Is It Too Late To Refinance Your Mortgage?
- Hippotecca
- Apr 1, 2021
- 5 min read
Updated: May 9, 2021
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. 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.
What is refinancing?
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.
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 Home Lender USA 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.
What do all these refinance terms mean?
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.
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.
What are the benefits of refinancing?
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.
Should you refinance your mortgage?
Understanding the basics will help you make the best decision on whether a refinance makes sense for you, and then move quickly if you decide to refinance. You’ll want to not only look at the current interest rates and closing costs, but also think about your personal situation and your financial goals.
For instance, if you’re planning to move in a few years, it’s likely that a refinance won’t make sense, since you won’t have enough time with the better terms of the new mortgage to offset the closing costs. But if you’re staying put in your house for the long haul and can get an interest rate that’s significantly lower than your current mortgage (at least 1% less), then there’s a good chance refinancing will ultimately save you money.
If after using a refinance calculator you find that a refinance makes sense for you, make sure you compare lenders and brokers to find the best mortgage refinance rates, as well as the lowest closing costs. Use an online comparison tool to quickly compare refinance terms across multiple lenders.
Once you decide that refinancing is the best move for you, the process can be quite easy, and you’ll be on your way to saving money and hitting your personal financial goals. Just don’t wait much longer to lock in today’s interest rates while they’re still low.
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