The Definitive Guide To A Home Loan Refinance

A home loan refinance can be an excellent option for homeowners. If you have a mortgage, it can unlock benefits, especially when interest rates are low. Since your home is likely the largest investment you’ll make in your lifetime, you should know a few things before jumping on the home refi bandwagon.

Home Loan Refinance: The Basics

You probably used a home loan to finance the purchase of your home. When you refinance, you take out a new loan to repay that first loan. A home loan refinance is when you take out a new loan to replace your existing mortgage. The thing that lots of people don’t know about refinancing is that you don’t have to use the same lender!

While your existing lender is an option, exploring other lenders is best to ensure you get the best interest rate and repayment terms for your situation. You could try local banks and credit unions to see what they offer. But to get the best rate, you should consider a local, online lender like Good News Lending.

Online lenders are professionals who know how to get our leads via internet requests and online searches, such as Google. So they don't spend millions on advertising.  That allows them to be much more competitive with interest rates (unlike some of the bigger advertised firms). They know the ins and outs of what it takes to qualify for a home loan refinance.

A Home Loan Refinance For Every Situation

There’s more to a home refinance than you might think. But don’t worry, a professional lender will walk you through the options. Before you pick a refinance loan type, it is best to consider why you want to refinance. Some reasons for wanting to refinance include:

• Save money on your mortgage payment
• Lock-in a lower interest rate
• Tap into your home’s equity and use the cash for something else
• Switch from an adjustable rate to a more stable fixed rate
• Pay off your home loan faster
• Kick mortgage insurance to the curb

The reason for refinancing will guide you toward the type of home refinance loan you need.

Here are your top refinancing options:

• Rate and Term Refinance - Used to lower your monthly payment or interest rate.
• Cash-Out Refinance - Used to pull equity out of your home. 
• Cash-In Refinance - This may add equity to your home to avoid paying mortgage insurance. 

Rate and Term Refinance

If you want to lower your monthly house payment or interest rate, a rate and term refinance is often the best option.  You can view our sample refinance chart to the right for an example. Once you qualify, you can use lower rates to save on your housing costs without increasing your loan balance.  

When you refinance your current outstanding loan balance at a lower rate, you pay less interest, and your monthly payment goes down. You could also refinance to a longer or shorter term.

It's important to remember that when calculating if a refinance makes sense, you should be sure to get an estimate for the closing costs.

Getting into a new loan costs money, but there is typically a "break-even point" within a few years of getting the loan if you're saving on interest and paying less out of pocket.

You might also consider a longer-term can lower your monthly payment, but it’ll take more time to pay off your loan. Refinancing to a shorter loan term is the way to pay off your home faster.

Cash-out Refinance

A cash-out refinance is an excellent choice if you have built up the equity in your home. With a cash-out home loan refinance, you can use the cash for something else in your life.

Cash-out refinance is great if you want to:

• Pay for home renovations
• Cover a large, unexpected expense
• Consolidate high-interest consumer debt
• Buy a second home or investment property

But the catch with this option is that you can only do a cash-out refinance if you have equity in your home. If you haven’t already paid down a good chunk of your existing mortgage, it might not be your best option.

Cash-in Refinance

Why would you want to put cash into your loan when refinancing a home loan? There are two main benefits to putting more cash toward your home loan. Firstly, it may improve your loan-to-value ratio and lower your interest rate. If you lower your loan-to-value ratio so that you’ve paid off 20% of your home’s value, you no longer have to pay private mortgage insurance. And that could save you a significant chunk of change on your monthly payments.

Loans with lower loan-to-value ratios can also qualify for lower mortgage rates, which can also lower your monthly payment.

5 Simple Steps To A Home Loan Refinance

The refinance process is similar to your steps to get your original home loan. Here’s what to do:

1. Set your goal: Do you want to reduce monthly payments? Pay off your home faster? Get rid of private mortgage insurance?

2. Shop around for interest rates: Every lender has different home loan refinance rates. Check several financial institutions, including online lenders, for the best rate.

3. Apply: Once you pick a lender, apply for a refinance loan and submit proof of income and other required documentation.

4. Lock-in your interest rate: Home loan interest rates fluctuate daily. Lock your rate to avoid an unexpected interest rate jump.

5. Close on the loan: Like a regular mortgage, a home refinance will have a closing date where you’ll pay closing costs and finalize the refinance loan.

Although the steps can vary depending on lender requirements and the type of home loan refinance you need, these are generally the steps you’ll take to complete your home refinance.

Is Now The Right Time To Refinance Your Mortgage?

You shouldn’t refinance your home loan on a whim. Generally, refinancing your home loan should provide a solution such as lowering your monthly payments, shortening your loan term, or getting rid of mortgage insurance.

Unfortunately, there isn’t a magic formula to tell you when to refinance. Also, there isn’t a one-size-fits-all answer to whether now is the right time. However, there are a few situations that could signal that it’s the best time to refinance

Interest rates fell enough that you’ll save a significant amount on your payment

It doesn’t have to be a lot. Remember, your mortgage term can be as long as 30 years. Saving $50 a month on a 30-year term can put $18,000 back in your pocket over the life of the loan. 

You have equity you want to use

If your home increases in value or you build up equity in your home by paying down your mortgage balance, you can use the equity in your home for other purchases or projects. You might want to use it to make home improvements, increase your emergency fund, buy another property, or pay credit card debt or medical bills.

You got a windfall or a lump sum of cash

A windfall or large lump sum could be a good time for a cash-in refinance. When you pay down more of your balance, you can cash-in on several benefits that could save you more money over your loan term.

Refinancing Your Home Loan Isn’t Free

The cost to refinance your home is similar to what you paid when you got your original home loan. So, how much does it cost to refinance a mortgage? Like most things in life, the answer isn’t cut and dry. According to Freddie Mac, the average cost to refinance is about $5,000.  

Common factors that determine how much it might cost to refinance your home include:

• How much you’ll borrow
• Your lender
• The home’s location
• Your credit score
• The available equity in the home
• Refinance loan term and type

Keep in mind that every lender has different loan costs and risk tolerances they consider.  

Shopping around can help you get the lowest closing costs and usually offers the best results.

Using A Refinance Calculator

Deciding to refinance your home loan is one thing. But crunching the numbers is an entirely different matter. A home loan refinance calculator can tell you how much you’ll save each month, what your new payment might look like, and the lifetime savings over the entire term of the loan.

A refinance calculator can also show your refinance “break-even” point. Since refinancing your home loan isn’t free. There are costs involved that can add up to thousands of dollars. So, it might take a while for the amount you save by refinancing to break even with how much it costs you to refinance. But eventually, your accumulated monthly savings will exceed the refinance closing costs.

The Secret To Getting The Best Refinance Rates

Closing costs are a one-time cost. You pay them when you close the loan, and that’s it.

However, refinance interest rates will affect your payment for the entire length of your loan. The lower your rate, the less you’ll pay in the long run. That's why putting some effort into getting lower rates makes sense. 

Here are a few factors to consider to secure the best refinance rates:

Improve your credit score

Lenders place significant importance on your credit score. To avoid being caught off-guard, request your credit report and review it for errors. You should also look for late payments, collection accounts, and overextended credit lines. Then, ask the credit bureaus to remove the errors, contact creditors to ask about removing late payments and collection accounts, and pay down overextended credit lines.

Keep your debt-to-income ratio low

Your debt-to-income (DTI) ratio measures how much money you have left after your debts are paid. The more debt you have, the higher your DTI. High DTI ratios can make a lender nervous. It can vary by lender, but the Consumer Financial Protection Bureau recommends a DTI of 43% or less to qualify for a mortgage.

Shop around to compare rates

The most critical step to getting the lowest rate on a home loan refinance is to shop around. Because lenders set their own interest rates, each lender can have its own loan programs, risk tolerance, fees, and rates. Many borrowers stick with the same lender and don’t question the fees. But shopping around can save you significant money when you refinance your home loan. 

Top Questions About Home Loan Refinancing

Being a homeowner can be stressful. Don’t let refinancing get in the way of enjoying your home.

When is refinancing a bad idea?

Refinancing your home loan isn’t always the best idea, even when interest rates are low. Consider the loan’s overall cost and calculate your break-even point to know if it’s worth pursuing. You don’t want to pay more over time because of fees, closing costs, a longer loan term, or higher interest rates.

Do I have to put money down on a home loan refinance?

Unlike a new mortgage, you don’t have to put money down to refinance your home loan. However, most borrowers roll the closing costs and prepaid items into their loan and rarely need cash to cover the closing costs, a separate expense from a down payment.

Does refinancing hurt my credit?

Any time a lender checks your credit score, your score could go down. The drop is usually temporary, and the benefits of refinancing generally outweigh the small change to your score. Your credit score can bounce back once you establish a timely payment history on your new loan.

Is it cheaper to refinance with my current lender?

It’s not always cheaper or better to refinance with your current lender. Check with other financial institutions and look at online lenders that can get you lower rates and more favorable terms when you refinance.