your financial details.
Mortgage rates are still relatively low. That means that there’s no time like the present to consider refinancing the mortgage loan you have for your home. Shaving at least a point or two off your current rate or converting your 30-year loan to a shorter 15-year term can help you keep more of your money in your pocket and out of the hands of lenders.
Before you go looking for a refinance loan, it’s a good idea to polish up your application package to make yourself as appealing as possible to lenders. SmartAsset has put together a quick checklist of things you need to do that can up your odds of getting your new home loan approved.
1. Track Down All Your Documents
Refinancing your home usually involves just as much paperwork as your original mortgage loan required. So getting your ducks in a row ahead of time can make the process a bit easier. You’ll likely need proof of income from your pay stubs for the past few pay periods and copies of your tax return for the last two years. If you’re receiving any child support or alimony payments, it’s also a good idea to have receipts or canceled checks on hand to show the sources of that income.
Next, you’ll need to gather up recent statements from your bank and investment accounts as proof of your assets. Lenders often check your account history from the past two years, so it’s best if you hold off on making any big withdrawals or deposits in the months leading up to your refinance application. If you do have any unusual banking activity, be prepared to explain it to the lender with documents to support your claims.
2. Take a Look at Your Credit
Lenders want to see that you’ve got enough income to cover your monthly payments after you refinance, but they’ll also be concerned with your credit score. If it’s been a while since you checked it, there’s no reason to put it off any longer.
There are plenty of ways to check your score without paying anything. You can get free copies of your credit report from each of the three reporting bureaus through AnnualCreditReport.com. Also, a number of credit cards now offer complimentary FICO scores to card members. You can also get a look at your credit score from SmartAsset.
3. Find Out What Your Home Is Worth
Unless you’re applying for an FHA Streamline Refinance, you’ll need to have an accurate estimate of what your home’s value is before applying for a new mortgage loan. The bank must have enough information to decide how much of a loan you’re eligible for. If the appraisal value comes in too low, you may not qualify for a refinance at all. That’s something you want to know before you get too far along in the application process.
Doing a little homework before you enlist the help of a professional can give you an idea of whether it’s worth it to shell out several hundreds of dollars for an appraisal. From there, you can compare your home’s value to the sale prices of similar homes to determine what ballpark you’re working with.
If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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You may have heard there’s a “new mortgage fee.” And you might have been told to hurry up and refinance NOW to avoid said fee.
While there is some truth to that, it is by no means a reason to panic, nor is it even applicable to all homeowners.
Additionally, it’s possible it may not save you money to refinance now versus a couple months from today, depending on what direction mortgage rates go.
So before we all get in a tizzy and give in to what some are clearly utilizing as a scare tactic, let’s set the record straight.
What the New Mortgage Fee Is and Is Not
- A 50-basis point cost known as the Adverse Market Refinance Fee intended to offset COVID-19 related losses
- It’s not a .50% higher mortgage rate
- It’s an additional .50% of the loan amount via closing costs
- Only applies to mortgage refinance loans backed by Fannie Mae or Freddie Mac
- Home purchase loans are NOT affected by the new fee
- Nor does it apply to FHA loans, USDA loans, or VA loans
Over the past week, I’ve been bombarded by articles warning of the new mortgage fee – most feature something to the effect of “refinance now” and “act fast!”
But in reality, you might not need to do anything different, nor hurry.
Sure, it’s an amazing time to refinance a mortgage, what with mortgage rates hovering at or record all-time lows. No one can argue that.
Still, it all seemed to come to a screeching halt two weeks ago when Fannie Mae and Freddie Mac surprised us with their Adverse Market Refinance Fee, which is designed to offset $6 billion in COVID-19 related losses.
Why would they do such a thing at a time when the economy (and homeowners) are already suffering due to COVID-19? Well, that’s a different story and not really worth getting into here.
The important thing to know is this new mortgage fee only applies to home loans backed by Fannie Mae and Freddie Mac, and only if you’re refinancing an existing mortgage.
It has nothing to do with FHA loans, USDA loans, VA loans, or home purchase loans. Or jumbo loans while we’re at it.
Additionally, they have since exempted Affordable refinance products, including HomeReady and Home Possible, and refinance loans with an original principal amount of less than $125,000.
Some single-close construction-to-permanent loans are also exempt.
In terms of cost, it’s .50% of the loan amount, not a .50% increase in mortgage rate. That could mean another $1,500 in closing costs on a $300,000 loan, which is nothing to sneeze at.
But mortgage rates don’t live in a vacuum, and can change daily, so how much more (or less) you’ll actually pay depends on what transpires between now and the implementation date.
When Does the New Mortgage Fee Go into Effect?
- Applies to loans purchased or delivered to Fannie and Freddie on or after December 1st, 2020
- This means you’d want to apply for a refinance 60 or so days before that cutoff
- Since mortgages are sold and securitized once the loan actually funds
- But remember there’s more to mortgage pricing than just this new fee
The fee was originally supposed to go into effect for loans purchased or delivered to Fannie and Freddie on or after September 1st, 2020, but after much uproar, they just delayed it to December 1st, 2020.
This doesn’t mean you have until December 1st to apply for a refinance in order to avoid the fee.
Since we’re talking purchase of your loan or delivery of your loan so it can be bundled into a mortgage-backed security, there needs to be a buffer.
We have to account for how long it takes to get a mortgage, plus the post-closing stuff that takes place before delivery or sale.
You’d really want to get your refinance in maybe 60+ days prior to December 1st to be safe, though it’s unclear if mortgage lenders will already start baking in the fee even earlier.
If not, you might be stuck paying an additional .50% of your loan amount, either via out-of-pocket closing costs or a slightly higher mortgage rate.
Assuming you don’t want to pay anything at the closing table, your interest rate might be .125% higher, all else being equal.
So if you qualified for a 30-year fixed mortgage rate of 2.5%, it might be 2.625% instead. On a $300,000 loan, it’s about $20 higher per month.
Sure, nobody wants to pay more, but it shouldn’t be a refinance deal breaker for most folks.
And here’s the other thing – mortgage rates might move lower over the next few months due to, I don’t know, COVID-19, the most contentious presidential election in recent history, a stock market that could collapse at any moment, and so on.
In other words, if mortgage rates drop another .25% or .375% by later this year, it’s possible to come out ahead, even with the new fee.
The counterpoint is not to look a gift horse in the mouth. Either way, don’t panic.
your financial details.
Refinancing your mortgage can bring your interest rate down, lower your monthly payments and generally save you some money. With rates still low, you may be pondering whether now’s the right time to try for a better deal on your home loan. But you don’t want to pull the trigger too soon. If any of the following apply to you, you may want to think twice before jumping on the refinancing bandwagon.
Compare refinance mortgage rates.
1. Your Credit’s Not in Great Shape
Refinancing when you’ve got a few blemishes on your credit report isn’t impossible, but it’s not necessarily going to work in your favor either. Even though lenders have relaxed certain restrictions on borrowing over the last year, qualifying for the best rates on a loan can still be tough if your score is stuck somewhere in the middle range.
If you took out an FHA loan the first time around, you might be able to get around your less-than-spotless credit with a streamline refinance, but approval isn’t guaranteed. Interest rates are expected to rise toward the end of the year, but that still gives you some time to work on improving your score.
Getting rid of debt, limiting the number of new accounts you apply for and paying your bills on time will go a long way toward improving your number so that when you do refinance, you’ll be eligible for the lowest interest rates.
Related Article: The Costs and Benefits of Refinancing
2. You’re Not Sure You’ll Stay in Your Home Long-Term
Refinancing involves replacing your existing mortgage with a new one. The interest rate, payments and loan term may be different but the one thing that remains the same is the fact that you’ll be required to pay closing costs to finalize the deal. Closing costs can run between 2 and 5 percent of the total loan amount, but that varies and is based on the lender you choose. If you’re refinancing a $200,000 mortgage, for example, it’s possible that you’d have to cough up anywhere from $4,000 to $10,000.
Since you’re reducing your payment and interest rate, you’ll hopefully eventually recoup the money you spend on closing costs, but it’s going to take some time. If you end up selling the home and moving before you hit the break-even point, all that money that you put out up front to refinance is basically gone. It could take a few years to break even so if you don’t think you’ll stick around that long, you may be better off keeping your cash and paying your current loan as is.
Learn more about refinance closing costs.
3. A No-Closing Cost Loan Is Your Only Option
If you don’t have a few thousand dollars to spare to cover the closing costs, you can always look into a no-closing cost loan. With this type of refinance, the lender folds the costs into the loan itself so you don’t have to pay anything extra out of pocket. While that’s a plus if you’re short on cash, you may be really putting yourself at a disadvantage in the long run. Increasing your mortgage (even if it’s just by a few thousand dollars) means you’re going to pay more interest over the life of the loan.
For example, let’s say you refinance a $200,000 mortgage at 4 percent for 30 years. Altogether, you’d pay $143,000 in interest if you don’t pay anything extra. Your closing costs come to 3 percent but you roll them into the loan so you’re refinancing about $206,000 instead. That extra $6,000 would cost you another $11,000 in interest so you have to ask yourself whether the monthly savings from refinancing justify the overall added expense.
4. Compare Your Refinance Loan Options
Once you’re ready to refinance, it’s important to take the time to compare what’s available from different lenders carefully. Checking out the rates and fees each lender charges ensures that you won’t spend any more money on a refinance loan than you need to.
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Posted on October 28th, 2020
Mortgage Q&A: “When to refinance a home mortgage.”
With mortgage rates at or near record lows, you may be wondering if now is a good time to refinance. Heck, your neighbors just did and now they’re bragging about their shiny new low rate.
The popular 30-year fixed-rate mortgage slipped to 2.80% last week, per Freddie Mac, well below the 3.75% average seen a year ago, and much better than the 4-6% range seen years earlier.
Historically, mortgage interest rates have never been lower, making a mortgage refinance a veritable no-brainer for many homeowners out there.
In other words, there’s a good chance you won’t be holding off from refinancing because interest rates are too high (unless you just recently refinanced).
But even if you did, there’s a possibility it could make sense to refinance a second time.
Should I Refinance My Mortgage Now?
- Consider your current interest rate relative to today’s available rates
- Along with required closing costs and how long it will take to break even
- Think about how long you plan to keep the mortgage/property
- And any other factors like removing mortgage insurance or shortening your loan term
Well, the answer to that question depends on a number of factors that will be unique to you and only you.
First, what is the interest rate on your existing mortgage(s)? Is it higher or lower than current mortgage rates?
If it’s higher, how much higher? If it’s lower, is your current loan adjustable? Or do you want to refinance for another reason, perhaps to tap equity?
Once you’ve got those basic questions answered, let’s talk about the new loan. What will the rate and closing costs be on the new mortgage?
Have you started shopping rates yet? Do you even know if you qualify?
How long do you plan to keep this new mortgage? What about the house? Are you sticking around for a while?
Assuming you’re still here, it might be a good time to take a look at a common scenario to illustrate the potential savings of a refinance.
Let’s look at a quick home refinance example:
Loan amount: $200,000
Current mortgage rate: 4.25% 30-year fixed
Refinance rate: 2.75% 30-year fixed
Closing costs: $2,500
The monthly mortgage payment on your current mortgage (including just principal and interest) would be roughly $984, while the refinanced rate of 2.75% would carry a monthly P&I payment of about $816.
That equates to savings of roughly $168 a month if you were to refinance. Not bad. But we aren’t done yet.
Now assuming your closing costs were $2,500 to complete the refinance, you’d be looking at about 14 months of payments, give or take, before you broke even and started saving yourself some money.
Yes, you need to consider the cost of the refinance too…
So if you happened to refinance again or sold your home during that window, refinancing wouldn’t make a lot of sense.
In fact, you’d actually lose money and any time you spent refinancing your mortgage would be wasted as well.
But if you plan to stay in the home (and with the mortgage) for many years to come, the savings could be substantial. Just imagine saving $168 for 200 months or longer.
This “break-even” point is key to making your decision, at least financially speaking.
You also need to consider whether it makes sense to buy down your interest rate by paying points, which will increase the time to this break-even point.
For example, those who paid upfront points on their refinance a year ago might be kicking themselves, knowing they’ll benefit from a subsequent refinance thanks to today’s even lower rates.
So sit down and determine your future housing plans before you decide to refinance to determine if it’s the right move.
If you don’t know what your plan is for at least the next few years, you may want to hold off until you do.
[The refinance rule of thumb.]
How Long Have You Had Your Existing Mortgage?
- You also have to consider how long you’ve had your current home loan
- This can play a big role in determining whether a refinance makes sense
- Take note of how much it has been paid down since that time
- And how much of each payment is going toward interest
Here’s another consideration. If you’ve already paid down your mortgage substantially, it might not make sense to refinance, assuming you want to pay the thing off.
Even if rates are super low, as there’s a good chance you’ll pay more interest overall if you “reset the clock” and start your full loan term over again. But this isn’t always the case.
To determine if a refinance is still the right move, get your hands on an amortization calculator.
That way you can see what you’ll pay in interest if you keep your mortgage intact versus what you’ll pay in interest with the new mortgage, factoring in what you’ve already paid on the old mortgage.
You can also use my refinance calculator to plug in all the pertinent numbers, including what we discussed above, to get a quick answer.
If your calculations reveal that you’ll pay more interest over the entire term of the refinance mortgage, there’s an easy strategy to reduce both interest paid and the term of the new mortgage.
Simply make the same monthly mortgage payment you were making before the refinance, with the excess going toward principal each month.
This will shorten the loan term and could save you a lot of money. I explain this method on my mortgage payoff tricks page, which you can read about in more detail.
If you can afford it, you may also want to look into shortening the loan term by going with a 15-year fixed mortgage.
For example, if you’re already 10 years into your 30-year mortgage, reducing the term to a 15-year fixed will ensure you don’t extend the aggregate term.
And with mortgage rates so low, you may be able to retain your low monthly mortgage payment and pay the mortgage off even earlier than expected.
Also, 15-year mortgage rates are lower than those on the 30-year fixed.
Other Mortgage Refinance Considerations…
- Even if interest rates are comparable to what you already have
- It could make sense to refinance out of an ARM or an interest-only loan
- The same is true if you want to get rid of mortgage insurance
- Or if you’d like to consolidate two mortgage loans into one
If you’re currently in an adjustable-rate mortgage, or worse, an option arm, the decision to refinance into a fixed-rate loan could make a lot of sense.
Even if the monthly savings aren’t tremendous, getting out of a risky product and into a stable one could pay dividends for years to come.
Or if you have two loans, consolidating the total balance into a single loan (and ridding yourself of that pesky second mortgage) could result in some serious savings as well.
You’ll have one less mortgage to worry about and ideally a lower combined monthly payment.
The same might be true if you have mortgage insurance and want to get rid of it. Many homeowners will execute an FHA-to-conventional refinance to drop MIP and reduce monthly payments once they’ve got some equity.
Additionally, you might be able to get your hands on a no cost refinance, which would allow you to refinance without any out-of-pocket costs (the rate would be higher to compensate).
In this case, if the rate is lower than your existing rate, you start saving money immediately.
As mentioned earlier, a cash-out refinance could also contribute to your decision to refinance if you are in need of money and have the necessary equity.
Heck, with mortgage interest rates this low you could even make the argument to tap equity and invest it elsewhere for a better return.
Again, you’ll want to aim for a lower rate and cash back, but there could be a scenario where borrowing from your home is the best deal, even if you don’t save much or anything mortgage payment-wise.
This is really just the tip of the iceberg. There are countless reasons to refinance your home loan, including many seemingly unconventional ones you may have never thought of.
Whatever the reason, be sure to put in the time (and the math) to ensure it’s a good decision for you and not just the bank or a loan officer pushing you to do it!
your financial details.
If you live in a rural area, getting a mortgage through the U.S. Department of Agriculture could be a good way to save money on your home purchase. Qualifying buyers can get a USDA loan without having to put any money down. The Department of Agriculture is making these loans even more affordable for existing borrowers by lowering the cost of refinancing. If you bought your home through the USDA program, here’s what you need to know about its streamline refinance program.
Check out our refinance calculator.
As of June 2, 2016, any homeowner with a direct USDA loan or a USDA loan guarantee could be eligible to take advantage of the USDA’s Streamline Refinance Program. Since 2012, the USDA has been testing out new refinancing rules on borrowers in certain states.
All USDA loans are subject to underwriting guidelines. But homeowners who have made at least 12 consecutive, on-time payments over the past year don’t have to undergo a credit check, secure an appraisal or be subject to a debt-to-income calculation (when refinancing for a 30-year term).
According to the Department of Agriculture’s estimates, the typical homeowner should expect to save approximately $150 a month once they refinance through the streamline program. Over the course of a year, that can add up to $1,800 in savings.
Related Article: What Is a Streamline Refinance?
Should You Refinance Your Mortgage?
Just from looking at the numbers, you can see that homeowners can save money by refinancing. In the pilot program, some homeowners who refinanced were saving as much as $600 a month. That kind of reduction in your monthly mortgage payment could have a huge impact on your monthly budget.
But refinancing doesn’t make sense for everyone. If you’ve already paid down a substantial amount of interest on your home, refinancing may not affect your monthly payment that much. And keep in mind that not everyone can qualify for a refinance. You may run into issues if you’ve missed a payment in the past year, for example.
Try out our mortgage calculator.
Also, it’s important to remember that refinancing an existing loan into a new USDA loan doesn’t eliminate the private mortgage insurance premiums you’ll have to pay. USDA loans come with an upfront fee and a monthly premium, both of which are rolled into the loan. They’re added on to your monthly payment, so it’s a good idea to run the numbers to see how refinancing your loan might affect your payments.
The Bottom Line
The USDA’s new refinance guidelines are designed to benefit lower- and middle-income homebuyers with high interest rates. While these changes might offer some homeowners the chance to save money, it’s best to consider the financial implications of refinancing before pulling the trigger.
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Posted on November 4th, 2020
Mortgage rates keep on marching lower and lower, with new records broken seemingly every week.
But with all the fervor surrounding mortgage rates, some lenders are playing the “how low can we appear to go” game.
For example, mortgage lenders may be talking about their lowest rates (with multiple points required), as opposed to offering their par rates, the latter coming at no extra cost to the consumer.
So instead of being presented with a mortgage rate of say 2.75% on a 30-year fixed, you may see a rate as low as 1.99%. Or even a 15-year fixed at 1.75%!
Here’s the problem; with mortgage rates breaking record lows time and time again, 10+ times so far in 2020, many homeowners are finding the need to refinance the mortgage twice. Or even three times.
And those who chose to pay points at closing, only to refinance within months or a year, essentially left money on the table.
Or they decide not to refinance to an even lower rate, knowing they’ll lose that upfront cost that’s already been paid, which is also a tough situation.
Mortgage Rates Aren’t as Low as They Appear
- In order to advertise lower mortgage rates lower than the competition
- Lenders will often tack on discount points to their publicized rates
- Meaning you’ll have to pay a certain amount upfront to obtain the low rate in question
- Make sure you’re actually comparing apples to apple when mortgage rate shopping
Guess what? That absurdly low mortgage rate you saw advertised isn’t really as low as it seems.
Typically, when you see a rate that’s beating the pants off the national average, and all other lenders, mortgage points must be paid.
And when the rate is really, really low, it usually means multiple mortgage points must be paid.
In other words, you wind up paying a substantial amount of money, known as prepaid interest, to secure an ultra low, below-market interest rate.
Assuming your loan amount is $200,000, two points to obtain a rate of 1.99% on a 30-year fixed would set you back $4,000.
If the loan amount were $400,000, we’re talking $8,000 upfront to secure that super awesome low rate.
Tip: Watch out for lenders and mortgage brokers who quote you a low mortgage rate, but neglect to tell you that you must pay a point (or two) upfront to obtain it.
Often, this tactic is employed to snag your business, and once you’re committed, the truth comes out, which is why mortgage APR is so important.
Is Paying for an Even Lower Mortgage Rate Right Now the Smart Move?
- When mortgage rates are already really low (record lows at the moment)
- It becomes somewhat less attractive to pay points at closing
- It could be pretty expensive to get just a slightly lower rate that will save you very little
- And your money might be better served elsewhere, especially if inflation worsens
Here’s the thing. Mortgage rates are already so low that paying mortgage discount points to go even lower isn’t all that attractive.
There’s a great chance mortgage rates will surge higher in the future as inflation finally rears its ugly head. And at that point, you’ll already have an insanely low interest rate.
On top of that, you’ll be able to invest your liquid assets in other high-yielding accounts, likely something pretty darn safe with a rate of return that will beat your low mortgage rate.
So why keep going lower and lower if you’re already paying next to nothing on your home loan?
Additionally, you won’t want to spread yourself too thin, especially if you’re buying a new house.
There are a ton of costs associated with a new home purchase, so committing all your liquidity to an even lower rate could mean that you won’t have money for relocation costs, furnishings, necessary repairs, or an upgrade.
And as mentioned, mortgage rates do have the potential to move even lower than current levels, meaning it could make sense to refinance again, favoring those who didn’t pay much to anything at closing.
Or better yet, just went with a no cost refinance to avoid paying anything to the bank or lender.
As always, do the math to see what makes sense for you. If you’re super serious about paying off your mortgage early, then buying down your rate could be the right move.
It will certainly vary based on your unique financial situation, the loan amount, the cost to buy down the rate, and how long you plan to stay with the loan/home.
Certainly take the time to compare mortgage rates with and without points, but don’t just chase a low rate below an emotional threshold, like 2%.
And determine how long it’ll take to pay back any points at closing with regular monthly mortgage payments.
Personally, locking in a 30-year fixed rate below 3% seems like a tremendous bargain.
Investing the money elsewhere, such as in stocks or bonds or wherever else, could end up being a lot more rewarding than paying prepaid interest at closing.
Perhaps more importantly, you’ll have access to that money if and when necessary for more pressing matters.
Lastly, you can always pay extra each month if and when you choose to reduce your principal balance and total interest paid. So that’s always an option regardless of the rate you wind up with.
Read more: Are mortgage points worth the cost?