Inside: Understanding when to refinance a home is something every homeowner should know! I’m sharing the mortgage tips we followed to better understand the refinance process and figure out the best refinance timeline for our home!
I’ve been a homeowner for over 3 years now and I feel like I have some good experience buying and selling a home. I understand how the process works and how a home loan breaks down, but one thing I’m wasn’t super familiar with was a mortgage refinance.
So this summer when my husband and I saw that mortgage rates had dropped significantly from just a few months prior when we locked in our rate, we started exploring refinancing to see if it was the right time for our situation.
I now know a good amount about the refinance process and I want to share some mortgage tips with you today so you can determine whether now is a good time for you to look at refinancing your mortgage.
What Does Refinancing a Loan Do?
For those not familiar with refinancing, this is the process of replacing your current home loan with a new loan on different terms. For example, we were looking at replacing our current 30-year home loan with a different 30-year home loan at a better interest rate.
You can also use a refinance to get cash out of your loan to pay for home renovation projects or other debts you want to pay off.
For all of the options available with a refinance, be sure to talk to a licensed loan officer, like one from Homie Loans!
The Pro’s Of Refinancing
There are some obvious pros to refinancing your home loan. Here are some of the key reasons to refinance your home:
- If the new interest rate is a big enough difference from your current rate, your monthly mortgage payment could go down significantly.
- You can cut down the length of your loan from 30 years to 20 or 15 which means you’ll have your house paid off quicker and you’ll won’t be paying interest for as long.
- If you have enough equity in your house, you can qualify to remove your private mortgage insurance (PMI) which could result in huge savings each month.
The Con’s Of Refinancing
Once we got the quotes back from our loan officer, there were some fees figured in that we had no idea we’d be paying for. Just as a heads up:
- You’ll be paying for the fees of a new home loan just like when you initially purchased your home. Some lenders will talk about a “no-cost” refinance, but there still is a cost associated with this option. At the very least, you’ll be required to pay the pre-paids of a new loan including 30 days of interest, hazard insurance, and property taxes.
- The “no-cost refi” can be rolled into your new loan so you pay nothing out of pocket, but that amount will be added to your loan so you’ll be paying interest on it month after month.
- You also may be required to pay points to get the great rate that your lender has advertised. As a rule of thumb, you should always expect your rate to be higher than what they advertise as the current refinance interest rate because the rate they show usually requires points paid.
- If you’re not getting a smaller term loan, your payments will restart from the beginning. So if you’re 5 years into a 30-year loan, instead of being 25 years away from payoff you’ll be back to 30.
Other Points To Consider
If you’re deciding when to refinance your mortgage you should also consider:
- How long you’ll be living in the home. Although we had PMI on our last home loan, we knew that we would only be there a max of 5 years so we didn’t ever look into refinancing. Restarting our loan term and adding those extra fees just wouldn’t have been worth it. BUT, if you’re in your dream home and you know you’ll be there for the long term, then a refinance is a great option to save you money each month if interest rates are lower.
- Shopping around for rates and fees. Just like when you got your initial mortgage, it’s worth it to shop around for the refinance fees. Some lenders may have better rates and some may have better fees, so it’s worth your time (and money) to get several different quotes. You can start with Homie Loans to get your first quote!
- That you’ll skip a monthly payment. Just like when you start a home loan for the first time, you’ll get that “free” month with no mortgage payment. We planned to use this month to pay down our principal from the closing costs of the refinance.
- That you’ll also get your escrow account refunded. This is another big chunk of change that can be used to make an additional payment to principal to lower the total loan amount.
Using Homie Loans To Refinance Your Mortgage
The best way to know if it’s time to refinance your mortgage is to get some quotes from lenders! Once you have those numbers in hand, you can compare the new monthly payment with your current payment as well as look over any fees the lender will be adding to your new loan.
You may have heard about Homie from their awesome home buying and selling program, but did you also know that they have a loan department as well?
They also guarantee that Homie Loans will beat any competitor’s locked loan estimate, or they’ll pay you $500. Reach out to them today for more information.
And if they aren’t already in your state, be sure to email [email protected] to see when they’re coming to your neighborhood.
When Should You Refinance Your Home?
Ultimately, we decided against refinancing our home loan right now. Interest rates are REALLY great right now, but the difference between the points-free rate and our current rate just wasn’t enough to make it worth it to take on the closing cost fees.
We also haven’t been paying our mortgage for a year yet, so our property tax still isn’t accurate since our home is a new construction. Because of this, the refinanced payment was actually coming in HIGHER than our current mortgage payment. We decided to wait to see what our new mortgage payment will be with the accurate property before we look at refinancing.
But we did get a good idea of when we should refinance our home loan.
Pay attention to refinance rates. There should be at least a .75% difference between your current interest rate and the new interest rate. If you can get the lower interest rate without paying points, even better! Anything less than .75% usually won’t be worth the closing costs.
A good rule of thumb is to make sure that the closing costs you’ll be paying is equal to about two years of the monthly mortgage savings you’ll get. If you’re saving about $150 per month off your mortgage payment and the closing costs were only $3600 (after you apply your skipped mortgage payment and escrow payout) then that’s breaking even in 2 years and probably worth it.
Another sign it’s time to refinance is if the new payment is similar to your current payment at a lower term length. That’s a no brainer! If you can get a 20-year loan for the same monthly payment as your current 30-year loan, then it’s probably time to refinance.
I’ve got more great homeowner insight to share! If you enjoyed this post, check out 9 Easy Tasks That Should Be On Every New Homeowner Checklist!
Like I mentioned earlier, the best way to know when to refinance a home is to get those lender quotes. If you want to check out how the current interest rates would change your mortgage payment, be sure to reach out to Homie Loans first! Are there any mortgage tips you’d add to this post? Let me know in the comments!
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