A Guide To Refinancing Your Home

You would think that mortgage applications always come from people looking to buy a house. But you would be wrong.

Lender FreddieMac recently reported that there were about $1.6 trillion worth of first-lien refinance originations during the first half of 2021—a figure that represents a 33 percent increase in refinance activity compared to the first half of last year.

Homeowners are jumping at the opportunity to refinance while interest rates are historically low, in order to reduce monthly mortgage payments. It's a move that's a no-brainer, really, for some families at a time when inflation is skyrocketing and the money saved on mortgage bills can be allocated for other pressing family expenses.

Up in the air still about whether refinancing is right for your family budget? Here's a guide covering some of the the key questions and considerations.

Should I refinance my mortgage?

Determining whether refinancing is the right move for your family's finances really comes down to sorting through a variety of questions and considerations linked to the overall cost of the refinance, the interest rate available on the new mortgage, your goals for refinancing, and how long your family intends to stay in the home that's being refinanced. Because of all the variables involved, there is no one right answer to the question: Does it make sense to refinance?

"For someone who is focused on lowering monthly payments as much as possible, the answer will be very different than for another person who is focused on making sure their home is paid off before they retire in 10 years," says Heather McRae, senior loan officer for Chicago-based CFS Mortgage. "The tangible benefit for one person may not be much of a benefit at all for the other. You have to know what your goal is for the property."

When to refinance

Acknowledging there is no universal answer, there are some market conditions that can make it a more favorable time to refinance. This is especially true when interest rates decline significantly enough to offset the costs associated with the new mortgage.

According to FreddieMac data, borrowers who refinanced mortgages in the first half of 2021 lowered their mortgage rate on average by more than 1.20 percentage points and saved more than $2,800 annually on mortgage payments.

"The best times to refinance are when rates have dropped to a point where the savings on your monthly mortgage payment outweigh the cost of refinancing within the timeframe a homeowner plans to keep the home," says Khari Washington, broker and owner of 1st United Realty & Mortgage in Loma Linda, California.

In other words, if the refinance costs you $5,000 in fees and closing costs, will you recoup that $5,000 in the form of decreased monthly mortgage payments before you plan to move or sell the home? Think seriously about how long you intend to stay in the home before proceeding with a refinance. If your family is preparing to move in a year and sell the property, it may not make sense to spend thousands of dollars that will not be recovered in the form of decreased mortgage payments for years to come.

"You'll need to perform some calculations to see how much in total interest you will pay with your current rate versus what you would pay with the refinanced mortgage, plus closing costs, plus refinance fees," says Mark Reyes, CFP and financial advice expert for the fin-tech platform Albert.

"If you don't plan on owning the house for the long haul, you may not be able to recoup the closing costs from refinancing," continues Reyes. "Depending on the difference in interest rates and closing costs, it may take more time to break even from refinancing. Typically, the higher the closing costs paired with a smaller change in interest rates, the longer it will take to break even."

Here are some other key times when it may make sense to refinance:

• To reduce the overall loan term or total (number of remaining payments on your mortgage) and do so with minimal increase to monthly installment payments

• When you want to consolidate debt with a cash-out refinance in order to lower your overall monthly debt obligations or payments
  
• You need cash for home improvements or to make a large cash purchase
  
• To convert an adjustable-rate mortgage to a fixed rate mortgage

"If you have an adjustable-rate mortgage (ARM) with an interest rate that varies and are looking to lock-in a set lower interest rate, refinancing may be a good choice," says Reyes.

You may also want to consider refinancing if you're family's income has decreased, which amid the COVID-19 pandemic, has been a very real issue for many.

"If you have had significant changes to your cash flow and want to structure your mortgage payments to better accommodate your monthly budget, it can make sense to refinance," Reyes advises.

What is the cost to refinance a mortgage?

The fees and costs associated with refinancing a mortgage are similar to those incurred when purchasing a home.

"The lender will most likely require appraisal fees, credit report fees, escrow fees, title fees, recording fees, and underwriting fees," says Washington.

The laundry list of fees can quickly add up and should play a big role in considering whether or not a refinance is right for your family. For instance, it can easily cost $4,000 to $6,000 when all is said and done, explains Martin Boonzaayer, CEO of Arizona-based The Trusted Home Buyer.

"The application fee is normally around $250, the origination fee is normally $3,000 to $4,500, credit report fees are $50, and home appraisal and home inspection cost $400 each," says Boonzaayer. You may also have to pay flood certification fees, which cost $25, title search fees (tack on another $600), recording costs of about $100, and reconveyance costs of about $50, says Boonzaayer.

What if I refinanced already recently?

With interest rates being so favorable, it can be tempting to want to get in on the action. But what if you already refinanced recently? Can you do so again right away? The answer is yes you can, in most cases.

"Most loans these days that are backed by FannieMae, FreddieMac, the Federal Housing Administration, Veteran's Affairs, or USDA and do not have pre-payment penalties, which means you can refinance at any time," says McRae.

There are a few exceptions to this rule, however. In instances when a homeowner is seeking a cash-out refinance, there's a six-month waiting period between the previous refinance and the new one, says McRae.

In addition, if you intend to refinance with the same lender that currently holds your mortgage, you may also have to wait a specified period of time before proceeding.

"If you want to use the same lender, they might require a six-month seasoning period between refinancing," explains Natalie Campisi, mortgage, and housing analyst with Forbes Advisor. "But, if you're refinancing with a different lender, there's likely no waiting period."

The important point to keep in mind is that refinancing in rapid succession may not make the most sense financially because you'll be paying closing costs and associated fees all over again. Crunch the numbers and make sure that you will benefit financially from a second refinance.

"There are always downsides to refinancing—the primary one being that it costs money to do. A lot of people forget that or don't pay attention to that," says McRae.

One more bit of advice on this front—don't be fooled by advertisements for no-cost refinancing. "There are so many marketing ploys out there that advertise 'no cost' loans. There is no such thing," says McRae.

Often, the costs associated with refinancing are tacked onto your new mortgage, increasing the total amount you owe on the home. Remember, this will cost you in the long run, in terms of decreased profit when you sell the home.

What if I have bad credit?

Your credit score should also play a big role in determining whether to proceed with a refinance. You can of course refinance with a less-than-ideal credit score. But you will pay a lot more to do so in the form of higher interest rates, which translate into higher monthly mortgage payments. To avoid such a scenario, work on improving your credit profile ahead of a refinance.

"Remember, refinancing is just like getting your original mortgage in many ways. This includes the fact that lenders will check your credit score, income, and employment history," says Campisi, of Forbes Advisor. "Since the goal of refinancing is typically to save money by lowering your interest rate, borrowers with poor credit scores will not qualify for the best rates available."

Generally speaking, you'll want a credit score of at least 700 to obtain competitive rates, suggest Reyes. Though the higher your score, the better.

"Even the difference between a 700 score and a 660 score could mean a 0.5 to 1 percent difference in interest," says Reyes. "That may not seem significant at first, but a 1 percent higher rate on a 30-year mortgage could cost you tens of thousands over time."

Borrowers who simply want to withdraw equity from their home via a cash-out refinance (and are thus are less concerned about lowering their interest rate) will still need to qualify for the new mortgage. The minimum credit score to qualify is often around 620.

"If you're struggling with bad credit, start by talking to a credit counselor who can help you formulate a plan to repair your credit based on your financial situation," says Campisi. "The U.S. Department of Housing and Urban Development (HUD) sponsors free counseling agencies across the country. You can locate a HUD-approved counselor on their website."

How to get started with refinancing a mortgage

Refinancing can be done with banks, non-bank lenders, and brokers. To get the process started, research the institutions or lenders you are considering working with and nail down their rates, loan costs, closing time frames, and programs available, says Washington.

"A homeowner should shop between a few companies to find one that they are comfortable using," says Washington. "After that, the homeowner will fill out an application, and submit the necessary paperwork."

Remember: Shopping around for the right lender can save you a great deal of money in the long run. Taking the time to truly engage in this step is critical to securing the best deal for your family and your unique financial situation and monthly budget.

"Doing your research and scouting out lenders and their fees, interest rates, and availability can help you find a refinance deal you're happy with," says Shelby McDaniels, channel director for corporate home lending at Chase.

You can also use a refinance calculator to calculate your potential monthly payment and review loan options. Chase offers such a calculator, as do numerous other financial institutions. Simply searching "mortgage refinance calculator" online turns up a long list of options.

Finally, it's a good idea to find a provider with whom you feel comfortable working, whom you trust, and with whom you can communicate easily.

"A loan requires quite a bit of paperwork, as well as the gathering and distributing a significant amount of personal information. Having a reliable lender to answer your questions can make the difference between a smooth, easy process and a tough experience," says McDaniels. "A dependable lender will help to keep everything on track and on time, and make a significant contribution to your personal peace of mind."