Refinancing a home loan can be beneficial for a variety of different reasons. For instance, it could help you cash out equity in the home, lower your interest rate or reduce the loan term.
It is important to know that refinancing a mortgage means that you are replacing the current loan with a new one. This means that you might have to make a down payment, pay closing costs and submit to a credit check.
Depending on how much you put down, it may be necessary to pay mortgage insurance and other fees designed to protect the lender against a default. You should also know that it could take days or weeks for the new loan to be approved and take effect. Finally, it may be a good idea to consult with your current lender to determine if there is a prepayment penalty on the loan as it could reduce the amount that you save by refinancing.
Five Questions About Mortgage Refinancing
Q: Do I Need a Down Payment?
A: A down payment of 20 percent is common for traditional mortgages whether you are buying new or refinancing. However, it may be possible to get a mortgage with as little as 3.5 percent down or no down payment by applying for a VA or USDA loan. Ideally, the lender that you use will take the time to explain your options. You can also call a lender prior to starting the application to learn more about down payment requirements.
Q: What Is My Interest Rate?
A: The interest rate that you receive will depend on your credit score and other variables deemed important by the lender. It is also important to determine if your loan has a fixed or adjustable rate. If your loan has an adjustable rate, you’ll want to find out how often the payment interest rate changes, how much it changes and how high it can climb during the life of the loan. Generally speaking, loans on adjustable rates change every five years.
Q: What Types of Fees Will I Pay?
A: Typically, lenders charge an origination fee that is roughly 1 percent of the loan amount. Furthermore, you should make sure to ask about the other fees that a lender could charge such as buying points or document fees. Remember, these charges are separate from closing costs such as your down payment or property taxes for the rest of the year. It is also separate from any penalties or other costs imposed by your current lender for paying off your mortgage early.
Q: What If My Home Has Negative Equity?
A: Negative equity means that the home is worth less than what you owe on the loan. If you have an FHA loan, you may be eligible for FHA streamlined refinancing. This makes the process of refinancing easier because it may eliminate some or all lender requirements to process a refinance such as a credit check or getting the home appraised by a professional. Your local or state government may also have programs available to help you refinance a home with negative equity.
Q: When Does Refinancing Make Sense Financially?
A: Without proper planning, it is possible to lose money when refinancing a home loan. While refinancing can help save money on mortgage payments, It typically takes 36 to 60 months to repay the costs incurred when you refinance your home. Therefore, selling less than three years after a refinance could result in spending more in lender fees than you save by lowering your monthly payment. Determining the date at which you break even on the new loan should be your first step when starting the refinance process.