Your loan is burying you, because regardless of what a lot of people think, having your home account for above 50% of your total debt-to-income ratio is a very bad thing.
Refinancing can help, but you have to be careful, and know what you’re getting into. At its basic state, a mortgage refinance is when a homeowner takes out a new loan to replace their old loan.
It’s achieved with the help of a financier or credit union, and can help homeowners to have more control over their current finances. There are a few layers of refinancing that you need to know about, and a few questions you need to ask yourself.
- Is this the right time to refinance?
- Do you actually need to do it, or is there another option?
Let’s talk about that.
How Does Refinancing Work?
When you refinance your home, you take your current loan and then buy it with a new loan. That old loan is paid, and the new loan terms (usually) reset you back to a 30-year fixed rate.
New loan beats old loan. Three are some reasons to refinance, which we’ll get into in a little bit, but suffice to say refinancing is similar to the process of getting your initial loan in the first place.
When you refinance your home, the new loan provider gains your business and increases their own institution value, which leads to a snowball effect for their business.
Because of this, there’s plenty of loan agencies that are fighting with one another to offer competitive rates to homeowners. That’s something you can capitalize on.
It’s definitely a market where there’s more demand than supply (of loan offices), so never close your mind to the options. The rate you signed on for at the start of your mortgage loan doesn’t have to be an end-all, be-all.
When You Should Refinance Your Home
There are a few reasons that someone should refinance their home, and many of them are time-sensitive depending on events and creditworthiness.
- Credit Score Increase: Once your credit goes beyond the credit you had when you signed on for your first loan, you can receive lower rates and possibly skip PMI altogether. A ten point increase isn’t much, but if you’ve been paying your mortgage for years, your score will increase dramatically and allow you to look for a new loan.
- Low Interest Rates: This is market-controlled, so it’s not something you can predict (which is why it’s always good to be on the lookout for refinance rates). If interest rates are hitting an all-time low or are historically lower than when you signed up for your loan, refinancing could help you save a ton of money.
- Your Income Changes: You now make twice as much as before, and you can make a larger monthly payment to the benefit of paying off your home sooner (and building equity faster). With higher monthly payments, you can get seriously low interest rates; you don’t have to be stuck with your current 30-year with higher rates.
You Could End Up Paying Less (If You’re Careful)
If you refinance your home when rates drop, you could actually save thousands (if not more) on your overall mortgage costs that you’ll pay over time.
It’s not just about having a lower monthly cost right now, but rather paying less interest and knocking out the principle at a faster rate than you were previously able to.
At the end of the day, refinancing could actually lead to an initial 30-year loan plan looking more like 25 to 27 years if you increase your credit, live in an up-and-coming area, and play your cards right.
Careful, Refinancing Can Moderately Affect Your Credit
One thing to note is that with a new loan, your credit is going to dip. The credit increase you’re enjoying now is what helped you get this new refinance, but things will balance out as you pay down your new mortgage on time.
Because you’re essentially closing a pre-established line of credit you’ve been in a positive stance with, that does hit your credit, but now that you’ve refinanced for a lower rate, taking the slight hit for a short while isn’t that bad.
You’ll build it up again quickly as you establish rapport with your new loan provider.
Should You Refinance Your Mortgage?
Refinancing your home could be a smart move, depending on what your current needs are and if it would help you fulfill long-term financial goals.
If you ended up getting into an FHA loan with a really bad credit score and you’ve successfully raised it over time, refinancing your home could be a great way to save four figures (or more) on your new mortgage rates.
While some will refinance to take advantage of new low rates, refinancing is a big deal and usually something that should be done after consulting every possible option.
Shopping around for refinance loans is basically the same as finding home loan offers in the first place, so there’s no reason no to keep your options open and see what the current refinance rate market can offer you.
Mortgage Refinancing FAQ's
Before you even approach the possibility of refinancing a home that you own, you should look at the home’s total equity, and you should know your credit score. It goes without saying, but a higher credit score equates to lower refinancing costs.
Additionally, you should be hyper aware of your debt-to-income ratio, PMI costs, and your breakeven point. Refinancing is a big decision, so treat it the same as you did when you bought your home in the first place.
Typically speaking, the larger the loan, the lower the total amount of closing costs you pay. You can expect an average of 2% up to 5% of the home’s total value in closing costs, which is both persistent for home purchases and refinances.
This is where some of the “hidden fee” feelings come out during the refinancing process.
It’s circumstantial, and may depend on the total cost of the home in some instances. Credit unions can help with reducing or removing closing costs. You can wrap the costs into the total principle of the loan.
If you bought your home on an FHA loan, there may be an option for you to not pay closing costs on your refinance.Your best option would be to check with your current financial institution to see if they offer some sort of customer loyalty program for account holders.
Many banks offer services such as refinances and home mortgages, so if you use that bank for your refinancing, they may be willing to settle the closing costs at the cost of customer retention.
Some costs can be deductions, but not all. If your closing costs are relative to mortgage interest or real estate taxes. Otherwise, you cannot. Things like appraisal fees, title fees, and any other services rendered do not count as tax deductions for a refinance.
However, if you did a primary refinance, you can deduct the full amount of interest on your loan (100%) if you took a cash-out refinance. Cash-out refinances are generally not worth the additional hassle of higher-than-previous principle costs, but if you do end up doing one, you can at least deduct the loan interest.
Credible allows you to compare rates from multiple lenders with no impact to your credit score. Refinance your mortgage with peace of mind.