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How to refinance your mortgage in 2020

Find out how to get a new loan for your home and if you're refinancing for the right reasons.

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Most homeowners can refinance their mortgage in one to two months. And some lenders will let you handle the whole process online.

Steps to refinance your mortgage

We’ll start with this: Refinancing a mortgage can take time. To maximize your savings and make the process as seamless as possible, follow these steps:

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Refinance Rate
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How to get better refinance rates

To score the best refinance rate on your mortgage, it pays to do your research and shop around. But there are other ways to improve your rates, too.

What are some reasons why I might want to refinance my mortgage?

There are several reasons to refinance your mortgage, and those goals guide the process from the get-go.

You want to reduce your monthly payment

Refinancing your home loan could free up hundreds of dollars per month for savings, investments and debts — or you could put that money towards your monthly mortgage payment to pay off your loan sooner.

While refinancing to lower your payment may increase the term of your loan, it might make the most financial sense.

You want a lower interest rate

If your home is financed at a high interest rate, you could save thousands of dollars by refinancing to a lower rate. Plus, reducing your interest rate can also lower your monthly payment and help you build equity in your home if you continue to pay the difference.

For example, say you took out a 30-year fixed mortgage on a $300,000 loan when the rates were 6%, and they’ve now fallen to 4.5%. That drop would shave $279 from your monthly payments, which adds up to $3,348 a year.

Keep in mind that taking out a new loan means paying new closing costs. You’ll want to weigh those costs against the savings you’re getting from the lower rate.

You want to shorten your term

If your income has increased, you may be able to afford higher monthly payments. In that case, you might want to refinance to a shorter loan. For example, from a 30-year fixed to a 15-year fixed to pay off your mortgage faster. By aggressively paying down your mortgage, you’ll probably save thousands in interest over the life of the loan.

Thanks to record-low interest rates, you may find that there’s only a few dollars difference between the monthly payments for a 15-year mortgage and your current 30-year mortgage.

You want to lengthen your term

On the flipside, if you’ve had or anticipate a drop in income, lengthening your term can help free up more money and pay off your loan more gradually. Lower monthly payments have you paying interest longer, costing more in the long run. So avoid stretching out your mortgage unless you’re struggling to keep up with payments.

You want to convert from an adjustable-rate mortgage to a fixed-rate loan

When you have an adjustable-rate mortgage (ARM), your monthly payment can go up and down as interest rates change. That can change your monthly payments dramatically, so refinancing for a fixed-rate loan with stable payments can offer homeowners a sense of security and set payments for easier budgeting.

Since interest rates are low, locking in a fixed rate now protects you from any rises in interest rates over the life of your loan.

Must read: When is an ARM a good idea?

Converting to an ARM might be a good idea for homeowners who don’t plan to live in their home for more than a few years. Since they won’t be there that long, they don’t need to worry about rising interest rates in the future. They also might be a good idea if you find interest rates falling.

You want to capitalize on your new-and-improved credit score

If you’ve boosted your credit score, reap the benefits. You could qualify for a much lower rate by refinancing. For the best rates, aim for a FICO score of 760 or higher.

You want to tap into your equity

Maybe you want to go back to school or fund your child’s college education. Your equity can help you do that and more. When you need cash, you may have enough equity in your home to take out a cash-out refinance. Mortgage rates tend to be lower than those of personal loans, so this can be a cost-effective way to achieve your goals.

For a cash-out refi, you’ll need to stay within your lender’s loan-to-value threshold. This is your mortgage divided by the appraised value of the property.

You want to consolidate your debt

Short-term debts like credit cards and car loans usually have higher interest rates than mortgages. If you have enough home equity, you can consolidate your debt through the lower rates of your mortgage loan. Rolling your debt into one monthly payment can save you money and simplify your finances.

What to look out for

Refinancing has its risks and drawbacks. These include:

  • High closing costs and hidden fees. Between paying lender fees, appraisal fees and pulling your credit report, it can be a pricey process.
  • Cash-out refinancing. By cashing out part of the value of your home, you’ll have less equity if you eventually sell the property.
  • Longer terms. While this leads to a lower monthly payment, it increases the interest you’ll pay in the long-term. And it means you won’t be free from debt for a while.
  • Tax impact. Lowering your interest rate saves you money, but it may not be worth it when you weigh it against the tax deduction.
  • One-time fees. To refinance your mortgage, you’ll have to pay fees, taxes and closing costs. If you’re not planning to live in the home for much longer, those costs may not offset the savings you’ll score from refinancing. The longer you stick around, the more sense it makes to forfeit those one-time fees.

What is no-cost refinancing?

Be wary of the “no-cost refinancing” sell. This usually means the lender is adding those fees to the ongoing costs of your loan, so you’ll end up with a higher interest rate or loan balance.

Compare refinance lenders

Bottom line

Refinancing can be a tedious process, but you can make it smoother by preparing your paperwork and researching lenders. To score the best possible deal, compare several mortgage lenders before applying.

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