Today’s interest rate for a fixed, 30-year mortgage is 3.64%. The prices are extremely low compared to the long-term average of 8.00% and the last-year average of 4.51%. That means it can be a good time to refinance your mortgage.
In this article, we’ll discuss when it is best to refinance your house and also what are the essential steps to refinance a property.
When Is It Best to Refinance Your Mortgage?
Consider a fixed, 30-year mortgage ($200,000) issued in 2011 at 5.3%. In 2020, you refinance $165,000 at 3.64%. You could save $357 per month even after paying $6,000 in refinancing costs. Your lifetime savings are $8,030. However, if you refinance with a loan valued at $180k, you’ll lose money in the long-run.
|Loan Value||Interest Rate||Refinance Savings|
The best reason to refinance a house is to get better lending rates and save money in the long run. It will help if you have equity in the home so that you can make a big down payment.
6 Steps to Refinance a Property
Shop for the Best Lender
You don’t have to go with your current lender. Industry changes with time. If you are refinancing after a decade, then it’s time to go into the market. Search for the best terms. You can find a better lender with a better mortgage product.
Calculate the APR
Refinancing is like getting a new mortgage. A new loan comes with costs such as loan origination fees, credit report charges, title insurance fees, appraisal fees, application processing charges, and closing costs, to name a few.
Don’t settle for the lowest interest rate. Check the Annual Percentage Rate (APR) to see how much a loan product will cost each year.
Consider the Amortization Schedule
Getting a new mortgage will reset the amortization schedule. On your new loan, you’ll first pay the interest rate and then the principal. Considering this situation, we need significant savings on our investment; otherwise, it’s not worth the effort. You can check the savings through a mortgage refinance calculator.
Pay Attention to Your Credit Score
Mortgage rates are historically low. However, that doesn’t mean you’ll get those rates. You need a down payment, an excellent credit score, and a stable income to qualify for the best interest rates. Consistent mortgage payments improve your credit score. That means, if you have significant equity in the house, you can qualify for better mortgage rates.
While getting the loan, don’t sign up for new credit cards or any other loan. That can immediately reduce your credit score, which can be a red flag for the bank.
Read the Fine Print
Carefully analyze the lending fees. Let’s say you have to pay $6,000 in refinancing costs, and you are saving $300 each month. That means you’ll have to stay in the house for 20 months before you could see any savings.
Sign the Mortgage Contract
It’s the last step of the process. Reset your mortgage to get better interest rates and affordable borrowing terms.
Refinancing your mortgage can seem challenging even though it is your second time getting a loan. If you’re needing to refinance due to financial troubles, it might be easier to simply sell the house and get all the cash at once without a bank.