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I want to see if I can lower my mortgage cost and interest rate. Feature Image
Posted on 06/23/2020 10 minute read

I want to see if I can lower my mortgage cost and interest rate.


You understand the responsibilities of owning a home. Maintaining its functionality and comfort also comes managing how affordable it is to live there.

As your monthly mortgage payments are likely one of your highest ongoing expenses, you want to make sure you have the most affordable home loan possible.

By updating your mortgage terms through refinancing, you can lower your interest rate and monthly payments. When refinancing you can also change to a different loan type that better fits your needs compared to when you initially closed on your mortgage. Considering these factors, our Homefinity professionals want to help you save costs over the lifespan of your loan by refinancing.

We’ve outlined the reasons to refinance, your specific factors to consider, the options available, and how to secure the most affordable loan for your situation.


Where to start

Reasons to refinance

Lower interest rate

This is the most common refinance route that homeowners take. If interest rates are lower than they were when you closed on your mortgage, you can get a new contract with terms that include these lower rates. If your credit score has improved since your last mortgage began, this can also help lower your interest rate, as well as having some equity in your home.

By lowering your interest rate, you lower your monthly payment and the overall cost of interest you would pay over the lifetime of the loan.

Shorter term

By refinancing to a shorter-term loan, such as from a 30-year term to a 15-year term, you can pay off your mortgage sooner and possibly lower your interest rate. This will help you save by paying less interest over time.

However, shortening your term gives you less time to pay the same loan amount, so your monthly payment will rise. Refinancing also comes with closing costs. If you own the home for several more years, you’ll break even on these costs. However, if you plan to move in the near future, you might sell the house before you’ll start to benefit from the interest savings.

Extending your term

You can refinance for a longer term to gain more time to pay off your mortgage. For example, if you have an existing 30-year mortgage, refinancing it could restart your term to stretch your payments over an additional 30 years.

By extending the term of the loan though, your interest rate might rise and you could pay more interest costs over the lifetime of the loan. You’ll want to weigh these factors when deciding what will make your mortgage the most affordable for you.


Is refinancing right for you?

To understand if refinancing is right for you, look at the condition of your current mortgage, your equity, and your finances.

Your current mortgage

A major factor in deciding to refinance is understanding the condition of your current mortgage and what could change if you refinance it.

With many home loans, the majority of your initial payments go to interest first, then your payments toward the end of the loan go toward mostly principal, meaning they amortize. With this in mind, your interest rate has the biggest impact at the start of your loan’s term and a lesser impact toward the end of the loan. If you’re refinancing to lower your interest rate, doing it earlier in the term of your loan will be most beneficial, such as within the first ten years.

If you have an older mortgage, it’s term might have started when interest rates were higher. If interest rates are significantly lower now, starting a new term could be worth the upfront costs to save you money over time.

If current interest rates are low enough, they can help you justify the fees and closing costs of refinancing. A small difference in interest rates, might not be worth it. However, if the difference in interest rate is 0.5% to 1% or even higher, you should run the numbers to see how refinancing would likely lower your mortgage costs. With a significant drop in rates, you can save hundreds of dollars a month on your mortgage payment.

You could also change to a new type of mortgage. People commonly refinance to switch from an adjustable-rate mortgage to a fixed one if their interest rate is expected to rise. 

Another reason to refinance is if you currently pay for private mortgage insurance monthly. Once you have gained 20% or more equity in your home, this insurance payment can be removed from your mortgage, lowering your monthly costs.

Your equity

The amount of equity you have in your home affects your loan-to-value (LTV) ratio, which can impact your terms when refinancing your mortgage. The LTV ratio is the percentage of what you owe on your mortgage, compared to your home’s available value.

For best results when refinancing, you’ll want your LTV ratio to be 80% or higher, meaning you have 20% equity in your home. However, you can refinance with as little as 5% equity and an LTV of 95%, or in special cases, with zero equity. With little or no equity, you might not qualify for a lower interest rate and you might be required to pay mortgage insurance.

Your finances

  • Credit score.

Credit score requirements can fluctuate, but we can typically find an appropriate loan program or assist you in improving your score.

Using a free site like CreditKarma, CreditSesame, or CreditWise can be a quick way to get an idea of how you’re doing with your credit. But, just keep in mind that when you go to qualify for your mortgage we’ll need to request your actual credit report and score, which will give us “official” credit scores and the full details of your credit history.

  • Your income vs debt.

When looking at your credit score and monthly budget, pay close attention to the amount of debt you carry compared to the amount of consistent income you earn. This determines your debt-to-income (DTI) ratio, which is your monthly expenses divided by your gross monthly income. To learn more about your DTI ratio and how it will effect your loan talk to one of our loan professionals.

Need to use your equity for cash now?

Another option for using your home’s equity is to refinance with the goal of borrowing money from the value of your home, to use for other life goals. This can provide a lump sum of money at closing or a line of home equity credit that you can access over a period of years. Learn more here.


Is a conventional, FHA, or VA refinance loan best for your situation?

Conventional rate and term refinance

The most common refinance option that homeowners use is a conventional rate and term refinance, also known as a no cash-out refinance.

You might currently qualify for a conventional refinance, even if your original mortgage was FHA or another loan type. Whether your original mortgage is conventional or otherwise, a rate and term refinance loan can lower your monthly payment with a lower interest rate. If you have 20% or more home equity you can also eliminate mortgage insurance costs.

Features

  • Most common loan for homeowners
  • No out-of-pocket closing cost option
  • Choose fixed or adjustable-rate

Requirements

  • Credit score requirements can fluctuate, but we can typically find an appropriate loan program or assist you in improving your score
  • Qualifying debt-to-income ratios can vary by the loan program, but typically the lower this ratio the better the terms of your mortgage.
  • Typically, a loan-to-value ratio of 80%, meaning you have at least 20% equity in your home
  • Loans with less than 20% equity require monthly private mortgage insurance payments

FHA Refinance and Streamline? Other FHA options?

You can secure an FHA refinance with your existing mortgage, regardless of whether it is originally FHA, conventional, VA, or another type. This opens up refinance options to homeowners with lower credit scores or less home equity. Consider, however, that FHA refinance loans have more guidelines that homeowners need to meet to reduce risks for lenders.

If your existing mortgage is FHA, you can apply for an FHA Streamline Refinance to lower your interest rate and monthly payment. A streamline option doesn’t require as much paperwork and documentation. In some cases this means no appraisal is needed, the loan will close faster, and the closing costs can be cheaper.

To qualify for a streamline refinance, you must also meet certain requirements that prove a net benefit after your refinance, such as a lower monthly payment or interest rate. Your monthly premium can’t increase by more than $50 and you must not have missed a premium payment within the past year.

Features

  • No appraisal option
  • No credit check option
  • Minimal paperwork option
  • No-closing-cost option

Requirements

  • Credit score requirements can fluctuate, but we can typically find an appropriate loan program or assist you in improving your score
  • Qualifying debt-to-income ratios can vary by the loan program, but typically the lower this ratio the better the terms of your mortgage.
  • Home being refinanced is your primary residence 
  • Upfront mortgage insurance premium and monthly mortgage insurance payments, likely for the life of the loan

VA Interest Rate Reduction Refinance Loan (IRRRL)

There are special refinance options available for those who are active duty or veterans.

The IRRRL is great for existing VA loan holders who want to save money on their monthly mortgage payment by securing a lower interest rate.

Also known as a VA Streamline loan, this type of refinancing involves less paperwork and little-to-no costs out of pocket. You can roll closing costs into your overall loan amount. Some loans can be approved without an appraisal.


How does Homefinity work with you?

Now that you have some background on how refinancing can help you lower your mortgage costs and interest rate, let’s find out what will work specifically for your situation. Homefinity’s professionals work with you from start to finish to secure the loan you need.

  1. With a phone call to our loan professionals or a convenient online form, you can start the application process, where we’ll ask questions about your credit and finances to learn about your needs.
  2. Your information helps us make the best possible recommendations on what refinance options will work best for you. We’ll discuss the options with you and any questions you have about your situation.
  3. Once you feel comfortable with choosing your loan, we’ll help you through the approval process. With approval, we can lock in your interest rate so it won’t fluctuate throughout the refinancing process.
  4. As you head toward closing your loan, we’ll guide you through every step, updating you at each point in the process with clear details and next steps. Your dedicated loan officer can answer your questions at any time.
  5. When you’re ready, we can close your loan on the day, time, and place that works best for you.

Get Started. Make it home.

Connect with a dedicated loan officer to discuss your options for refinancing your current mortgage. Apply online or over the phone to start the approval process so that you can feel comfortable with your loan in the home you love.




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