Even if you’ve signed a loan agreement with a 30-year term, it doesn’t mean you’re stuck with it. Comparing refinance options from different lenders could help you save over the life of your loan. But while you might be able to leverage better market rates, your home’s equity or an improved credit score to replace your mortgage with a new one — timing is everything.
Refinancing is when you replace your existing mortgage with a new one that comes with better rates and terms. You can refinance your loan with your current lender or start a new loan with a competing bank or nontraditional lender.
Often the main purpose of refinancing is to save on repayments. But you can also refinance to unlock equity in your property with products like cash-out refinances. A cash-out refinance replaces your existing mortgage with a loan amount that’s higher than what you owe — you’ll get the difference in cash.
How much can I save by refinancing my mortgage?
If you can lock in a lower rate than what you’re paying now, you stand to save thousands. But because of closing costs and other fees, it’s important to do the math to make sure refinancing is worth it.
Suppose you signed a 30-year $550,000 mortgage with an average variable rate of 3.10% — the ongoing rate at the time — you’d pay $2,349 on your loan monthly.
Now suppose that you’ve found a new lender willing to refinance your existing mortgage at a new average rate of 2.74%. It’ll cost you 2% closing cost. Although you would need to pay $11,000 in fees, it would drop your monthly payments to $2,242.
Total Principal and Interest
By refinancing, you’d save $107 a month — or around $27,000 ($38,223 – $11,000 = $27,223) over the lifetime of your 30-year loan, after deducting closing costs and fees.
Learn whether refinancing can help save you money, cut down your repayment term or leverage equity in eight steps:
Examine your current loan. Check your existing rate against today’s averages, and ask about fees to switch.
Ask your current lender for a lower rate. Your lender could offer you a rate discount based on your research. If not,compare your options among competitors.
Compare refinancing options. Look for a loan with a stronger rate, shorter term or other loan features you’d like to take advantage of.
Crunch the numbers. Weigh the costs of your new loan, including any fees, against your potential new loan to learn whether it’s worth it.
Apply for the new loan. Submit your application and supporting documents to get the ball rolling. Verification, valuation and assessments, approval and settlement can take a month or more, depending on your financial situation.
Close your existing loan. Your new lender works with your old one to pay off the balance of your existing mortgage and set up your new contract.
Repay your new lender. But don’t forget to check in on the market periodically to see if you might benefit from another refinancing.
You’ll provide a lot of the same documentation necessary for your existing mortgage including:
Proof of your salary and other income
Bills or contracts for other debt
How much will refinancing cost me?
Refinancing a mortgage can be expensive, requiring upfront costs to both your old and new lenders. Still, after factoring in the fees, you may still benefit from the lower rate or longer term offered by your new mortgage.
Ask both lenders about fees that can include:
Early termination for your old loan
Application fees for your new loan
Ongoing fees for your new loan
Why should I refinance?
Switching can save you money. You also stand to gain more by refinancing your mortgage:
Pay lower interest. Generally, the lower your rate, the lower your repayments. If you haven’t looked at your existing mortgage interest rate in a few years, you might be surprised to learn that the current rate you’re paying is higher than average.
Unlock equity. If you’ve carried your mortgage for a while, you may have built enough equity in your home to refinance. You could lower your mortgage repayments while borrowing against your equity with a cash-out refinance.
Pay down other debts. With some lenders, you can refinance your existing mortgage for more than you owe, borrowing the difference between the two loans as a lump sum. Refinancing to pay down higher-interest debts may save you money in the long run.
Take advantage of special offers. Many lenders offer cash incentives or sign-up bonuses to entice you to refinance — especially during the spring. or “mortgage season.” Before switching lenders, research its rates and terms to make sure cashback offers are worth it.
When shouldn’t I refinance?
You may be better off sticking with your current mortgage if:
You plan to sell your property soon. Make sure you can keep the loan long enough to make the closing costs worth it.
Your mortgage is small. Any savings that come with refinancing might not be worth the interest you’ll pay.
You still owe more than 80% of your home’s value. You may end up paying private mortgage insurance — or PMI — potentially wiping out your monthly savings.
You’ve had your current mortgage for a long time. If you’ve had your mortgage for a while, you’ve likely paid more towards the interest than the principal. If you refinance, you’ll have to pay towards interest again — even if it’s at a lower rate.
You want to access your home equity. Although a cash-out refinance loan lets you borrow money against your home equity, it comes with some risk. If you fail to keep up with your monthly loan payments, you’ll risk losing your home and all the equity that you’ve built.
Do I face tax issues with refinancing?
Generally, your ability to deduct taxes won’t change with a refinanced loan. If you’re worried about taxes, speak to your accountant or a tax professional before refinancing.
Taxes become more complicated with specific types of refinancing, like a cash-out refinance. Refinancing can also reduce your total tax deductions, depending on how much it saves you.
No matter how happy you are with your mortgage, you could benefit from lower rates or better terms. Changing market rates, built-up equity and improved credit are all opportunities to refinance for a lower rate or better terms. Once the savings start rolling in, start your search for your next mortgage.
Maybe. Some lenders will refinance borrowers with bad credit, though you might pay higher interest rates and fees. It’s a good idea to know your overall creditworthiness before applying to refinance with a lender.
Not always. If you’re refinancing, say, a $75,000 mortgage, the monthly savings may not be worth the increased interest you’ll pay over time.
It depends on your financial goals. A fixed interest rate can keep your repayments low if you think interest rates will rise significantly. A variable-rate mortgage adjusts to the market, which means it could be helpful if you think interest rates will drop.
No, refinancing is not typically required for these situations. Talk with your lender to learn more.
Yes, in most cases. Your potential bank will want an up-to-date idea of your property’s value. With savvy negotiating, you may be able to get your new lender to agree to waive any fees associated with your appraisal.
Not easily. If you haven’t gained equity with your existing mortgage, it may be difficult to find a new loan because of the high loan-to-value ratio. Talk with a mortgage expert about your options, or wait until you’ve gained enough equity to refinance.
Richard Whitten is a senior writer at Finder covering home loans and property. He helps everyone understand the ins and outs of mortgages so they can make smarter property decisions. Richard trained as a high school English teacher but found it easier to manage personal finances than a classroom full of kids. Before joining Finder, he edited textbooks and taught English to office workers in South Korea. Richard has a Bachelor of Education and a Graduate Certificate in Communication.
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