To some, refinancing a mortgage may sound counterintuitive. Many people are wary of the time it takes to refinance and the upfront costs.
To others, refinancing a mortgage offers an incredible financial opportunity. No matter which camp you fall into, it’s important to understand how refinancing works and how soon you can do it.
Here’s what you need to know:
How Does Refinancing a Mortgage Work?
Refinancing a mortgage involves taking out a new loan on your existing home and using this loan to pay off the old one so that you only have to make payments on the new one. This new loan comes with a new interest rate, and if you want, a new type and a new term.
Depending on your financial situation, there are tons of potential benefits that come with refinancing a mortgage. These benefits are definitely worth exploring no matter how long you’ve been in your current house.
Why Should You Refinance a Mortgage?
It doesn’t always make sense to refinance a mortgage. In some circumstances, it could end up costing you more than it saves you. However, in many circumstances, it does make a lot of sense.
Here are some situations in which you should consider refinancing your mortgage:
1. You Want a Lower Interest Rate
Refinancing your mortgage could help you get a lower interest rate. Especially now, when interest rates are near record lows, refinancing could give you a lower interest rate and save you thousands of dollars over the term of your loan.
For example, 10 years ago, in December of 2011, the average rate for a 30-year fixed-rate mortgage was 3.96%. Today, in December of 2021, average rates for a 30-year fixed-rate mortgage are closer to 3% than 4%.
And while a single percentage point may not seem like a big difference, it can quickly add up over the course of a 30-year loan. So let’s say that you currently have an interest rate of 4% on a loan of $250,000.
Your monthly payment with principal and interest would be about $1,194. But with an interest rate of 3% on a loan of the same amount, your monthly payment with principal and interest would be about $1,054.
This single percentage point can save you $140 a month and nearly $50,000 over the course of a 30-year loan term.
2. You Want to Get Rid of PMI
Refinancing your home is also a way to get rid of private mortgage insurance, or PMI. If you put less than 20% down on the purchase of your home, you are required to pay PMI until you reach that 20% equity. So let’s say that you have a PMI of 1% per year on a $250,000 loan, which would add $208 to your monthly payments.
Clearly, this is a substantial expense on top of your principal, interest, property taxes, and homeowner’s insurance — so you want to get rid of it as soon as you can. With some types of loans, PMI is automatically dropped when you reach 20% equity. With others, you have to refinance to remove it.
3. You Want To Pay Off Your Loan Faster
If you want to pay off your loan faster, refinancing is a great way to achieve this. For example, if you have a 30-year mortgage that you’ve been paying for five years, you technically have 25 years left.
However, you could refinance with a 15-year mortgage that effectively cuts ten years of mortgage payments. Depending on your rate and other factors, switching the term of your mortgage when you refinance may not result in unrealistically high monthly payments.
4. You Want To Remove Someone From the Mortgage
Refinancing allows you to remove someone from the mortgage, for example, in the event of a divorce. The spouse who is maintaining the home will re-apply for a mortgage using only their name and assets.
The spouse who is no longer maintaining the home will then have the ability to purchase another home if they so choose. That same spouse is also able to better protect their credit in the event that the other spouse fails to make payments on the mortgage and the home ends up going into foreclosure.
5. You Want a Different Type of Mortgage
There are two main types of mortgages to choose from — fixed-rate mortgages and adjustable-rate mortgages. Each mortgage type comes with its own set of pros and cons.
For example, an adjustable-rate mortgage may initially come with lower interest rates but increase down the line. Alternatively, a fixed-rate mortgage can provide you with an unchanging and favorable interest rate.
If you currently have an adjustable-rate mortgage and are dealing with higher interest rates after the initial period, it may make sense to refinance into a fixed-rate mortgage with a lower interest rate.
On the other hand, if you currently have a fixed-rate mortgage with an average interest rate and want to take advantage of the lower interest rates offered by adjustable-rate mortgages, then you may want to consider going this route.
6. You Want to Access Your Equity
Finally, you should consider refinancing your mortgage if you want to access your equity. Cash-out refinances allow you to take out up to 80% of your home’s equity so long as you have at least 20% equity built up. You can then use this cash for a variety of different expenses, often with lower interest rates compared to other types of loans.
How Soon Can You Refinance a Mortgage?
Most people assume that they have to wait to refinance their mortgage, but is that really the case? First, you should double-check if your current mortgage has a pre-payment penalty. Some lenders charge a fee if you choose to pay off your loan early.
Additionally, it might come down to your loan and your lender. If you have an FHA or VA loan, there’s a 210-day waiting period. If you have a USDA loan, there’s a six to 12-month waiting period. If you have a conventional loan, there’s no required waiting period. If you want a cash-out refinance, there’s a six-month waiting period.
Additionally, some lenders make you wait at least six months before you’re eligible to refinance with them. However, you can just as easily switch to another lender, bypass this waiting period, and refinance your conventional loan right away.
Steps to Refinance a Mortgage
If you’re sick of waiting to refinance your mortgage and are ready to get the process started, here are the steps you need to follow:
Step 1: Check Your Finances
Before you move to refinance your mortgage, it makes sense to check your finances. After all, the lender is going to. If you recently closed on your home, the odds are that not much about your financial situation has changed. Note that if you have taken out a new loan to buy a car, finance home improvement projects, or purchase furniture, it could affect your ability to refinance.
Specifically, you need to check your credit score and your debt-to-income ratio (DTI). In order to refinance a conventional loan, you need a credit score of at least 620.
However, if you want to receive the best interest rate, then you likely need a credit score over 740. You will also need a DTI below 50%, so take steps to pay off any loans or debts before applying to refinance.
Step 2: Evaluate Your Current Lender
When you refinance your mortgage, you can either choose to stay with your current lender or go with a different lender. If you haven’t enjoyed your experience with your lender thus far, then you should definitely consider going with a new lender when you refinance. If you like your current lender, you may want to consider staying with them based on the rates and terms they offer.
Step 3: Look Into Other Lenders
Even if you love your current lender, it’s always a good idea to look into other lenders to make sure that you’re getting the best possible rates. As a general rule of thumb, you should try to get quotes from three to five different lenders. It’s also a good idea to approach a diverse group of lenders ranging from big banks to private lenders to see what the different rates are.
Step 4: Apply for a New Mortgage
The process of applying to refinance your home is similar to the process you experienced when you first bought your home. For starters, the lender will need to check your credit history and credit score.
From there, they will need to verify your income. Be prepared to provide them with documentation detailing your income and overall financial situation. Specifically, they may request to see your recent pay stubs, W-2s, bank statements, and income tax returns.
Step 5: Decide on a Lender
Based on the information in your application, each lender will pre-approve you with a specific interest rate. You should choose the lender that offers you the lowest interest rate — even if it means switching lenders. Saving thousands of dollars through the term of the loan is well worth making the switch.
Step 6: Underwriting and Appraisal
Once you’ve decided on a lender, they will begin the underwriting process wherein they verify the information from your application. You will also have to have a home appraisal done to ensure that the home is actually worth the value of the new loan.
These processes were both done when you initially received your mortgage, so you should have a good idea of what to expect.
Step 7: Closing
After the appraisal and underwriting processes are complete, it’s time to close on your new mortgage. Again, this process is largely similar to when you first closed on your house. You will sign all the mortgage documents and pay your closing costs at this time.
Wrap Up on Mortgage Refinancing
As you can see, there’s really no need to wait to refinance your mortgage. If you have a conventional loan, you can refinance your mortgage the day after you move in if you want. At the same time, it’s important to calculate the costs to make sure that refinancing is actually worthwhile since it’s not free.
If you’re interested in refinancing, you need to find a lender that offers favorable rates to make the time and costs worthwhile. Vaster is a premier bridge lender that works with clients to provide the best rates and terms. We have extensive experience in the mortgage and real estate industries and can help you secure a loan that makes sense for your finances and goals. Reach out to our lending experts today to get started on your application.