Important Questions to Consider Before Refinancing

Refinancing your mortgage can have many benefits. If interest rates have dropped, it can help you reduce your monthly mortgage payment.

It can also allow you to pay off your mortgage sooner. However, even though there are a lot of benefits of refinancing, it’s a big task, and it’s important to make sure it’s the right move for your financial situation. You’ll also likely have many refinancing questions along the way.

Keep reading as we dig into some of the most popular questions to ask when refinancing your mortgage.

What Benefit Will I Get Out of This Refinance?

The biggest reason why most people refinance their mortgages is to save money. But that’s not the only reason. Here are some of the biggest reasons why people choose to refinance:

• Lower their monthly mortgage payment
• Receive a lower interest rate
• Withdraw equity for debt consolidation, home improvement projects, etc.
• Speed up the mortgage repayment process
• Eliminate mortgage insurance
• Change their loan terms (move from a 30-year to a 15-year mortgage)

When Should I Refinance My Loan?

Many people wonder when the best time to refinance a mortgage is. The answer depends on several factors.

Have interest rates recently dropped? If so, you might be able to refinance today and lower your monthly mortgage payment. However, if you believe they could continue to fall, you might want to wait a little longer.

Another instance when it might make sense to refinance sooner rather than later is if you’re currently in an adjustable-rate mortgage and the fixed-rate period is about to end. Refinancing into a fixed-rate mortgage can give borrowers a more predictable monthly mortgage payment. 

Because property values have increased significantly, many homeowners have more equity in their homes today than they did several years ago. If you’re currently paying for mortgage insurance but now have more than 20% equity in your home, refinancing today can help you eliminate your mortgage insurance payments.

What Are My Options For Refinancing?

Before you refinance, it’s important to understand what type of refinance is best for your situation. While many different types of refinances are available, here are a few of the most popular.

• Rate and Term Refinance: This is probably the most popular type of mortgage refinancing. With a rate and term refinance, you’ll change either the interest rate, the term on the loan, or both. For example, a rate and term refinance would be used if you want to take advantage of lower interest rates. It can also be used if you wish to switch from a 30-year loan to a 15-year loan.
• Cash-out Refinance: If you want to access some of the equity in your home, you could use a cash-out refinance. The new loan amount would be for more than your current principal balance, and the difference would be given to you in cash. This could be used to pay off high-interest debt, complete a home improvement project, or for another use.
• Streamline Refinance: If you have an FHA, VA, or USDA loan, you can choose to go through a streamline refinance. This can help you avoid some of the necessary paperwork and, in some cases, bypass needing an appraisal. Unfortunately, Streamline refinancing is not available for conventional loans.

What Qualifies Me For a Refinance?

If you’re thinking about refinancing, the process will be very similar to when you took out your original mortgage. You’ll need to go through the underwriting process to ensure you’ll be a good borrower. Here are a few qualifications you’ll need to meet.

• Credit Score: Lenders will require you to have a certain credit score when applying. However, the exact score will depend on the product you’re using. For conventional loans, a credit score of at least 620 is required. To get the best rates possible, your score must be closer to 760. If you’re going to be using an FHA loan, you can have a credit score as low as 500 as long as you’re using a 10% down payment. If you’re only using a 3.5% down payment, your credit score must be 580 or above.
• Equity: If you’re doing a rate and term or streamline refinance, the required equity will be the same as when you took out your original mortgage. However, if you want to do a cash-out refinance, most lenders will require at least 20% equity in the home.
• Debt-to-Income Ratio: Debt-to-income (DTI) is how much your monthly debt payments are compared to your total income. Debt could include mortgage, car payments, student loans, credit cards, and more. Lenders typically want to see your DTI be no more than 43%.
• Waiting Period: While the required amount of time will vary between lenders, most will require at least six months since you established your mortgage or last refinanced before you can refinance again.

Can a Refinance Hurt Me In Any Way?

While there are many benefits of refinancing, there are some negatives that you must be aware of before moving forward.

• Closing Costs: When you refinance a mortgage, closing costs will be involved. Typically, this can be anywhere from 2% to 6% of the loan amount. Before moving forward with a refinance, it’s best to understand if the savings will be worth the cost. This can be done by figuring out the breakeven point – how many months will it take before the savings are greater than the cost? If you’re not planning to stay in the home this long, then refinancing might not be worth it.
• Drop in Credit Score: Because lenders will perform a hard inquiry on your credit report, there will be a slight drop in your credit score. Usually, the decrease is small and temporary.
• You Could End Up in Additional Debt: If you plan to cash out some of your equity to pay off debt, make sure you have a plan to avoid being in the situation again. The last thing you want is to continue spending more than you should and end up in debt again.

What Kind of Equity Do I Need To Have For Refinancing My Mortgage?

When refinancing your mortgage, most lenders require a specific amount of equity in the home. The exact amount will depend on the lender and the loan product. 

For conventional mortgages, you’ll typically need at least 20% equity in your home. However, if you’re doing a cash-out refinance, lenders will require at least 20% equity after the refinance is complete. That means if you own a home valued at $400,000 and your mortgage balance is $200,000, you must have no less than $80,000 equity left in the home after refinancing. 

The requirements are usually the same with FHA loans; however, with a VA loan, you can cash out up to 100% of the equity, meaning there are no requirements.

When Can You Refinance a Loan? 

If you recently took out or refinanced your mortgage and are thinking about doing it again, you should understand there are rules around “loan seasoning.” Depending on your specific loan, you might need to wait a certain number of days before you can refinance. 

Let’s take a look at the requirements for common loan products.

• Conventional: There is no waiting period for a rate and term refinance. If you’re doing a cash-out refinance, you must wait at least 12 months. However, there will be no waiting period if you inherit the home or receive it in a divorce.
• FHA: There is no waiting period for a rate and term FHA refinance, and you must have at least six consecutive on-time payments. If you’re using a Streamline refinance, the waiting period is seven months. It increases to 12 months when using a cash-out FHA refinance, and you need to have 12 straight on-time payments
• VA: The waiting period is 210 days, and you must have at least six months of on-time payments.
• USDA: You must wait at least 12 months from the closing date of your current loan, and you must have made six to 12 on-time payments (depending on the lender).
• Jumbo: No waiting period.

Can You Refinance With The Same Bank?

One of the most important things you can do when refinancing is to compare lenders so you can find the best possible mortgage rates. Many also wonder if you can use the same bank to refinance your mortgage.

Luckily, the answer is yes. Your current lender should be one of the first you contact. Because they want to retain your business, they may be willing to give you a discount on your interest rate.

When you start shopping around for lenders, check out our resource on the best mortgage rates.

How Many Times Can I Refinance My Loan?

Theoretically, you could refinance as many times as you want as long as you wait the required amount of time. However, even though you could refinance, it’s important to ensure it’s worth the cost beforehand. Determine how much refinancing will cost and what your savings will be.

If the numbers make sense, then refinancing would be a smart move.

What Will Refinancing Do To My Monthly Payment?

When you refinance your mortgage, the impact on your monthly payment will depend on several factors. If you go through with a rate and term refinance and lock in a lower interest rate, your monthly payment will be reduced.

However, if you change the terms of your loan from 30 years to 15 years, your mortgage payment will increase. 

If you’re completing a cash-out refinance, your principal balance will be increasing since you’re pulling equity out of your home. This will increase your monthly payments.

However, if you’re also locking in a lower interest rate, this could reduce the amount your monthly payment goes up.