Owning a home is a huge investment. For many people, it’s their single largest asset, too. And that’s exactly why you may be looking to refinance! But before you do, make sure you understand what's involved. Some offers may be too good to be true, only to cause you a headache or expenses down the road.
If you're considering refinancing sometime soon, make sure you get all the facts. Our team of expert mortgage lenders fielded the most common questions on refinancing to guarantee you know what you're doing.
We address it all!
-How long do you have to wait?
-Should you refinance now, or wait for a better interest rate? What are the conventional loan-refinancing rules?
-How soon can you refinance a mortgage?
-And how many times can you refinance your home?
By the time you finish this article, you'll know the answers to these questions and many more.
Should I refinance my mortgage?
A mortgage refinance is when you take out a new loan to pay off your existing mortgage. People usually do this to receive a lower interest rate, access cash or change their loan term.
You'll want to consider several things before refinancing, like how long you plan on staying in your home and if you can afford the closing costs. We dive into detail on what else to think about before refinancing below.
What should I consider before refinancing?
There are quite a few things, actually! Keep reading for an in-depth look at each one:
-Your financial goals:
What are you hoping to accomplish by refinancing? If you're looking for a lower monthly payment, then getting a lower interest rate might be your best option. If you need cash now, you may want to extend your mortgage term so your monthly payments don’t balloon.
-Your home equity:
This is the portion of your home that you actually own outright. You can calculate it by taking your loan balance and subtracting it from your home's current market value. To qualify for a refinance, most lenders require at least 20% equity in your home. Other rules about equity may differ by state and by loan type.
-Mortgage rates:
These can change daily, so if you're considering refinancing, keep an eye on them! If your primary goal is a lower mortgage rate, you need to be prepared to move quickly once rates hit a low that appeals to you.
This is because lenders can typically only "lock-in" a specific mortgage rate for a short period of time. If you miss that deadline because you're still gathering the necessary documentation for your refi, you might miss out.
-Closing costs:
When you refinance, you'll likely have to pay some upfront fees including appraisal fees, origination points, title insurance, and more.
Be sure to ask your lender for an estimate of these costs so there are no surprises down the road. However, a good rule of thumb is to plan that these costs will be about 2% to 5% of the loan amount.
-Your credit score:
This is a big one. To get approved for a refinance, you'll need a good credit score. Most lenders are looking for a score of 620 or higher.
If your credit score is lower than this, you may want to speak to a financial advisor to strategize how to raise it.
Different loan refinancing rules
There are different loan refinancing rules based on loan types. Here's a breakdown of the most common types of loans and their respective rules:
-Conventional loans
These are not backed by the government and usually have stricter guidelines. To qualify, you'll need at least 20% equity in your home as well as a good credit score.
-FHA loans
FHA loans are insured by the Federal Housing Administration and usually require a smaller down payment than conventional loans. To qualify, you'll need at least 15% equity in your home as well as a credit score of 580 or higher.
-USDA loans
USDA loans are available to those who live in rural areas and are often used to help low-income individuals or families buy homes. To qualify, you'll need to meet certain income guidelines as well as have a credit score of 640 or higher.
-VA loans
VA loans are available to active-duty military members, veterans, and their spouses. To qualify, you'll need a certificate of eligibility from the Department of Veterans Affairs as well as a credit score of 620 or higher.
How soon can you refinance a mortgage?
This depends on your loan type. For a conventional refinance, there's typically no waiting period. Meanwhile, for FHA loans and VA loans, it's generally 210 days.
USDA loans have fairly flexible guidelines and you may be able to refinance just 6 months to one year after taking out your original loan.
Keep in mind that waiting periods, no matter the loan type, may be enforced based on the state where you own the property. For example, in Texas, there's a 6 month waiting period for a cash-out refinance.
Additionally, many lenders have a 6-month “seasoning period.” That means that a current borrower will have to wait 6 months before they can refinance with the same company. So if you're in a hurry to refinance, you may need to switch lenders.
How long does a refinance take?
The process usually takes around 30 to 60 days from start to finish. Factors that can impact this include the type of loan you're getting, the time of year, and your lender.
For example, FHA loans usually take longer than conventional loans. Additionally, there are factors in your control that can impact the timeline. If you don’t have your documentation in order, a refi can stretch out over several months.
How many times can you refinance your home mortgage?
Again, this depends on your loan type, but you can typically only refinance once every 12 months and sometimes as much as once every two years.
There are some exceptions though, like if you're refinancing an FHA streamline loan that doesn't require another appraisal. In that case, you may be able to do it more often.
Does refinancing hurt your credit?
No, refinancing does not hurt your credit. However, if you're applying for a new loan, the lender will run a hard inquiry on your credit report which can temporarily lower your score by a few points.
If you're thinking about refinancing, it's important to do your research and make sure it's the right move for you. There are a lot of factors to consider including your financial goals, current interest rate, and how long you plan on staying in your home.
Can I avoid closing costs?
When you refinance, part of your consideration should be if you'll have to pay closing costs. If the answer is yes, it may negate your reasons for the refi (such as saving money).
If you want to avoid closing costs on a refinance, you'll likely need to wait until you have more equity in your home. You can also try asking your lender if they offer any programs to help cover these costs.
There is also such thing as a "no-closing-cost refinance" This means the lender will cover the closing costs, but they may raise your interest rate or add points to the loan to make up for it.
What does a refinance cost?
If you don't get a "no-closing-cost" refinance, you're looking at a cost associated with the refinance. These include the appraisal fee (if required), loan origination fee, title insurance, and other smaller fees.
You'll also have to pay for prorated items like property taxes and home insurance. So for example, if your new home mortgage is $400,000, you are looking at paying $8,000 to $20,000 in fees.
Why should I refinance my mortgage right away?
If interest rates have dropped since you originally took out your mortgage, it may make sense to refinance to get a lower rate and save money.
Another reason to refinance right away is if you purchased your home with cash but need access to more liquid assets now. This is known as "delayed financing" when the refinance takes place almost immediately after the home is purchased.
However, even if you are 6 months or a year past the purchase, you might opt to refinance for this same reason. Many cash buyers find that while it was helpful to use cash to secure their home in a competitive market, they'd like to have that liquidity back to cover other expenses.
Other good reasons to refinance
If you're still on the fence about whether a refinance is right for you, consider the various scenarios for refinancing. Do you see yourself in any of these? If so, a refinance could save you time and money.
-You're looking for a shorter loan term:
If you have 20 years left on your 30-year mortgage and you refinance into a 15-year mortgage, you'll likely get a lower interest rate. This means you'll pay off your home sooner and end up paying less in interest overall.
-You want to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage:
An ARM has an interest rate that changes over time while a fixed-rate mortgage has the same interest rate for the life of the loan. If you're considering refinancing, it may make sense to switch from an ARM to a fixed-rate mortgage so you know exactly how much your monthly payments will be.
What is the fastest way to refinance your home?
If you're looking to refinance as quickly as possible, the best thing to do is start by comparing rates and lenders online. This way, you can get an idea of what's out there and narrow down your options.
Once you've found a few lenders that you're interested in, contact them and begin the application process. It also helps to find a local expert. For example, the lenders at Texas United Mortgage are well-versed in various refinance scenarios and local regulations.
Why you might want to refinance quickly
There are a few situations where it might make sense to refinance your mortgage as soon as possible.
-You're facing foreclosure
If you're behind on your mortgage payments and are at risk of foreclosure, refinancing may be a way to save your home.
-You're underwater on your mortgage
If you owe more than your home is worth, it may be difficult to sell or refinance. However, some programs can help if you're underwater on your mortgage.
-You need cash fast for a specific expense
When you need cash to cover an unexpected expense, a cash-out refinance is often the best option. As we noted, homes are often a family’s largest asset. You can use your home equity to help cover costs from medical expenses, to home repairs, or even college tuition.
Why the right lender matters when you refinance your mortgage
While it may seem like mortgage lenders are interchangeable, if you're looking for superior service and cost savings, you better do your homework. In fact, working with the right lender (or the wrong one) can impact your refinancing plans.
Therefore, it pays to research mortgage lenders before you decide on one. Here are some things to look for:
-Competitive interest rates
Obviously, you want to find a lender with low-interest rates. But don't stop there. Make sure the rate is competitive with other lenders in the market.
-Low fees
In addition to interest rates, compare the fees charged by different lenders. These can include origination fees, application fees, and closing costs.
-Flexible terms
Some lenders may be more flexible than others when it comes to loan terms. If you're looking for a specific loan term (like a 15-year mortgage), make sure the lender offers it.
Don’t be shy to ask questions of your lender. The lending team at Texas United Mortgage is well-respected and has great testimonials of happy customers.
The bottom line: Is refinancing right for me?
Refinancing may be a good option if you're looking to lower your interest rate, shorten your loan term, or convert from an adjustable rate to a fixed-rate mortgage.
However, it's important to compare rates and lenders before moving forward with any type of refinancing. Additionally, make sure you understand the fees involved as well as any risks associated with refinancing.
If you're not sure whether or not refinancing is right for you, it's always a good idea to speak with a financial advisor. They can help you weigh the pros and cons of refinancing and make a decision that's in your best interest.
Refinancing might not be right for everyone but if you're looking to save money or get out of debt, it could be a great option. Feel free to reach out to our lending team today with any other questions or to get started on your refinance!
