Lower Your Monthly Payment
Most borrowers refinance to lower the monthly payment and the cost of the home. You will want to consider a refinance when the mortgage rate, the rate you are paying the lender on borrowed money, drops by a half or more percentage. For example, if you are paying a mortgage rate of 4 percent, and lenders are now offering rates of 3.5 percent, you should call to see if you should refinance. The lender can quickly figure what your new monthly payment would be.
You can also visit our Mortgage Calculators to learn how different rates will change your payment.
Know Your Mortgage Rate
Most people know what the monthly mortgage payment is on the house. However, many folks forget what rate they are paying on the borrowed money. It is important to know as it may save you a lot of money to refinance. Most mortgage servicers have a website that you can access to learn about your mortgage, change your payment, check your loan terms such as rate, check your escrow balance, and access tax documents. If you are getting monthly mortgage statements by mail, you can check the statement for more information or call the customer support number.
Rate Lock
Mortgage rates can change daily. When rates drop you can check daily and when you are ready, ask your loan officer to “lock the rate.” It means you have secured that particular rate. Should rates go higher, you are protected as long as your mortgage application doesn’t change. Should rates go lower, however, you cannot re-lock without a fee. Changes to your mortgage application that could void your lock include income changes, credit score, or home value. Make sure your rate is frozen for the length of time it may take to close the loan.
How Important is the Rate?
While rates are a significant part of your monthly mortgage payment, there are other factors affecting your payment. Mortgage insurance has an impact on the monthly payment. If you already have mortgage insurance, the rate you pay should not change with a refinance unless you switch products. Closing costs may affect your monthly payment, too.
Your monthly payment includes principal, interest, taxes, and insurance (PITI). The two biggest parts of PITI are the principal and interest. Just taking these two parts of a monthly payment, for example, you can see why the rate is important.
Mortgage Rate
- 4.5 Percent
- 5 Percent
- 5.5 Percent
Monthly Payment
For 15-year mortgage
- $1,912
- $1,977
- $2,042
Monthly Payment
For 30-year mortgage
- $1,267
- $1,342
- $1,419
Make Application
Applying for a cash-out refinance involves the same steps as applying for your initial mortgage EXCEPT the need to make a down payment. The lender will review
- Your income, including your work history.
- Your credit scores.
- Your monthly debt-to-income ratio (including credit cards, car loans, student loans, child support), and,
- Your total house payment which includes principal, interest, taxes, and insurance. If required, your total house payment would also include monthly mortgage insurance (PMI).
Mortgage Insurance
Whether or not you pay mortgage insurance depends on several factors, including the type of loan being refinanced, the loan-to-value (LTV) ratio, and whether you currently have mortgage insurance.
Conventional Loan
If you’re refinancing a conventional loan, whether mortgage insurance is required depends on your LTV. Generally, if your LTV ratio is 80 percent or lower, you typically won’t need mortgage insurance. However, if your LTV ratio is higher than 80 percent, you may need to pay private mortgage insurance (PMI) unless you qualify for a refinance program that doesn’t require it.
FHA Loan
If you’re refinancing an FHA loan, you’ll need to pay mortgage insurance premiums (MIP) regardless of your LTV ratio. FHA loans require an upfront MIP payment at closing, as well as ongoing monthly MIP payments for the life of the loan.
VA Loan
VA loans do not require mortgage insurance; however, there may be a funding fee since the refinance is basically getting a new loan.
USDA Loan
Refinancing a USDA loan typically requires payment of a guarantee fee but does not require mortgage insurance.
The Three NOs!!!
Closing Costs
You want to refinance when you are in the home long enough for the savings to cover your closing costs. If you have to pay $2,000 in closing costs to refinance for monthly savings of $100, then the first 20 months of savings go to the lender. You can roll your closing costs into the refinance amount, but you will be paying interest on the additional loan amount.
Closing costs to refinance are similar to the costs to close a purchase mortgage. You are taking out a new mortgage to replace an old one, so expect similar costs.