Feeling overwhelmed by all the information about mortgage refinancing? You’re not alone! Refinancing your home can be a stressful and complex decision, but with the right research and advice it doesn’t have to be.
Refinancing your mortgage can be a great way to save money and reduce the amount of time it takes to pay off your loan. It’s important to understand the process before you start—refinancing isn’t right for everyone.
In this article, we’ll take some of the mystery out of mortgage refinancing, answering some of the most common questions homeowners have when considering a refi. Let’s dive in!
What is mortgage refinancing?
Mortgage refinancing is the process of replacing your current mortgage with a brand-new loan, typically for more favorable terms. There are three common reasons for mortgage refinancing: getting a better interest rate, changing your loan type or terms, and using your home’s equity.
You have options
Every real estate market is unique – this is especially true of Texas with its restrictions on home equity and mortgages. Take advantage of our local knowledge to get your refinance done well.
1. Getting a Better Rate
If interest rates have fallen since you took out your original mortgage, a new mortgage loan with a lower rate will lower the total amount of interest you pay—as well as potentially lowering your monthly payment.
2. Changing Your Loan Term or Type
Maybe you originally took out an adjustable-rate mortgage, and now you want a fixed-rate loan. A new mortgage loan is a great way to do this. Refinancing is also a great way to change your loan term from a 30-year to a 15-year, or vice versa.
3. Using Home Equity to Get Cash
A refinance can also be used to tap into your home equity. With a cash-out refinance, you would take out a new loan larger than your existing loan. The difference between the two loans is money that you pocket and can use at your discretion.
Is it better to refinance or get a new loan?
Refinancing is the process of taking out a brand-new loan—so they are one and the same!
When is the best time to refinance?
The best time to refinance depends on individual circumstances. Generally speaking, it’s a good idea to refinance if you can get a lower interest rate than what you currently have or if you want access to cash without taking out an additional loan beyond your mortgage.
If you are going to refinance, it’s typically smart to make sure you’re also going to be staying in the home for at least several more years. There are costs associated with refinancing, just like when you first took out your mortgage—so you want to make sure you’re in the house long enough to break even.
3. Can you refinance an FHA, USDA, or VA loan?
4. How do I apply for mortgage refinancing?
To apply for mortgage refinancing, start by researching potential lenders who offer competitive rates and terms. After you find the right lender, you’ll apply for your new loan. The process will look a lot like it did when you got your original mortgage.
You’ll submit an application with income documentation, credit history information, and details about any other loans or debts outstanding against the property being mortgaged. The lender will review all materials before making a decision.
5. What are the eligibility requirements for mortgage refinancing?
Like your original home loan, a refinance will have eligibility requirements that you must meet in order to be approved. The exact criteria are dependent on the loan and lender, but it’ll likely look like this:
- Enough equity: In Texas, borrowers must have at least 20% equity in their home to refinance. (Read more about Texas-specific mortgage refinancing laws)
- A good credit score: For conventional refinances, you’ll likely need to have a credit score of at least 620. Some government loan programs have lower requirements or none at all.
- Low DTI: If you’ve acquired new debts since buying your home, you may want to reevaluate your debt-to-income ratio. Lenders will want to see a DTI of less than 43%.
- Proof of income: You must show proof of steady income and the ability to afford the new loan payments.
Remember, a loan refinance is simply replacing one home loan with another. Expect to find similar requirements to those when you initially applied for home financing.
6. Will my house need to be appraised to refinance?
In most cases, yes, your home will need to be appraised again to obtain a refinance.
The exception is if your lender opts to waive the refinance appraisal condition, which applies to VA, FHA, and USDA loans.
7. What are the risks of mortgage refinancing?
Typically, the risks associated with a refinanced mortgage aren’t much different than your original mortgage.
One risk associated with mortgage refinancing is that if you choose a variable interest rate loan product, your interest rate could fluctuate over time. Additionally, if you do not keep up with payments on a refinance loan, you could put yourself at risk of foreclosure or other serious consequences.
The main thing that buyers should be aware of is the costs of refinancing. Generally speaking, refinancing is only worth it if you plan on staying in your home for at least five years. That’s because it can take at least that long to recoup your closing costs through your monthly savings.
8. How long does it take to refinance a mortgage?
The average timeline for most refinances is about six weeks from start to finish — although it can vary depending on factors such as how quickly paperwork is submitted and how complex the terms of the new loan may be.
9. How much does it cost to refinance a mortgage?
Most lenders charge between 3% and 6% of the total loan amount as closing costs when you refinance your home. However, this can vary quite a bit depending on who you work with and what type of loan product you choose— which is why it’s important to shop around when looking to refinance.
In Texas, closing costs are limited to 2% by law.
10. What are the tax implications of mortgage refinancing?
When you refinance your home, there probably won’t be tax implications—unless you take out more than $2 million dollars in cash during the process. At that point, part of that money may be taxed as ordinary income by the IRS.
We always recommend talking to a tax professional whenever your financial situation can be impacted by taxes.
11. What should I consider before refinancing my mortgage?
Before deciding whether or not to refinance your home, make sure that doing so makes economic sense for your particular situation. You should also consider what type of repayment terms work best for you and what adjusted payments will mean for your month-to-month finances.
Consider working with an experienced lender who will help guide you through this process and ensure that all documents are filled out correctly.
The Bottom Line
Mortgage refinancing can be a great way to save money and reduce stress on monthly payments, but it’s important that borrowers understand their rights and responsibilities before diving in headfirst.