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Are you struggling with high monthly mortgage payments? Maybe you’d just like some extra cash to spend each month. Then you should know that there are some simple ways to cut your monthly costs through mortgage refinancing. And with today’s attractive interest rates, refinancing may make sense more now than ever. Let’s look at the options you have for monthly savings.
When Refinancing Makes Financial Sense
As a rule of thumb, if you can lower your current interest rate between 0.5% and 1%, then refinancing your mortgage usually makes sense. Does a 1% reduction really make that much of a difference? Yes. Let’s take a hypothetical existing 30-year mortgage for $225,000 with a fixed rate of 4%. Then refinanced at 3% after three years. Just calculating by interest and principal, the monthly payment at 4% would be $1,074 and after refinancing at 3%, it would be $846. That’s a difference of $228 per month, or an annual savings of $2,736.
Monthly Savings with Mortgage Length
Beyond simply getting a new interest rate on your mortgage, you may also consider lengthening the term when you refinance; by going from a 15-year mortgage to a 30-year one, you can significantly lower your monthly payments. It makes sense if you plan to stay in your home for a while. And consider that the savings don’t have to be just cash in pocket — you could invest that money. For example, earning, say, 8% interest by investing that monthly savings nicely offsets the lower rate of interest you pay on the refinance loan.
What about rising interest rates?
Yes, the historically low interest rates we’ve seen in the recent past have been going up; the rise was inevitable. And you may look at these increases and assume that refinancing won’t help you save money, or at least not enough money to make the effort worthwhile. But that’s simply not true for millions of Americans who, indeed, would benefit from refinancing.
Recent findings from Black Knight show that close to four million homeowners in the United States would be able to lower their monthly payments by refinancing their mortgages. The data and analytics firm identifies prime candidates for refinancing as homeowners who have 30-year fixed-rate mortgages, loan-to-value ratios that are less than 80%, with credit scores of 720 and higher. These homeowners should be able to cut 0.75% or more in interest on their mortgage loans.
It’s worth noting that the conditions for refinancing approval that Black Knight cites may be stricter than those of some lenders. With more lenient prerequisites, the number of borrowers who could reduce their monthly mortgage payments through refinancing jumps to nearly seven million people, according to Black Knight.
Figure Out When the Savings Really Start
If you are thinking about refinancing, you’ll want to determine your break-even point, when the costs of the new loan are surpassed by the savings. These refinancing costs are often anywhere from 2% to 5% of the loan’s total amount. Say, for example, that refinancing reduces your monthly payments by $100 and you paid $5,000 in closing costs. It will take 50 months (just over four years) to recoup the closing costs: that’s your break-even point when the saving begins.
Save With VA Streamline Refinancing
If you’ve already qualified for a VA Loan, you know it comes with big benefits, such as no down payment and no private mortgage insurance. But there’s another plus: an Interest Rate Reduction Refinance Loan, or IRRRL. Commonly called VA streamline refinancing, an IRRL is similar to refinancing for conventional mortgage loans. But with fewer restrictions than there are with other types of refinancing.
There’s a reason they call it “streamlined” — the road to approval is generally smooth with few obstacles. With a VA IRRRL, there’s no need to get an appraisal as you do with some other refinancing programs, and there’s often no need for a credit check, as credit underwriting packages aren’t required by IRRRLs. So even if your credit has taken a few hits since initially getting approved for your VA Loan, approval for an IRRRL is still possible. Plus, the funding fee and the closing costs of the refinancing can get rolled into the mortgage.
Steps to Take Right Now
As you approach refinancing, you might consider these first financial steps to get yourself prepared.
- Make a goal. Are you looking to move from an adjustable-rate to a fixed-rate mortgage? Or go from an FHA mortgage to a conventional loan? Beyond saving money each month, what you wish to achieve through refinancing should be clear from the start.
- Determine your home’s equity. Your lender will look at your home equity during the approval process, so you should, too. The more equity you have in your home, the less of a risk you are to lenders, and the better your refinancing terms may ultimately be. To figure out your equity, first determine your home’s market value; an online home value estimator will get you close. Subtract what you owe on your mortgage from that amount to determine your equity. If you have more than 20% equity, you’re well-positioned for refinancing.
- Check your credit report. Lenders almost always look at credit scores in evaluating applications for refinancing, so you don’t want any surprises. You can get a free credit report from the credit reporting agencies TransUnion, Equifax, and Experian. And know that you have the right to contest any errors you may find.
- Gather the needed paperwork. Your lender is going to want some financial information from you, so make sure you have the paperwork for your current mortgage. You’ll want to get your W-2s from the past two years, and your most recent pay stubs, or bank statements if you are self-employed or have non-traditional income.
Whether you stick with your loan’s current length, or stretch things out to pay less each month, City Lending is here with a range of refinancing programs that could very well lower your monthly payments.
If you’ve got considerable equity in your home, you’ve got some serious purchasing power. And you may be able to use the wealth you’ve amassed in one home to buy another. If you take advantage of cash-out refinancing. Here’s how.
Your First Home Finances Your Second Home
Whether the next house you purchase is a vacation home or an investment property, you might be able to finance its down payment, or perhaps even the entire home, through cash-out refinancing. And at an interest rate that’s comparable with the rates of mortgages for primary residences.
How does cash-out refinancing work?
You are essentially refinancing your existing home mortgage for more than you currently owe, getting the difference in cash. That way you achieve two things: refinancing your current mortgage at a new rate, and getting money to buy a second home. The repayment clock resets to either a 15-year or 30-year mortgage, whichever you choose — you are basically doing a reset on your current mortgage at a different rate.
Let’s look at a hypothetical cash-out refinancing. Say you owe $100,000 on a mortgage for a home that’s worth $200,000. So you have $100,000 in home equity. You can refinance the home for $150,000 and get $50,000 in cash. It’s as simple as that!
How much cash can you get with cash-out refinancing?
Oftentimes lenders will allow you to take out up to 80% of the equity you have in your home; 20% home equity is the line above which most borrowers don’t have to pay for mortgage insurance. In some cases, such as with VA Loans, homeowners may be able to take out up to 100% of the home’s value with cash-out refinancing.
What are the requirements for cash-out refinancing?
While there is no one single set of requirements for all programs, most guidelines take these qualifications into account:
- DTI. Your debt-to-income ratio probably should not exceed 45% — and remember that your existing mortgage counts as a debt.
- Credit score. You may be able to get cash-out refinancing with a credit score that is as low as 620.
- Longevity. Exceptions aside — inheritance is one — most lenders will want you to have owned the home for a minimum of six months in order to approve conventional cash-out refinancing.
Talk to one of the lending specialists at City Lending to see if the equity in your home could make the dream of buying a second home come true.
With today’s attractive interest rates, now is a good time to refinance. The “when” part is clear. But what about the “why?” Why would you want to refinance your mortgage and what will you use the potential savings for? Let’s consider how your specific financial goals can be achieved through refinancing.
The Simple Goal of Saving Money
So how much can you save? Black Knight, a leader in mortgage data and analytics, says that an estimated six million people with mortgages could each save around $275 per month through refinancing. That’s over $3,000 per year for each homeowner who refinances. To put that amount into perspective, that means that in America, there’s a combined annual savings of close to $20 billion that’s not being realized.
How do you know if you’re a good candidate for refinancing? A chat with your lender would be helpful here, but in broad terms, borrowers who have home equity of 20% or more with credit scores that are 720 and up are well-positioned to seek refinancing. These homeowners, which Black Knight labels as “high-quality” candidates for refinancing, may be able to cut up to 0.75% from the rate they are currently paying on their mortgages. Some could see reductions of 1%.
Let’s look at how that kind of reduction would work in practice with a hypothetical $250,000 mortgage loan over 30 years at 4%. If that mortgage was to get refinanced at 3%, the monthly payments would decrease by $140 a month, with an annual savings of $1,680.
Can I refinance a second mortgage?
Yes. Sometimes called home equity loans, second mortgages can often reap the same refinancing benefits as primary ones. Notably by reducing monthly payments for short-term savings and/or offering long-term savings through paying less interest. Got high payments on a second mortgage? You might consider lengthening the loan’s term to give you some relief on monthly expenditures. Or you may wish to increase the amount of the loan, and just might have the increased borrowing power to do so; the unprecedented rise in home values across America of late has given many homeowners equally unprecedented home equity to tap into.
Could a cash-out refinance be right for you?
Just as it sounds, a cash-out refinance is used to put cash in your hand to use any way you wish. If you want to use the money to buy a diamond-studded hot tub, go right ahead. Though most folks use the money more practically. Data from the Federal Home Loan Mortgage Corporation (Freddie Mac) shows that around 40% of homeowners who do cash-out refinancing use the money to pay off debts, while about 30% of them invest in their homes through repairs or construction. 7% of borrowers use the cash-out money for college, 9% buy cars, and 14% of them put their refinancing savings in the bank.
Home Improvements With FHA 203Ks
As Freddie Mac data shows, home improvements are one of the leading reasons why homeowners turn to refinancing. But cash-out isn’t the only way to go here; FHA 203K Rehabilitation Loans are designed specifically for home improvements, whether it is upgrades, such as bathroom and kitchen makeovers, or significant reconstruction. As they’re backed by the Federal Housing Administration, 203Ks often have fewer requirements and more flexibility with qualification compared to conventional mortgages.
How do FHA 203K Rehabilitation Loans work with refinancing? To answer the first question of many, No, your initial mortgage doesn’t have to be an FHA Loan — anybody can do refinancing using an FHA 203K. And as with other refinancing options, the repayment of the loan can be rolled into your monthly mortgage payments. There are two types of 203K refinancing: limited and standard.
- Limited 203K refinancing, sometimes referred to as streamline loans, has no minimum cost threshold and offers as high as $35,000, with further flexibility in that homeowners can choose their own contractors and, in some cases, even do some of the improvements themselves. If projects come in under $15,000, inspections aren’t required. But you can’t do most major structural work with a Limited 203K. For those, you need a Standard 203K.
- Standard 203K refinancing starts with projects that cost $5,000 and up. No matter the cost of the renovations, all work needs to be inspected by a consultant who is approved by the U.S. Department of Housing and Urban Development (HUD). A few FHA-approved exceptions aside, homeowners must work with general contractors who are licensed. Standard 203K refinancing is usually for big stuff like replacing plumbing systems or adding on extra rooms.
Defining Your Goals
Knowing exactly what you want to do with the extra money you gain through mortgage refinancing is an important part of the process. What are your financial goals? Maybe you’re looking to pay off debt, put away money for retirement, or just make sure you have enough cash on hand to deal with any emergencies that life throws your way. For many, paying off a mortgage is a goal, and so refinancing from a 30-year mortgage down to a 15-year mortgage is a simple way to achieve that objective. Whatever you wish to achieve, you should go into the refinancing process with that singular goal in mind.
Consider Your Closing Costs
The closing costs of refinancing often run between 3% and 6% of the loan’s total amount. Your lender can give you a more precise idea of what the costs of your refinancing will be, and how they factor into the overall cost-benefit analysis you’ll have to make, calculating your break-even point. Say, for example, you refinance with $15,000 in closing costs to give you a monthly savings of $200. It would take 75 months for those savings to cancel out the closing costs and then all savings after those 75 months are the true cash-in-pocket gains.
