If you have a mortgage, you’ve probably heard of or thought about refinancing it. Maybe you’re not happy with your current mortgage, or you’ve noticed a serious drop in current rates and are wondering if you can get an even better deal.
Knowing when to refinance, how to find low refinance rates, and what mortgages will actually save you money can be difficult. Here’s some advice to get you on your way to potential savings.
To know what APR (Annual Percentage Rate) and mortgage terms will save you money, you should know the details of your current mortgage. You’ll need to know your APR, the total amount your mortgage was for originally, how much you still owe, and your monthly payment.
In addition to knowing the financial details of your mortgage, you should check and see if there are any early repayment fees. When you refinance your mortgage, you pay off your old mortgage with a new one. This means you are paying off your current mortgage early, which can come with a penalty under the terms of some mortgages. These are somewhat rare, but you don’t want to be surprised by penalty fees when you pay off your old mortgage.
In general, it’s a good idea to keep an eye on the general state of the market.
Some services offer automatic notifications that send you an email or text when rates drop. Other websites might offer a periodic update on the best mortgage rates. This is a great passive way to watch out for dropping rates.
Even when rates are dropping, if your credit score has gone down significantly since you took out your mortgage, you might not qualify for the lower rates you are eyeing. In the most competitive times, premium mortgage rates can be reserved for people with excellent credit.
Be aware of your credit and how it has changed over time to avoid any surprises. And if you want to be proactive, work on raising your credit score to make sure the lowest refinance rates are available to you when you need them.
There are multiple types of mortgages when you are refinancing.
Cash-out refinancing is when you refinance your home with a new mortgage that has a balance higher than what you owe on the home. It’s a way to access the equity you hold in your home in the form of cash.
Cash-out refinancing is a great option if you need a loan for a particular project. Usually, mortgages have lower interest rates than other types of personal loans, so they can help you borrow money for less.
Rate and term refinancing is a fancy way to say you are refinancing to get a better rate or a different length mortgage. When interest rates on the market drop, rate-and-term mortgage refinancing lets you access that APR.
As a note, the outcome of rate-and-term refinancing can be different depending on your needs. If you can afford to pay more on your mortgage each month now as compared to when you originally took out the mortgage, you might want to refinance for a shorter term.
Many people will refinance out of a 30-year mortgage and move into a 15-year term. While you’ll pay more each month, because the loan length is shorter, you will pay less in interest overall. Shorter-term mortgages can often come with a lower APR as well.
If, on the other hand, your financial situation has changed and you can no longer afford your monthly payments, you can also refinance to lower your monthly payments. If you can get a lower interest rate, this might not significantly extend the life of your mortgage. Chances are, though, that you’ll end up with a longer loan term. That means you’ll pay more in interest in this situation. However, if this frees up the money you need each month, it might be worth it.
Cash-in refinancing is the opposite of cash-out refinancing. If you have extra money to put towards your mortgage, you can go for a cash-in refinancing. This will decrease the amount you take out as a loan, which can get you a lower rate, a shorter term, and help you pay less in interest overall.
Once you’ve decided what you want out of refinancing and rates have dropped, it’s time to start shopping.
The best rule of thumb for any loan is to look for APR at multiple financial institutions. You can check out your local bank, credit union, and online for mortgage options. As you shop, keep a spreadsheet of your options. Once you’ve found a few that look good, use a calculator to compare the specifics of each mortgage (see below for our financial planning calculators!).
Once you’ve found 2-3 mortgages that will save you the most money, you can apply for pre-approval. This is a process that tells you whether you will be approved for a particular mortgage. Once you have that, be sure to weigh the costs and fees associated with each mortgage.
If you’re looking for more advice on how to shop for home loans and refinance, check out the links below!