If you are a homeowner with a mortgage, there are a couple of reasons why you may choose to refinance your loan at least once during its life. Perhaps you want to get a lower interest rate, extend your loan term or get cash out from your built-up equity. Whatever your reason, having a clear understanding of how much a refinance will cost you and how to prepare for one can save you time and money. In this blog, we’ll discuss ways you can prepare for and save better with a mortgage refinance.
Reasons to Refi an Existing Mortgage
One good thing about having a mortgage is that you can refinance it to adapt to changes in your life or the economy. For example, you could refinance to take advantage of lower interest rates, to access built-up equity, to remove or add a borrower, or shorten or extend your loan term. Let’s explore these reasons further.
- Lower Interest Rate: Refinancing to obtain a lower interest rate is a smart way to save money. First, a lower rate lets you pay down your principal balance quicker. Also, it can reduce your monthly payments, making it easier on your budget and freeing up funds for other things, such as emergency savings.
- Access Home Equity: Conducting a cash-out refinance lets you take out equity in your home as cash once your new loan is processed. This refinancing lets you roll the cash that you took out and your current mortgage into a new home loan with a new term and interest rate. A cash-out refinance is a practical option for homeowners who want to stay in their home but need extra cash for home renovations, higher education costs, debt consolidation and other things.
- Add/Remove a Borrower: Another reason to refinance is to add or remove a co-borrower. If you’re adding a person to the loan, that individual will need to first qualify for the loan. If you’re removing someone from the loan, you will need to be able to qualify for the entire new loan by yourself. Keep in mind that refinancing changes the length of the loan term and interest rate.
- Adjusting Your Loan Term: Another reason to refinance is to change the length of your loan term. For example, say you have 20 years left on your 30-year mortgage. If interest rates drop below your current mortgage rate, you could refinance to a 15-year mortgage without increasing your monthly payments, as well as cut five years off the loan. Of course, this type of refinance depends on interest rates dropping enough over time to make this worthwhile for you.
Refinancing an existing mortgage should not be taken lightly. It requires homeowners to evaluate their financial needs and decide on the right path for success. Refinancing means going through the mortgage process once again, and this may include a home inspection, closing costs and other requirements.
Preparing to Refinance
There are things you should do before you select a lender and apply for a home refinance. The first is to check your current credit score and credit report. While you qualified for a mortgage previously, your credit report will show if you’ve kept up with your mortgage and other debt payments since then. The goal here is to get your credit score as high as possible so you can receive the best interest rate on your refinance.
You can check your credit score and report for free each year at AnnualCreditReport.com. Be sure everything in your report is accurate. If there are any discrepancies, challenge them with the credit reporting bureaus. Another way to improve your credit score is to minimize the amount of debt you incur and to pay down existing debt as much as you can.
Next, shop home loan lenders to find the best rates for your refinance. Start with your local financial institutions, such as Travis Credit Union. When comparing rates, use a refinance calculator to see what your payments would be under various rates and loan scenarios.
How Much Does It Cost To Refinance?
Refinancing your mortgage does cost money. According to Bankrate, the average mortgage refinance is $2,375, not including taxes. Additionally, the costs may vary depending on the loan size and where you live.
As a rule of thumb, expect to pay between 2% and 6% of the updated loan balance, according to Bankrate.com. Shopping around to see which financial institution offers the lowest refinance fees can help save money. Keep in mind refinancing costs include the following:
- Application fees
- Origination and/or underwriting fees
- Recording fee
- Appraisal fee
- Credit check fee
- Title services
- Survey fee
- Attorney/settlement fee
Knowing what to expect when it comes to closing costs will let you ask the right questions when meeting with your lender. Again, you can lower your refinance costs by boosting your credit score and shopping for the best rates. You can also negotiate your closing costs and ask for fee waivers. There are even some lenders that offer no-closing costs to refinance, so do your research.
Requirements To Refinance
There are several requirements to refinance your mortgage. Generally, you will need a credit score of at least 620. You’ll also need to have at least 20% equity in your home based on your home appraisal. Lenders will also look at your debt-to-income ratio to measure how much of your income goes to paying your debt. Plus, you’ll need to provide proof of a steady income to show you can afford the mortgage refinance. Lending requirements will vary by financial institution so be aware of your lender’s requirements to avoid any delays.
How Can Travis Credit Union Help?
Travis Credit Union’s mortgage loan officers can help find the right refinance option for your unique financial situation. Visit our Home Loan Center to get started and use TCU’s mortgage calculators to determine your estimated monthly payments.
TCU is focused on providing you with the financial information you need to save better when you refinance. Learn more about how Knowledge is Power at TCU.