In early September, more than 19 million homeowners were considered “high-quality” candidates to trade in their current mortgages for new loans at lower rates, according to Black Knight, a mortgage market analytics firm. Representing roughly 43% of all mortgage holders, it was the largest population of potential re-financers the market has ever seen. Yet, despite potential savings of up to hundreds of dollars a month, many of these homeowners didn’t, or won’t, refinance.
The reasons vary; some aren’t paying attention, others are afraid they won’t pass another round of underwriting, and some simply don’t want the hassle, even though gaining approval for a refinance is often simpler and faster than when they originally applied for financing.
Even if replacing your loan is a bit of work, though, it could be well worth the effort. LendingTree, the online lending marketplace, says someone who took out a $300,000 mortgage five years ago at 3.91% could save about $300 a month by refinancing now at 2.87%.
The Benefits of Refinancing Your Mortgage
Besides trimming your house payment, refinancing offers other benefits, too. You can refinance to obtain the funds for a remodeling project, like adding a sunroom or a home office. It could enable you to drop costly mortgage insurance (if your new loan to value ratio is under 80%), or switch from an adjustable-rate mortgage (in which the payments change from time-to-time) to fixed-rate loans with stable payments over the loan’s life.
You may even be able to lower the length of your loan from 30 years to, say, 20, 15 or even 10 years. Lenders can write their mortgages for any number of years you choose; all you have to do is ask. Remember, though, that the shorter the payout period, the higher the payment. Consequently, going shorter may wipe out your monthly savings. But still, it could save big bucks in the long run.
LendingTree reports that on average, 86% of all refinance applications are approved. “The odds of approval are strong no matter what part of the country you live in,” says the firm’s chief economist, Tendayi Kapeidze.
How do you know if you are a candidate for refinancing? The general rule of thumb is that if you can shave at least 0.75 percentage points off your current rate, you should at least run the numbers. And you don’t have to do the math yourself; Homes.com has an online calculator that will do it for you.
Get started on your refinancing journey with Homes.com’s smart calculator.
The First Steps to Refinancing
Once you see how much money you could save both monthly and over the life of your new loan, it’s time to get started. Your first step is to make sure your credit records are up-to-date and free of errors. On-time payment history and wise credit use determines much of your credit score, the Holy Grail used for almost any kind of significant financial decision, including mortgages.
Black Knight defines a high-quality refinance candidate as a borrower with a credit score of at least 720. But, yours may not need to be that lofty to qualify. LendingTree says a 620 score will do and the Federal Housing Administration dips as low as 580.
The cost to refinance, including lender fees, escrow costs and third-party fees for things like appraisals, can run anywhere from 2% to 6% of the new loan amount. But remember, you can save those upfront costs by rolling them into the loan amount. Doing so will reduce your savings, but you won’t have any out-of-pocket costs.
Having equity in your property can also affect your refinance. Your equity includes whatever price appreciation your home has experienced since your initial financing, the down payment you made when you purchased, and the value of whatever improvements you’ve made. Twenty percent equity is a common refinance benchmark, but depending on the loan, the lender and your credit score, you may be able to refinance with less.
Of course, the longer you’ve owned your house, the more equity you’re likely to have. Black Knight uses a five-year benchmark for “high quality” candidates, but some lenders may offer refinancing as soon as a year in to your mortgage.
Once your finances are in order, you should search for a lender. Generally, it’s a good idea to begin with your current lender. You’re already on the company’s books and it may not want to lose your business. But, before making your decision, look around to see what others are offering. If you get a better offer from a different lender, take it to your current lender and see if they’ll match it.
When you’ve chosen your lender, lock in your mortgage rate right away. Current interest rates are at historical lows; and, while the experts say they’ll remain low for the foreseeable future, there’s no guarantee that an economic or global calamity won’t quickly drive them higher.
Once you do that, and your lender gives you the green light, you should be able to close on your new mortgage within a few days.
Ready to Start the Refinance Process? Homes.com Can Help!
If you’re interested in refinancing, Homes.com offers a variety of tools for homeowners to get started on the process. Homes.com’s blog offers a variety of articles and our website provides tools like a refinancing calculator and a member match program that will facilitate the connection of lenders to you, making the process of getting started easier than ever.