Should I Refinance My Mortgage?
The coronavirus crisis caused mortgage rates to plunge into record-low territory in March 2020, leading many homeowners to ask “Should I refinance my mortgage?” On the surface, the answer might seem obvious, but the drop has been so sudden that the standard rules of thumb for refinancing a home may not apply.
- Should I refinance my mortgage?
- When should I refinance my home?
- How much does it cost to refinance?
- What to do if you can’t refinance but need payment relief
Should I refinance my mortgage?
Refinancing a home makes sense if you can replace your current mortgage with a new loan that provides a financial benefit. Interest rates dropped to historic lows in March 2020, bottoming out at 3.29% before bouncing back up as lenders struggled to keep up with demand and coronavirus uncertainty rocked the financial world.
There are evolving factors to consider as the economic fallout affects each facet of American life. You should consider refinancing if:
You have job stability
If your employment and income are steady, a refinance loan could free up room in your budget to hedge against future reductions in overtime or bonus pay. If you’ve already applied for a mortgage refinance, let your loan officer know if anything changes before you close. Lenders typically reverify your income before closing, and any changes could cause delays or even result in a loan denial.
You have paid your mortgage on time
Mortgage late payments may knock you out of the running to refinance your home loan. If you’ve fallen behind, contact your mortgage loan servicer immediately and discuss your situation.
You have paid other debts on time
Recent late payments on credit cards and installment loans are red flags to lenders that your finances may be shaky. They also have a big impact on mortgage interest rates you may receive. A low credit score may push your rate up to the point that a refinance doesn’t make sense.
You haven’t racked up extra credit card debt
Try to keep your credit card balances below 30% of the limit to avoid a dip in your credit score — even better, try to pay the balance off each month. In addition, lenders often check your credit before closing. A big jump in balances could spell trouble for your refinance approval.
When should I refinance my home?
Timing is everything if you’re refinancing a home, and that’s especially true when financial markets are in turmoil. You should consider a refinance mortgage when you can:
- Reduce your monthly payment and recoup costs quickly. Saving on your monthly mortgage payment is most cost-effective if you can recover closing costs quickly. Consider a no-closing-cost refinance to avoid draining your savings account to pay for refinance closing costs.
- Take advantage of streamline refinance programs. If your income has become unpredictable and you currently have a government-backed loan, no-income qualifying options may be available.
- FHA streamlines*. If you can prove on-time payments on your current FHA mortgage, you may be eligible for an FHA streamline. You won’t need income documents and can skip the hassle of a home appraisal.
- VA IRRRL**. A VA interest rate reduction refinance loan (IRRRL) allows active-duty and veteran service members with a current VA loan to refinance with no income verification or appraisal.
- Get rid of or reduce private mortgage insurance. You may be able lower or even eliminate private mortgage insurance (PMI) altogether by refinancing your loan. If your down payment was less than 20% when you bought your home, you’re likely paying private mortgage insurance (PMI).
- Refinance from an FHA loan to a conventional loan. You’re stuck paying FHA mortgage insurance premiums (MIPs) for the life of your loan if you made a 3.5% down payment with FHA financing when you bought your home. Refinancing from an FHA loan to a conventional mortgage could save you big bucks on your monthly mortgage insurance.
- Pay off your loan faster. The shorter term of a 15-year, fixed-rate mortgage may be a faster path to a mortgage-free home, as long as you have room in your budget for the higher payment.
- Refinance from an ARM to a fixed rate. Check your adjustable-rate mortgage terms before you go down this road. With benchmark indexes at the lowest levels in history, your rate might drop when your adjustment period kicks in. Take advantage of the lower payment by applying the savings to your principal or padding your emergency savings account.
- Tap equity to pay off bills or boost your emergency savings. A cash-out refinance may help clear out credit card balances or stockpile savings by replacing your current loan with a larger loan. Most lenders will cap you at 80%, which leaves you with equity you can pocket if you have to sell your home quickly.
*The Federal Housing Administration insures loans made by FHA-approved lenders
**The U.S. Department of Veterans Affairs guarantees loans made by VA-approved lenders
How much does it cost to refinance?
You’ll spend 2% to 6% for closing costs on a typical refinance mortgage, depending on your loan amount. The table below provides an itemized breakdown of common refinance closing costs.
|Mortgage application fee||$235|
|Home appraisal fee||$480|
|Loan origination fee||1% of loan amount|
|Attorney or escrow closing fee||$750|
|Title search and lender’s title insurance||$733|
|Local recording fee||$138|
Source: ValuePenguin and Consumer Financial Protection Bureau
- Mortgage application fee: Some lenders charge this to process your mortgage application. The fee varies and may be charged upfront or applied to the origination fee when your loan is ready to be closed.
- Home appraisal fee: This is typically required for a professional home appraiser to estimate your home’s market value. In some cases, you may not need an appraisal.
- Loan origination fee: Lenders charge this to cover the costs of originating, approving and closing your loan.
- Attorney or escrow closing fee: Also known as a settlement fee, this is paid to a professional to assist with the closing process and supervise the proper signing of all documents.
- Title search and lender’s title insurance: Mortgage lenders require this to protect them from any ownership issues with a home’s title for the life of your loan. Because you’re taking out a new loan, a new policy must be issued when you refinance.
- Local recording fee: This is charged on a refinance loan to record information about the new mortgage in public records.
- Reconveyance fee: Your current lender may charge this to release their interest in your home once the loan balance is paid off.
- Credit report fee: This is charged when a credit report is pulled by mortgage lenders to review your credit history.
- Flood certification fee: This is routinely charged to verify if the property is in an area prone to flooding.
Mortgage tip about your closing cost breakeven
Calculating the breakeven on a refinance is a good way to determine if a refinance is worthwhile. For example, if you can save $100 a month with a refinance that had $2,000 in closing costs, you’ll recoup your costs in 20 months.
If you plan to keep your home for at least that long, the refinance makes financial sense. You might even consider paying mortgage points for a lower rate if you’re living in your forever home. The long-term interest savings could pay off despite the longer breakeven timeline.
What to do if you can’t refinance but need payment relief
A refinance loan may not be possible if your credit scores have already taken a hit from late payments or you’re behind on your mortgage. Taking action quickly can help delay or stop a potential foreclosure.
- Contact your servicer. Your mortgage payment statement should have contact information. Call and talk to a representative, and make sure to ask for a written follow-up.
- Prepare documentation of your hardship. Lenders will typically send you a form to complete that would outline your monthly expenses and income. Send the requested information and follow up on the status frequently.
- Request a forbearance. In certain situations, lenders may allow you to stop making payments for a set period of time if you request a mortgage forbearance. Make sure you understand what happens to the interest that accrues and if your payment will be affected after the forbearance period ends.
- Contact a HUD counselor. The Department of Housing and Urban Development (HUD) provides a list of certified HUD counselors who can help you navigate your options for free. The HUD website features a list of foreclosure avoidance counselors.
- Don’t pay fees for foreclosure prevention help. The first sign you’re dealing with a mortgage relief scam is being pressured to pay upfront for help. Foreclosure prevention services are offered free by certified HUD counselors.