Factors To Consider When Refinancing Your Mortgage
First, if you’re thinking about refinancing your mortgage. Then you should consider a few factors to determine if it’s the right move for you. Here’s what you need to know:
Your Current Interest Rate And The New Interest Rate
If you can get a lower interest rate by refinancing, you may save money on your monthly payments and over the life of the loan. However, you should also factor in the closing costs and fees of refinancing, which can eat into your savings.
Your Current Loan Term And The New Loan Term
Refinancing can shorten or extend your loan term, depending on your goals. For example, if you want to pay off your mortgage faster and save on interest, you can refinance from a 30-year to a shorter term loan. But if you want to lower your monthly payments and free up some cash flow, you can refinance from a 15-year to a 30-year loan. However, extending your loan term means paying more interest over time.
Your Home Equity And The New LTV
Home equity is the difference between what your home is worth and what you owe on your mortgage. Loan-to-value (LTV) is the percentage of your property’s value you borrow with your mortgage. Refinancing can affect both of these numbers in different ways. For example, if your home’s value has increased since you bought it. In that case, refinancing can allow you to tap into some of that equity by taking out a larger loan or do a cash-out refinance. But if your home value has decreased or stayed the same, refinancing may not give you much benefit or even require you to pay mortgage insurance if your LTV exceeds 80% with most loan types.
How To Calculate Potential Savings
To determine if refinancing a mortgage is right for you, you must compare how much money you will save versus how much you will spend by refinancing.
One way to do this is by using an online refinance calculator that takes into account various factors like:
- Your current loan balance
- Your current interest rate
- Your current monthly payment
- Your new interest rate
- Your new loan term
- Your closing costs and fees
The calculator will show you how much money you will save or lose each month and over the loan term by refinancing. It will also show you how long it will take to break even on the refinancing costs.
Another way is to do it manually. Here, you need to compare the current loan terms with the new loan terms. Here’s the formula to calculate potential savings:
Potential Savings = Total Loan Payments on Current Loan – Total Loan Payments on New Loan
To use this formula, you’ll need to calculate the total loan payments for both the current and new loans.
Total Loan Payments = Monthly Payment x Loan Term
- Monthly Payment is the amount of your principal and interest payment each month.
- Loan Term is the length of time the loan is for in months.
Once you have calculated the total loan payments for both the current loan and the new loan, you can subtract the total loan payments on the new loan from the total loan payments on the existing loan to determine the potential savings.
For example, let’s say you have a current mortgage loan with a starting balance of $300,000 with an interest rate of 6% and a remaining term of 28 years. You are considering refinancing the amount owed with a new loan for $294,000 at an interest rate of 4.5% with a term of 30 years.
Using the formula above, you can calculate the total loan payments on the current loan with a starting balance of $300,000:
Total Loan Payments = $1799 x 336 = $604,464
And the total loan payments on a new loan of $294,000:
Total Loan Payments = $1490 x 360 = $536,400
The potential savings would be:
Potential Savings = $604,464 – $536,400 = $68,064
In this example, refinancing would potentially save you $68,000 over the life of the loan. It’s important to also factor in the additional two years of payments on the new loan when extending from 28 years to remaining to starting a new loan at 30 years.
As I discussed above, additional fees may be associated with refinancing, so you should also consider those when deciding.
How To Prepare For The Mortgage Refinancing Process
Now, if you have decided to refinance your mortgage and understand all the information in this article, there are a few things you can do to prepare for the process. Here’s what you need to know:
Gather The Necessary Documentation
One of the first things you need to do is gather all the documentation your lender will require for the refinancing application. This may include:
- Proof of income, like pay stubs, tax returns, W-2 forms, etc.
- Proof of assets, like bank statements, investment accounts, retirement accounts, etc.
- Proof of debts, like credit card statements, car loans, student loans, etc.
- Current mortgage statement and loan details
- Homeowners insurance policy and declaration page
- Property tax bill and assessment
Having these documents ready will speed up the process and help you avoid delays or errors.
Check Your Credit Report
Your credit score has a significant role in determining your eligibility for a new mortgage. Before you start the refinancing process, check your credit report and address any errors or issues affecting your score.
You can get a free credit record from the three credit bureaus (Equifax, TransUnion, and Experian) once a year.
Research Potential Lenders
Of course, not all lenders are created equal, so research and find a lender that meets your needs. Look for a reputable lender with competitive rates and a straightforward application process. You may also want to consider working with a loan officer or a mortgage broker who can help you analyze rates and find the best deal.
Common Mistakes To Avoid
- Not shopping around: Don’t assume that your current lender is the best option for refinancing. Shop around and compare rates to ensure you get the best deal.
- Waiting too long: Interest rates can fluctuate quickly, so don’t wait too long to start refinancing. If rates are low and you’re eligible for refinancing, it’s a good idea to start the process sooner rather than later.
- Forgetting about closing costs: Refinancing comes with closing costs, which can add up quickly. Make sure you’re aware of all of the costs associated with refinancing before you start the process.
- Not being honest: Be honest with your lender about your financial situation and any issues that may affect your eligibility for refinancing. Being upfront can help you avoid surprises later on in the process.
- Refinancing too often or too soon: Refinancing too frequently can cost you more in fees than what you save in interest rates.
- Not considering the break-even point: The break-even point is the time it takes for the savings from refinancing to outweigh the costs. Refinancing makes sense if you plan to stay in your home longer than this period; otherwise, it might not be worth it.
By following these tips, I’m 100% sure you can prepare for the refinancing process and ensure that you’re getting the best deal possible. Good luck!
Therefore, before refinancing your mortgage, consider several factors, like the current and new interest rates, loan terms, potential savings, closing costs, and other fees. By taking all of these factors into account, you can determine whether refinancing your mortgage is the right move for you. Another vital consideration when refinancing your mortgage is to consult a loan officer who is an expert in the field. Get personalized advice based on your unique financial situation and help you navigate the process. By working with an expert, you can make an educated decision about whether refinancing is right for you.
Mortgage Refinance FAQs
What is Mortgage Refinancing?
How Does Mortgage Refinancing Work?
What Are the Benefits of Mortgage Refinancing?
How Long Does it Take to Refinance a Mortgage?
The duration of the mortgage refinancing process varies depending on a number of factors, such as the lender, your creditworthiness, and the complexity of your application. On average, the process takes 30 days to complete. Some lenders offer expedited services, which can reduce the refinancing timeline to 15 to 20 days. Delays may occur if you do not have all the necessary documentation or if there is an issue with your credit history.
To expedite the process, it is crucial to assemble all the necessary documents and financial information beforehand, respond promptly to any inquiries from the lender, and stay in touch with your loan officer throughout the process.