Last Updated on August 27, 2021 by MoneyVisual
Even with the 3.132% average interest rate on a mortgage, you can get a better rate and save thousands of dollars! What is your mortgage rate? If it’s too high, consider refinancing your mortgage.
Home loan refinancing is the process of replacing an existing loan with a new mortgage loan with a better interest rate. The main reason behind refinancing is low interest rates or switching adjustable-rate mortgages to fixed-rate mortgages or vice versa. Low interest rates mean saving a few percent of the money. Remortgaging also increases your credit score, so the chances of getting the best mortgage rates increases.
How Much Does it Cost to Refinance Your House? click here to learn more
If you are thinking about home loan refinance, you should compare the interest you pay with the current mortgage rates. The ongoing interest rates are 3.18% for fixed 30 years and 2.98% for Adjustable-rate mortgage. Today, we will share a few secrets on when to refinance and how to save money on refinancing.
What is a Home Loan Refinance?
Refinancing home loans is getting a new loan to pay off the current loan. The purpose of mortgage refinance is to get a loan at lower interest rates. You can get the refinance through the same process by checking different lenders and comparing their rates and offers.
Whether refinancing saves your money or hurts you depend on the plan you are adopting. You should know both the pros and cons of refinancing so you can get the best advantage of it.
Ways to Save on Mortgage Refinance
There are a few ways by adopting these you can surely save money on home loan refinancing. Those strategies are:
Pay Closing Cost with a Low-Interest Rate
Some mortgage brokers and lenders charge no closing cost, but this does not mean they are the best option. They may charge hidden fees and high-interest rates that cumulatively become higher than closing costs.
To save money in refinancing, you should clarify with your broker that if you pay the cost and fee for a low-interest rate (Discount point), will you be able to get any advantage?
Paying high points and low-interest rates save hundreds of dollars each month, but most borrowers prefer zero cost because they don’t consider the hidden charges.
Reduce Interest Rates
Refinancing saves money by lowering the interest rates by 2% or sometimes less than 1%. Reducing the interest rate also lowers the per-month payment.
For instance, for 30 years with an interest rate of 4.25% on a home loan of $400,000, you have to pay monthly $1,968 and the total interest of $308,393. Simultaneously, the same loan with a 3.1% interest rate makes you spend $1,708 monthly and a gross $214,094 interest rate.
Refinancing also helps you to pay the loan quickly, so you can save interest that you have to pay if you opt for a long time frame.
Increase in Credit Score
Refinancing increases the borrower’s credit score, and the potential advantage of a high credit score is that you can get a low-interest rate. A credit score between 720 to 850 is considered an excellent score to get the best mortgage rates.
It is good to have a high credit score during refinancing. You can increase your by opening new accounts. A person with lots of credit and debit cards can also increase his score.
Shop to Choose the Best Lender
Shopping to search for the best lender is necessary for both first loans and refinancing. Shopping around helps you find the best lender that meets your requirements and financial situation.
The interest rate and closing rate may vary from lender to lender. When choosing the lender, not only keep your eyes on the interest rate instead, other factors like terms and closing cost should also be considered.
You can also select your current lender if you are happy with his mortgaging policies. In case you go with the same lender, then there will be no need for complex time-taking paperwork, and they might also give you the best package.
Conversion to Fixed-Rate Mortgage from Adjustable-Rate Mortgage
For homeowners who stayed in the mortgage house, switching from fixed-rate mortgage to ARM during refinancing when the interest rates are dropping can save money if the rates are going down.
On the other hand, the interest rate in ARM is less than a fixed-rate mortgage, but as the name suggests, it will gradually adjust this increase to the overall interest rate.
One advantage of conversion from an adjustable rate to a fixed-rate mortgage is that if the market interest rate increases, this increment will not apply to the borrower having a fixed-rate mortgage. Considering the fact, switching from an ARM to FRM if the interest rate is low will save money. You can find more details here.
Removing FHA Mortgage Insurance Cost:
You can not get rid of Federal housing administration mortgage insurance like traditional home loans. The only way to remove FHA insurance is refinancing if you have accumulated enough equity. Otherwise, you will have to pay the premium until the property is sold out.
Do the Homework before Refinancing (Takeaway Note)
Self-research is necessary when you are going for refinancing. Otherwise, instead of saving money, you may lose it. You have to check the current interest rate. The instance at which the interest rate is low is the right time for refinancing.
If you have funds and want to close your loan faster, you can increase your monthly payment amount by switching to a shorter-term mortgage. Long-term mortgage charges more interest than the short-term, but in the long-term mortgage, the per month balance decreases. You need to shop the whole market before refinancing so you can get the best lender that offers low-interest loans.
You can start shopping around and asking for quotes from banks. Alternatively, you can do research and find a trusted mortgage broker who can help guide and assist you during this complicated process. The last but not the least important thing is to try to increase your credit score. It will increase the chances of getting a loan at a low-interest rate.