mortgage with a new mortgage worth more than you now owe on your existing loan. You can then take the remaining difference out in cash. Homeowners often use this cash to pay for home improvements or to pay for a child’s education. If you’re seeking such a loan, be cautious — many advisers counsel against using the cash-out refinance to pay off credit card, car loans and other unsecured or short-term debt.
- Traditional refinance. A traditional refinancing is centered on replacing an existing mortgage with a new one. Homeowners may consider a traditional refinancing to reduce interest rates and monthly payments, as well as to decrease or increase the course of the loan term.
Getting your best rates
Shop around for lenders to get your best rates when refinancing a home. Keep your eyes on the market to see how mortgage interest rates are trending in order to land your best rate. Also, shop around for a lender that offers lock-in rates, which is a lender’s commitment to maintain the terms of a specific interest rate while your refinancing application is being processed. Lenders may charge you a flat lock-in fee.
You can also increase your chances of refinancing with a new, improved mortgage interest rate by focusing on the state of your other personal finances, particularly your credit score. You may be eligible for better interest rates or lower monthly payments if you’ve improved your credit score since you entered your initial mortgage agreement.
It’s also possible to negotiate closing costs, including the cost of a title search and title insurance. If you have insured your home’s title within the last 10 years, you may be eligible for a discount. Ask the lender holding your title insurance policy if it can reissue your policy, rather than conducting a brand-new title search again, and you may be able to save on these costs.
Pros And Cons Of Mortgage Refinance
Lower interest rates are not the only reason to refinance your mortgage. There may have been a change in your financial situation since obtaining the original loan that makes it a sensible move to take now, for example.
Before you decide to refinance your current mortgage, you should consider the impact of the following factors first.
- Lowering your interest rate
- Eligibility for refinancing
- Credit-score changes
- Decreasing length of loan
- Amount of equity in your home
- How long you plan on living there
- Lower interest rate for your ARM
Reasons you should refinance
Consider these possible advantages:
- Interest rates are lower today than when mortgage was obtained
- Your current monthly payments are too high
- Your ARM is ending
- You can obtain a lower interest rate, plus tap home equity with a cash-out refinance
- Your credit score has improved
- Your salary has increased
- Your property valuation has risen
Reasons not to refinance
These factors could make the decision less beneficial:
- You have had mortgage for many years
- You don’t plan on being in the home long-term
- Your credit score has declined
- You can’t afford the closing costs on a refinance
- Your debt has risen
- Negative amortization has occurred, which means you owe more on your mortgage than you originally borrowed
- Mortgage has a prepayment penalty
- Your salary has declined
- Your property valuation has declined
- You have an existing home equity line of credit (HELOC)
There’s no foolproof way to predict the state of the housing market; as such, you can expect mortgage interest-rate fluctuations every year.
The same is true for 2022, which is why you’ll need to consider refinancing with care. Evaluate why you want to refinance, whether it’s to shorten the life of the loan, decrease monthly payments or to move from an ARM to a fixed-rate mortgage.
Be sure to calculate the costs saved versus expenses that arise during the loan process, keep your eye on the loan markets and make sure to find your best possible rate for yourself when exploring refinancing your home.