Mortgage rates have been dropping steadily over the last few years. In fact, average rates for 30-year fixed-rate mortgages have dropped by around one percentage point since March 2018. While refinancing your mortgage may seem enticing, it’s important to consider every angle before making a decision.
If you’re asking yourself, “is it a good time to refinance?,” we’re here to help. In this blog, we’ll review the benefits of refinancing your mortgage, questions to ask yourself, the refinancing process, and the benefits of refinancing with a credit union.
The Benefits of Refinancing
There are a variety of benefits to refinancing your mortgage if the situation is right. They include:
- Pay less each month. Since your loan amount is smaller and your interest rate is lower, your monthly payment will be lower.
- Spend less on interest. Since your interest rate is lower, you’ll spend less on interest over the life of your loan.
- Build more equity. Since your loan amount is smaller (and you’ve already been paying on an existing loan), you’ll have more equity after refinancing. A lower interest rate also means less money is going toward interest and more money is going toward your principal.
- Potentially eliminate PMI. Since you’ve likely built equity since you got your first mortgage, you may have 20% (or close to 20%) when you get your refinanced mortgage.
Questions to Ask Yourself Before Refinancing
Making the decision to refinance your mortgage shouldn’t be taken lightly, since it has long-term ramifications. Ask yourself the questions below before you sign on the dotted line. They’ll help you understand the pros and cons of refinancing depending on your specific situation.
Are current interest rates lower than my existing interest rate?
If current interest rates are lower than your existing interest rate, you should definitely consider refinancing. If they’re higher than your existing rate, you shouldn’t refinance.
Is my current mortgage loan unconventional?
If you have an unconventional mortgage loan – like a jumbo loan or a balloon mortgage – refinancing may be a good idea. Unconventional loans often have an initial period of lower monthly payments that is followed by rising monthly payments after the introductory period. If you currently have a conventional loan, refinancing may still be a good idea, but you’ll need to weigh the decision carefully.
Does my current loan have a prepayment penalty?
If it does, you probably don’t want to refinance. Some loans allow for refinance prepayments (known as a soft prepayment penalty), while others don’t (known as a hard prepayment penalty). If your mortgage doesn’t have a prepayment penalty, the lump sum you receive from refinancing could be used to pay off your existing loan.
Do I plan to stay in my home for the next 2-5 years?
If the answer is yes, you might want to consider refinancing your mortgage. If the answer is no, you should stick with your current mortgage. It can take up to two years to see the true savings of refinancing. However, the amount of time it takes to break even will depend on the difference between your old and new interest rates.
At Diamond, we can sometimes work a cross-sell into a first lien home equity loan for homeowners who may move in the next few years. This loan is very similar to a mortgage, but it has lower closing costs, a somewhat higher interest rate, and no ability to escrow. Depending on your situation, though, there could still be some kind of savings.
Have I built at least 20% equity in my home?
If you have, you may want to refinance to use the extra equity for home improvements or debt consolidation. Lenders are more willing to refinance mortgages where the homeowner has a lot of equity.
Should I wait to refinance since there’s always a chance rates could drop even lower?
Are you asking yourself, “when can I refinance my home?” If you’re struggling to decide when you should refinance, consult with a financial professional. In many cases, homeowners wait too long, and then rates go back up before they can refinance.
Should I refinance my FHA loan into a conventional mortgage?
Yes! Federal Housing Administration (FHA) loans carry mortgage insurance for the life of the loan, even after you’ve built up 20% equity. When you refinance to a conventional loan, your mortgage insurance will cancel once you reach 20% equity. Plus, you’ll earn a better interest rate.
The value of my home has gone up over the last few years. Should I refinance?
In this scenario, it really depends on your specific situation. Refinancing may allow you to tap into some of your home’s equity, while also securing a lower interest rate. Plus, you may be able to remove your PMI more quickly if your loan has mortgage insurance that cancels.
The rate itself might not be low enough to justify refinancing, but the savings from removing or lowering your mortgage insurance and accelerating your release date may make refinancing a no-brainer. This is because mortgage insurance lowers once you hit certain tiers, like 85%, 90%, and 95% loan-to-value.
My credit score has improved since I got my first mortgage. Is that a good reason to refinance?
Definitely. You should especially consider refinancing if your credit score was “fair” when you got your first mortgage. If your score has improved significantly, there’s a good chance you’ll qualify for a lower interest rate and a lower monthly PMI payment. This is one of the biggest benefits of refinancing.
How to Refinance Your Mortgage
When you refinance, you’ll go through the same process as you did when you got your first mortgage. That means there’s a cost to refinance a mortgage. You’ll need to:
- Complete a mortgage application (and pay the associated fee)
- Pay for a credit check
- Pay for a home appraisal
- Pay for closing costs
Once you’re approved for your new mortgage, you’ll use the money you receive to pay off the balance of your existing mortgage. Moving forward, you’ll make monthly payments on your new loan.
Why You Should Refinance with a Credit Union
There are many benefits of refinancing your mortgage with a credit union. Credit unions:
- Are committed to providing members with excellent customer service.
- Are local, which means they provide personalized service for members.
- Can charge lower PMI than banks.
- May hold onto your mortgage, rather than selling it on the secondary market.
- May offer lower interest rates since they’re exempt from paying federal income tax.
- Employ teams of mortgage experts who provide members with first-rate financial counseling.