There are many ways to save money on a mortgage, but the best ones can cost you little or no money up-front. Before you refinance your home to lower your monthly payments, consider a few tricks you can do to save money. For example, most people don’t realize that they have the option to refinance their mortgage every two years.
Home mortgage lenders often serve as the gateway between you and the financial services company. Once you have obtained a mortgage, you will need to apply for financial products from them, such as various insurance and retirement plans. This means you will need to have a mortgage broker to walk you through the process.
One of the most common questions that people ask on forums and social media sites is “How can I get a better rate on my mortgage?” In this post, we will show you how to get the best rates on your mortgage by refinancing it before it’s too late.If you’ve been hearing a lot of excitement about mortgage rates in the news lately, there’s a good reason: They’ve never been this low before!
During the 2020 pandemic, just as interest rates were beginning to fall, my wife and I took the opportunity to refinance our home. This was my third time since we became owners 17 years ago.
Each time we refinanced our loan, it was for a different reason. But ultimately, we do it because it either results in increased cash flow each month, or tens of thousands of dollars in interest savings over the life of the loan.
In this article, I explain how mortgage refinancing works and why it can help you save money. Believe me, if you bought a home three or more years ago and still haven’t refinanced, you may be sitting on a once-in-a-lifetime opportunity without even knowing it.
What is a mortgage refinance?
A mortgage refinance is the replacement of a previous mortgage contract with a new one. The reason for taking out a new loan is that its terms are somehow better than the previous one.
The principle of refinancing is simple:
- You apply for a new loan using your existing home as collateral.
- This new loan will then be used to pay off the full balance of the old loan (your existing mortgage) so that it can be closed.
- The refinance becomes your new mortgage, and you start making all your home and escrow payments on it.
Refinancing mortgages is very common. Not only have we refinanced 3 times, but my friends and colleagues refinance every 3 to 5 years. It depends on when the right circumstances arise and whether the new arrangement is more favourable.
To give you an idea of the size of the mortgage switching industry, check out this data from Statista. In the fourth quarter of 2020, mortgage originations (new loans) were $410 billion. But in the same period, refinancing reached $851 billion, more than double!
But the goal of refinancing a mortgage is to save you money in the long run compared to your current loan. In fact, if you refinance your current mortgage, you can get a lower interest rate, which will lower your total monthly payments.
Why should you refinance your mortgage?
People refinance their mortgages for a variety of reasons. But the main motivation is that refinancing will ultimately save you money in one way or another.
Here are seven of the most common reasons why you should consider refinancing your mortgage.
1. Reduced interest rate
When I bought my first house 17 years ago, I remember discussing the terms of the loan with my dad. I told him my rate would be 5.75% and he was shocked. When they bought their house, the mortgage rate was around 9%!
Several more years passed and interest rates continued to fall. I ended up refinancing my mortgage at 4.50% and was amazed at how much money we would save. To give you an idea:
- Our mortgage balance was about $160,000 and our current monthly payment was $934.
- When we refinanced the loan at 4.50%, our new payments dropped to $811 per month.
- That’s an additional savings of $123 a month!
That’s why it’s so important to pay attention to current events and regularly check where the current rates are. This can be an easy way to save $100 or more a month on your budget, which you can use to achieve any of your other financial goals.
2. Reduced monthly payments
It stands to reason that if you refinance at a lower interest rate, you can expect your payments to drop. But there is another factor that can also help reduce your payment.
Some people refinance their mortgage every 5 to 10 years, just to stretch it out and spread the payments over 30 years again. In this way, they can effectively reduce their monthly payments and improve their cash flow.
Here’s a simple example of how it works:
- Imagine you have a 30-year fixed rate mortgage for $200,000 at 4.0%. Your monthly payment is approximately $955.
- After making payments over 5 years, your principal drops to about $180,000.
- You decide to refinance again and spread the remaining 25 years of payments over a new 30-year period. If the interest rate stays the same at 4.0%, the balance is lower, and 5 more years are added, the monthly payment would drop to $859.
- This would result in a savings of $96 per month.
Professional advice: Now that your monthly minimum payments have been reduced, you can reinvest the money you’ve saved into your mortgage payment. This way, you’ll pay about $100 to $200 more per month on your mortgage, which will help you pay off the loan faster and build equity faster.
And if you need extra money for any reason, you can always use it to pay off your mortgage and spend it on whatever you need!
While this strategy may have positive short-term effects, it should be kept in mind that there are also some drawbacks to this method:
- You push the finish line to pay off your mortgage further and further away.
- You build equity in your home more slowly because the amount of each payment that goes to repayment is not as large.
- Any additional refinancing will increase the interest rate you pay over the life of the loan.
3. Switch to 15-year mortgages
When my wife and I bought our current home, we took out a $215,000 30-year fixed rate mortgage at 3.75%. Our principal and interest payments were approximately $996 per month.
Then, during the COVID-19 pandemic in 2020, when mortgage rates started to fall, we did something crazy: We refinanced a 15-year mortgage. Our payments have increased to $1,451!
Why would anyone go the other way and increase their monthly payments? For two very important reasons:
- You pay off your mortgage in half the time. Instead of 30 years to pay off the full balance, your payments are spread over 15 years. This means that not only will you arrive at your destination faster, but you will also build equity in your home much faster with each payment.
- You pay much less interest! How much? This may come as a shock to you …. With our old 30-year mortgage, we would have paid about $143,451 in interest over the life of the mortgage. But with the new 15-year mortgage, total interest payments would be $46,248. That’s $97,204 in interest savings!
When you consider that your housing costs are only increasing by 40-50% per month, this is not a bad price, especially if you can eliminate one of your biggest monthly expenses. And if you can afford it, switching to a 15-year mortgage can save you a lot of money on interest over the life of the loan.
4. Transition from ARMs to fixed-rate mortgages
Not everyone qualifies for a 30- or 15-year fixed-rate mortgage, and not all the time. And in the 2007 housing crisis, it got a lot of people (including mortgage companies) in trouble.
One of the other products that mortgage companies advertise is the adjustable rate mortgage (ARM). This is another type of loan structure where the interest rate is very attractive during the first 3, 5 or 7 years.
However, after this short introduction period, the interest rate will be adjusted to the current market rate. This means that if interest rates rise, you could be in for an unpleasant surprise.
When my wife and I moved into our first home, many other young couples had bought their homes with ARM. They were not worried about a rise in interest rates because they thought they would refinance or move in the next five years.
… Then came the real estate crisis of 2008. The economy began to slow and home prices fell. Anyone looking to refinance their home at this point has received an appraisal showing that the new value of their home is about 25% less than what they paid for it (meaning you just lost all the equity you built up).
To make matters worse, the housing market has virtually stalled. No one was buying, and the people who did manage to sell their homes did so at a loss.
At that time, the MRA’s discounted launch rates were expiring. For many of my neighbors, the payments have increased dramatically. Some have even doubled in size overnight.
Many people in our region, as well as other parts of the United States, struggle with the cost of housing. Some just gave up the mortgage. It was a very scary and difficult time, but also a lesson in mortgages that I will never forget.
In a nutshell: If you have applied for an adjustable rate mortgage or other type of alternative loan, refinancing can help. You can opt for a fixed rate mortgage, where you always know how much you owe and what your monthly payments will be.
A fixed rate mortgage makes it easier to make financial plans for the future, because the total mortgage payments you make at the beginning of the term will be exactly the same at the end of the term.
You don’t have to worry about market changes or the policies associated with those changes. With a fixed rate mortgage, you just need to make sure you have a reasonable budget each month to cover all your mortgage payments.
5. Cash payment
When you apply for a refinance, the loan officer will certainly ask you if you want to make a withdrawal. Cashing out is asking for more money than you owe for your home to use it for other purposes.
For example, you may only have $175,000 left to pay your mortgage. But if you go to refinance, you borrow $200,000. In this way, you are effectively withdrawing $25,000 in cash.
There are many reasons why someone would want to collect:
- Pay off your debts, for example. B. Credit cards, student loans or other loans
- Renovate your house by enlarging it or rearranging a room
- Use additional capital for entrepreneurial activities
Remember, if you borrow this money, the repayments will be spread out over the life of the loan. This means that if you took out a 30-year mortgage, you will have to pay it back with interest over the next 30 years.
Another thing to keep in mind, especially if you are using the money for entrepreneurial activities, is that your home serves as collateral. That means you have to be careful. If the deal falls through and you can’t make your payments, you could lose your home.
But if you’re happy with your monthly payments and have a way to use the extra funds responsibly, a cash-out refinance can help improve your finances overall!
6. Eliminate PMI
If you got your first mortgage down by less than 20%, your lender probably had you accept a PMI as well.
PMI stands for private mortgage insurance. This is a special type of insurance that protects the lender (not you) if you default on your loan. Depending on the amount of your mortgage, this could be an additional $100 per month deposited into your escrow account.
The reason they force you to accept this is because you came to the table with less than 20%. From the lender’s perspective, you are considered a riskier candidate even if you have an excellent credit history.
The only way to get rid of PMI is:
- Pay off the loan over time until you have 20-25% equity in your home. The amount depends on the specific terms and conditions of the lender.
- Refinance your loan and prove that the value of your property has increased.
One of the main reasons we wanted to refinance our first mortgage was to forgo PMI and save $100 a month by not having to pay it. We were convinced that our property had increased in value, so during the refinancing process we had an appraisal done to prove it.
Here’s how refinancing our house got us out of the PMI:
- The original cost of our house was $170,000. Our mortgage debt was $160,000. So we had about 6% equity in our house.
- Over the next 5 or 6 years, we paid off the mortgage by about $20,000, bringing it down to $140,000. All other things being equal, we’d have about 18% equity in our house right now.
- At the same time, our property value increased by about $200,000. After getting a new appraisal and proving to the mortgage lender that it was the most recent market value, we got $140,000 we still owed on the mortgage, which meant our actual equity was 30%.
Because we now had proof that we owned 30% of our home at the time of refinancing, we were able to waive the PMI and completely eliminate this additional cost from our monthly payments.
7. Choosing the best lender
Less than two years after we moved into our first house, I received a letter stating that our mortgage company had sold our loan to another lender. I was surprised because I didn’t know they did that. But apparently this is common, because about a year later our mortgage was resold to another lender.
This means that the original institution that managed your mortgage has transferred the loan and all its terms to the new lender. A bank, credit union or other financial institution may do this to free up extra funds to make loans to more people.
Not only was it annoying, but it caused problems with my automatic payments. I didn’t know who I was paying, if my payments were being made, or if my information was correct.
On top of that, some of these lenders were pretty shady. These were companies with websites that barely worked and no customer service phone number. You can be sure that I was very uncomfortable sharing my banking information with these people.
If this has happened to you and you would rather work with someone with a better reputation, refinancing can help. This was another factor that led us to do our first refinancing. We chose a lender because they told us they were not specifically selling their mortgages.
It’s not necessarily something that will help you save money or get a better deal. But it gave us confidence that we would finally be making payments to a reputable mortgage company.
When does it make sense to refinance a mortgage?
If you’re wondering if it’s time for you to refinance your mortgage, here are some simple questions to help you determine if you’re the right candidate:
- What are the current mortgage rates? In general, if they are less than or equal to 1% of your current mortgage, you will almost certainly save money. Don’t forget to compare 30-year and 15-year mortgage rates, as the 15-year rate is usually much lower. Also, check whether or not the application mentions an interest rate with points, as this will have an impact on the amount you end up paying when taking out the refinance.
- Would you like to set aside some money each month? If this is the case, regardless of the interest rate, refinancing with 30-year payments will allow you to reduce your payments again. In general, this is only recommended if you plan to live in the house for a long time.
- Would you like to pay your rent as soon as possible? Although your payments will be higher in this case, the 15-year term will certainly help speed up the process. Plus, you’ll save tens or even hundreds of thousands of dollars in interest.
- Do you want to get out from under a bad deal like the MRA? A 30 or 15 year fixed rate mortgage gives you peace of mind.
- Do you need a large amount of cash? Refinancing with a cash-out option is an easy way to get the capital you need for the next project or event you are planning.
How to apply for mortgage refinancing
If you want to be proactive about refinancing your mortgage, here are the steps to take.
1. Memory to
The internet has made it so easy to find out the current mortgage rates and compare different lenders. Usually the first place I go to shop is the Bankrate website. I can just enter my zip code and see what refinance companies in my area have to offer.
In addition, I will spend some time researching our local credit unions. My wife and I have been members of this company for several years and have always gotten good deals on car loans through them. Sometimes it helps to go to a local branch and talk to a loan officer.
The last candidate you should not rule out is your current mortgage broker. It’s a good idea to stay with the company that already has your mortgage, as they already have all of your information and thus should be able to make a smooth transition in the refinancing process.
If you are happy with everything, call them and see what they have to offer. If they are smart, they will do everything they can to make sure they don’t lose your case.
Before contacting any of these companies, it is helpful to have some basic information:
- Information about your current mortgage (balance, interest rate, etc.)
- your estimated creditworthiness
- Your annual income and recurring monthly debts
Keep in mind that when it comes to your credit score, most lenders require a FICO score of at least 620 to approve your refinance application.
Also, remember that at this stage of the purchase, you should only gather global numbers. Some online forms or credit agents ask if they can check your credit, but tell them no.
Every time someone checks your credit, it will show up on your credit report as a hard inquiry. Too many complex investigations can hurt your FICO credit rating.
Instead, you can ask them to ask questions carefully. Soft inquiry is when lenders use other measures of credit score, such as B. Your VantageScore.
2. Calculate numbers
Once you have gathered all the data, you need to understand whether or not refinancing is worthwhile. You can calculate it yourself if you know how to set up equations in Excel or Google Sheets, or use a free online calculator like this one.
When comparing, don’t forget to pay attention to things like the closing costs of refinancing and the interest rates for the term of the loan (especially if you plan to extend the term). Also, don’t forget to include the value of the points if that includes the interest rate you are offered.
3. Full application
Once you are convinced of the value of refinancing and have chosen the best lender, it is time to fill out an application. You will need to set aside some time to make sure you answer all the questions correctly, especially regarding your finances.
Once you have submitted an application, it takes some time for the lender to review and approve your information. I remember the last time I refinanced, it took 2-4 weeks from preparation to closing.
4. Refinancing of closure
As with any other loan, the final step is to attend the closing and sign the refinancing documents. Most lenders work with networks of title companies that allow you to do this in person in your city or a nearby city.
Once you have signed a series of documents, the refinance officially becomes your new mortgage. The balance of your old loan will be paid in full and the money that was in escrow will be returned or transferred to the new loan.
5. Look for opportunities to start again
The most important thing to remember about refinancing a mortgage is that it’s never a one-time deal. There are no restrictions or laws on how often you can refinance your mortgage.
When we moved to our current home, I refinanced our mortgage less than a year later. Interest rates were dropping, and after doing the math I saw an opportunity to save about $60 a month.
The most important thing is to always look for ways to get new loans. Whether it’s a better interest rate, a longer or shorter term, or the ability to borrow a little more money for something else, don’t hesitate. Strike at the right time!
Refinancing your mortgage is a way to renegotiate the terms of your loan and save money.
Some people refinance to get a better interest rate, waive PMI or increase their monthly cash flow. Other people do it to change their credit structure. You can even use refinancing to get a large sum of money that you can use to pay off other debts, renovate your home, or invest in a business.
The best time to refinance is when the opportunity arises for you and your financial goals. Check online or by phone for current interest rates and mortgage types. Then calculate and compare which scenario will save you the most money in the long run.
Not only was I able to refinance our mortgage to save over a hundred dollars a month, but with their help I was able to avoid paying tens of thousands of dollars over the life of the loan. The sooner you start looking into whether it’s time to refinance your mortgage, the sooner you can start saving money.First off, you should put away any preconceived notions you have about getting a mortgage. When you are ready to refinance, you’ll find that the process is simple and easy. Lenders have changed their procedures to ensure that refinance loans are simple and easy. In fact, the biggest misconception about refinance loans is that they are harder to obtain than a standard loan. In reality, the process is much quicker.. Read more about google refinance calculator and let us know what you think.
Frequently Asked Questions
How does refinancing a mortgage save money?
Refinancing a mortgage can save money in the long run. The interest rate on your new loan will be lower than the current one, and you may be able to get a better deal on your monthly payments.
How much can refinancing save you?
The average savings from refinancing a mortgage is $1,000 per year.
Is it worth refinancing to save $100 a month?
It depends on your situation. If you have a high interest rate and are struggling to make the payments, then refinancing might be worth it. If you have a low interest rate and are making the payments, then it might not be worth it.
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