Mortgage rates hit all-time lows in the last two years, leading to a surge in the number of homeowners refinancing their homes. Perhaps you have considered refinancing your home but are not clear on how it works or what refinancers might stand to gain. If so, keep reading to learn what home mortgage refinance is and who should try it.
Home Mortgage Refinance 101
Put simply, home mortgage refinancing is when homeowners who already have a mortgage apply for a new mortgage. With the new mortgage, they pay off their old mortgage. This enables them to move forward still carrying only one mortgage but under entirely new terms.
What Refinancing Is Not
It is not uncommon for homeowners to confuse refinancing with taking out a second mortgage or a line of home-equity credit on their properties. Such a mistake is understandable, but knowing the differences is key.
Second mortgages and home-equity lines of credit are loans that homeowners take out using their homes as collateral. Almost by definition, these loans are something that homeowners take out in addition to a mortgage. Although they can be ideal for accessing cash when homeowners need it, they add substantially to a household’s overall debt burden.
Conversely, when homeowners refinance, they swap one mortgage for another. No additional debt is accrued and, in fact, the household’s total debt burden often goes down.
With that said, “cash-out” refinances are an option. Selecting a cash-out refinance may give homeowners the best of both worlds in that they secure better mortgage terms and gain access to cash based on the value of their homes. Any homeowner interested in this option should evaluate contract terms carefully to ensure that they do not unnecessarily add to their debt and reduce the overall benefits of refinancing.
Advantages and Disadvantages
Among the many benefits of refinancing are that it can allow homeowners to:
- Secure new and better loan terms including lower interest rates
- Lower their monthly payments
- Change the length of their loan
- Switch from one type of loan to another
- Eliminate private mortgage insurance (PMI) premiums
Take, for example, homeowners who took out a mortgage years ago at a rate of around six percent. Choosing to refinance at more recent rates which have remained steady at around three percent could cut their monthly payments and the total interest they will pay by half over the course of their loan.
Moreover, refinancing could allow them to switch from more volatile types of mortgages, such as an adjustable-rate or balloon mortgage, to a fixed-rate mortgage. That would lock in the better rate and guarantee their long-term savings.
Applicants will find almost no disadvantages to refinancing. Applying can involve a small amount of paperwork-related hassle and applicants may need to budget for homes’ closing costs as part of the process. Working with a home loan provider that charges minimal closing costs or waives these costs altogether, however, can erase even that minor inconvenience.
It is also worth noting that refinancing involves closing out your existing loan and taking out a new one. This can have a modest effect on a homeowner’s credit score since that alters their credit history.
Most homeowners will not find this a deterrent. Anyone planning other large purchases or transactions, however, may want to time their refinancing so that a dip in their credit score does not impact their other plans.
Generally, refinancing is most popular and common when mortgage rates notably drop. This is in part due to the fact that it is easy for homeowners to recognize the potential savings when interest rates fall well below what mortgage holders are currently paying.
Difficulties with an existing mortgage can also drive decisions to refinance. Mortgage holders alarmed by upcoming changes to their payments in a balloon mortgage are a good example. Such households might elect to refinance to keep payments in a range they can afford.
Alternatively, homeowners in excellent financial shape might refinance in order to pay off their mortgages sooner.
How Much Does Refinancing Your Home Cost?
Many homeowners are surprised to learn that the process of refinancing differs little from applying for a mortgage when buying a house in the first place. Applications involve most of the same closing costs, such as:
- Appraisal and application fees
- Attorney fees
- Title search and title insurance costs
- Recording fees
- Origination fees
- Underwriting costs
Closing costs can vary from lender to lender and homeowners do well to shop around for the best terms.
Banks and Interest Rates
Beyond closing costs, the primary factor that determines a homeowner’s total refinancing cost is the terms of the loan they choose. Both the lender and the interest rate the lender is offering matter.
During late 2020 and early 2021, the government-sponsored Federal Home Loan Mortgage Corporation Freddie Mac offered average interest rates of 3.11 percent on 30-year mortgages and 2.61 percent on 15-year mortgages.
Other lenders offering similarly competitive rates include:
- New American at 3.08 percent
- Rocket Mortgage at 3.66 percent
- AimLoan at 2.75 percent
- AmeriSave at 2.90 percent
- Wyndham Capital at 3.12 percent
Importantly, the exact rates available to a given mortgage seeker can vary. Factors that influence rates include:
- Credit scores
- Geographic location
- Overall loan terms
Additionally, rates and terms change over time. Usually, they rise and fall in response to Federal Reserve rates. Thus homeowners can often predict whether terms will become better or worse in the near future by watching the Federal Reserve and experts’ projections about its upcoming moves.
Current Mortgage Rates
Prompted by the nationwide financial stresses of the Coronavirus pandemic, the Federal Reserve slashed interest rates repeatedly over the course of more than a year. Record-low rates resulted.
These rates are still in effect and experts project that they will remain steady for a while longer. While this offers homeowners some leeway, these rock-bottom rates are not sustainable long-term.
Therefore, homeowners interested in refinancing should investigate their refinance options sooner rather than later. Waiting may cause them to miss out on the best possible terms.
Understanding home mortgage refinance options can help homeowners make the best choices about their homes, properties, and finances. Learn more about real estate and finance by browsing the other great articles on our blog today.