It’s no secret that all homeowners want to get the best deal on their mortgage. However, as you consider whether a refinance makes sense to your situation, it’s important to have all of the necessary information regarding what the process entails. The truth about refinancing your mortgage is that it’s not always the right move for everyone.
What Does Refinancing a House Mean?
Simply put, refinancing a mortgage involves taking out a new loan to pay off your original mortgage loan. One of the main reasons people refinance is to obtain a lower mortgage interest rate. If their credit score has recently improved, they may be able to apply for a lower interest loan which could save thousands of dollars over the loan term.
Another big reason people refinance is to free up money for larger purchases like cars, vacations, or wedding expenses. Refinancing can also be used to reduce or consolidate debts like credit card payments and other high-interest loans.
How Often Can You Refinance Your Home?
If you are considering a refinance, you may be asking yourself the following questions:
How often can you refinance a mortgage?
How many times can you refinance your home?
How much money will you save by refinancing?
When it comes to the number of times you can refinance, there are no official regulations. However, certain lenders will impose their own limitations, and sometimes penalties when a loan is refinanced too soon. You may find that waiting times, known as “seasoning”, apply to your loan agreement.
The term seasoning describes the waiting period required to be approved for a loan or mortgage. It is also used to define the time period you need to wait after taking out your initial mortgage before you are allowed to refinance.
Most lenders will require you to show financial stability before issuing any loan, mortgage agreement, or refinance deal. For example, you may be required to prove you’ve had a down payment or savings for a given time, or in the case of refinancing, that you’ve been making regular, timely payments on your existing mortgage.
So how soon can you refinance a mortgage? Seasoning periods are typically 6-12 months long, but this is not usually a concern for refinancing, as very few homeowners need to restructure their payments within the first year of ownership.
What Is a Cash-Out Refinancing?
There is no cash-in-hand benefit to the borrower with a standard refinance, just a reduction in monthly payments. With cash-out refinancing, however, homeowners can release additional funds up to a certain percentage of the value of their home. First, the home is appraised, and the lender decides on a percentage of the home value to loan. Then, the balance on the original mortgage is subtracted, and the remainder is lent to the owners.
Many people will make improvements that increase the value of their homes after purchase. In this case, refinancing allows homeowners to tap into a line of credit based on the increased value of their property while also reducing the balance owed on their mortgage.
Reasons to Refinance Your Home
Should I refinance my mortgage now? Is it a good time to refinance? The answers to these questions depend on your reasons for wanting to refinance. Refinancing a home can benefit homeowners who want to take advantage of better interest rates and loan terms. If you have a good credit score, refinancing your home may also be a good way of switching between variable and fixed rates and getting a lower interest rate on your mortgage at the same time.
Refinancing to Obtain a Lower Interest Rate
By reducing your interest rate, you will save money on your monthly repayments and build equity in your home at a faster rate. Industry experts normally recommend refinancing if you can reduce your interest rate by 1-2%, as this should be enough to equate to considerable savings over time.
Refinancing to Change Loan Types
When interest rates are falling, switching from a fixed-rate to an adjustable-rate mortgage may make sense to take advantage of smaller monthly payments. Likewise, if interest rates are rising, it may be prudent to switch from an adjustable-rate to a fixed-rate to safeguard against unexpected interest rate hikes throughout the remainder of the mortgage term.
Refinancing to Shorten Your Loan Term
Homeowners can sometimes take advantage of a dip in interest rates to refinance their existing mortgage for a loan that will significantly shorten the payment term without a big jump in monthly payments. However, this usually is only a good option for those who are already financially stable, with enough money coming in each month and no other long-term debts. For those on tight budgets, spending more on your home in the short term may not be the best strategy.
Refinancing to Unlock Equity or Clear Debt
Perhaps you’d like to release a lump sum value for that dream vacation or your child’s college fund? Maybe you’ve had a financial emergency or simply want to consolidate your existing debts? Whatever the reason, homeowners looking to refinance can quickly free up equity to pay off other obligations.
Reasons Not to Refinance Your Home
It’s a good idea to consider not just how many times can you refinance your home, but how many times should you refinance your home, if any at all. The idea of reducing expenses is always appealing. However, refinancing may not always be suitable. It’s incredibly important that you have all of the information and understand the potential risks so you can make the right decision.
It takes discipline and planning to refinance in order to consolidate debt. For example, saving money by replacing high-interest debts like credit card payments with a lower interest mortgage repayment only works if you can avoid compound losses caused by racking up even more debt once you’ve freed up capacity on your credit cards.
Higher Lifetime Interest Costs
Depending on how far into your current mortgage agreement you are, it may not be worth refinancing as this will likely extend the number of years you’ll be paying off your home. If you are at a point where a good chunk of your mortgage payment is allocated toward principal, it may not make much sense to start a brand new mortgage again and extend your terms.
There are closing costs attached to all refinance deals. These are payable to the lender to cover charges for the appraisal, attorney’s fees, title insurance, and transfer fees, etc. These typically equate to 3-6% of the loan’s principal, can take years to recoup, and may end up defeating the goal of refinancing.
Ways to Help You Qualify for a Refinance
Mortgage refinance approval depends on your credit score and the current equity in your home. If you have refinanced in the past and have a lower equity score now than you did then, you may not qualify. However, there are other things to consider that may help you obtain approval:
Improve Your Credit Score
This is one of the most heavily weighted factors in the refinancing application process. You can access your annual credit reports free of charge from credit bureaus and take steps from there to improve the health of your credit profile.
Reduce Your Current Home Costs
Save money by switching your home insurance premium to another provider. Consider raising your deductible or cutting additional costs like monthly subscriptions. You can even appeal your property tax assessment by contacting your county tax assessor.
Increase Your Income
Easier said than done, we know. But whether it’s taking on some extra hours, asking for a raise, or sourcing an additional part-time income, even a temporary boost in income could help you meet approval requirements.
Personal loans or home equity line of credit (HELOC) loans can also provide you with quick access to money if you are in a pinch.
Reali Can Help
The team at Reali is dedicated to providing the best possible customer service, combined with the best products and services to help save you money. All of our agents are experts in their field and are waiting to support you through your refinancing journey.