Should I refinance my mortgage?

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Expect to pay 2% to 5% of the new mortgage amount in closing costs when you refinance your mortgage.

If you have sufficient equity in your home and you’re tempted by a rate-and-term refinance or cash-out refi, here’s what you need to know.

What Is the Average Cost to Refinance a Mortgage?

Refinancing isn’t free because you’re taking out a new home loan and paying off your current one, and doing so brings on a host of costs, though not as many as purchase loans incur.

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The main difference between average closing costs for refinances vs. home purchases is that owner’s title insurance and several inspection fees common for purchases are not typically required for refinances, according to ClosingCorp, a provider of residential real estate closing cost data and technology.

Closing costs to refinance single-family home loans averaged $2,375 in 2021, excluding any type of recordation tax or other specialty tax, according to ClosingCorp.

That is less than 1% of the average refinance loan amount of nearly $305,000 at that time, even though a general rule of thumb is that a refinance usually costs 2% to 5% of the loan amount.

Common Mortgage Refinance Fees

Some fees to refinance are flat fees that vary by lender. Other fees are based on a percentage of the loan amount.

Then there are recurring closing costs like homeowners insurance and property taxes. Six months of property taxes are usually due at closing.

Here are common fixed closing costs, though in some cases, a borrower may not need an appraisal.

Common Mortgage Refinance Fees

And here are common percentage-based closing costs. Not all borrowers will need mortgage insurance (PMI or MIP: private mortgage insurance for conventional loans, and mortgage insurance premium for FHA loans).

PMI is usually needed for a conventional loan exceeding an 80% loan-to-value ratio.

An FHA loan can be refinanced to another FHA loan or to a conventional loan if the borrower meets credit score and debt-to-income requirements for a nongovernment loan.

USDA and VA loans can also be refinanced.

Closing costs

Are You Eligible to Refinance?

Most mortgage lenders want a homeowner to have at least 20% equity in the house in order to refinance, although those numbers are not universal.

What is home equity? Here’s an example. If your home is worth $350,000 and the current mortgage balance is $250,000, you have $100,000 in equity. The loan-to-value ratio is 71% ($250,000 / $350,000). This scenario fits the parameters of many lenders for a refinance to take place.

You’ll typically need a minimum FICO® credit score of 620 to refinance a conventional loan and 580 to refinance an FHA loan. A score of 740 or above often ushers in the best rates.

Besides credit score, lenders normally review recent credit applications, on-time payments, and credit utilization.

Check to see if your current mortgage has a prepayment penalty. These days they’re fairly rare.

 

Benefits of Refinancing a Mortgage

The most common type of refi is a rate-and-term refinance, when you take out a new loan with a new interest rate or loan term (or both). Some people will choose a mortgage term of less than 30 years when they refi, if they can manage the new monthly payment.

Then there’s cash-out refinancing, which provides a lump sum to the homeowner.

In general, refinancing may make sense if interest rates fall below your current mortgage rate. Here are some times when a mortgage refinance could be beneficial.

If You Can Break Even Within a Suitable Time Frame

Calculate how long it would take to recoup the closing costs. Find the break-even point by dividing the closing costs by the monthly savings from your new payment.

Let’s say refinancing causes a payment to decrease by $100 a month. If closing costs will be $2,500, it would take 25 months to recoup the costs and start to see savings.

If you plan to sell the house in two years, refinancing may not be the right strategy. If you intend to stay long term, it may be an idea to explore.

If You Can Reduce Your Rate Even a Smidge

You might read or hear that refinancing is worth it if you can reduce your mortgage rate by 1% or 2%. But for a big mortgage, a change of just a quarter of a percentage point, or half of one, could result in significant savings, especially if you can minimize lender fees.

Again, consider the break-even point and how long you plan to keep the home.

You’d Like to Tap Home Equity

With a cash-out refinance, a percentage of your equity can be issued in a lump sum for any purpose. You will need to have at least 20% equity remaining after the transaction.

Be aware that the higher loan amount of a cash-out refinance usually results in higher closing costs.

(If your main goal is to access cash and not to change your rate or term, a home equity loan or line of credit may be less expensive than paying the closing costs on a cash-out refinance. With a home equity product, how much home equity can you tap? Often 85%.)

An ARM’s Teaser Rate Is Appealing

Refinancing a fixed-rate mortgage to an adjustable-rate mortgage could make sense for a homeowner who plans to move before the initial rate adjustment.

5/1 ARM, for example, will come with a rate for five years that is lower than that of most fixed-rate mortgages.

In other rate environments, it could make sense to refinance an ARM to a fixed-rate mortgage.

You Want to Reduce Your Repayment Term

Some people may decide to enjoy a lower rate and shorten their mortgage term, say from 30 years to 15. Monthly payments may well go up, but a lower rate and a shorter term mean paying much less over the life of a loan.

The amortization chart of this mortgage calculator shows how much interest may be saved.

You’d Like to Get Rid of FHA Mortgage Insurance

FHA loans come with MIP that costs the typical borrower $850 per year for every $100,000 borrowed. Unless you put down more than 10%, you must pay those premiums for the life of the loan. The only way to get rid of the MIP is to get a new mortgage that isn’t backed by the FHA.

Tips to Lower the Cost of a Mortgage Refinance

When preparing to refinance, the most important action is to shop around.

Comparison Shop and Try to Negotiate

You need not apply for a refinance with just your current lender — and doing so would be a missed opportunity, the Consumer Financial Protection Bureau notes. Then again, your current lender may offer loyalty incentives.

Apply with as many lenders as you wish; you’ll receive a loan estimate from each. Compare the costs, including those of the lender’s preferred vendors.

Ask potential lenders which fees can be discounted or waived. Remember, each lender wants your business.

Typical non-negotiable closing costs found under Section B of each loan estimate include credit reports and appraisals.

Keep Your Credit Shipshape

Having at least a “good” credit score can help you get a more attractive rate, and if your credit score has improved since the initial mortgage was taken out, that could be a reason to refinance all by itself.

A good FICO score on the credit rating scale of 300 to 850 falls in the range of 670 to 739. VantageScore®, a competitor developed by Experian, Equifax, and TransUnion, considers a score between 661 and 780 good.

If your credit profile could use some polishing, consider ways to build credit over time.

Use the Same Title Insurance Company

Save money on the lender’s title insurance policy by asking for a reissue rate from the title insurance company that was used for the original loan.

Consider a Streamline Refi for Government Loans

If you have an FHA, USDA, or VA loan, you may want to see if you’re eligible for an FHA Streamline, USDA Streamlined Assist, or VA interest rate reduction refinance loan. The programs charge a lower mortgage insurance fee than regular government refinance programs and do not require an appraisal.

Think About a ‘No Closing Cost Refi’

no closing cost refinance allows borrowers to roll the closing costs into the mortgage or accept a slightly higher interest rate on the new loan.

Rolling the closing costs into the refinance loan will increase the principal and total interest paid. But if you’re going to keep the loan for more than a few years, this move could be worth it.

Accepting a slightly higher rate could work for borrowers who can skip the upfront payment and who plan to keep their new loan for only a few years.

FAQ

Is refinancing your mortgage free?

No. A whole new loan must be approved and processed.

Is refinancing a mortgage worth the closing costs?

It might be. You’ll want to calculate your break-even point: Divide your closing costs by whatever your monthly savings will be to find the number of months it will take you to break even. Beyond that point, the refinancing benefits kick in.

Is it worth refinancing to save $100 a month?

Refinancing to save $100 a month could be worth it if you plan to keep your home long enough to cover the closing costs. Divide your closing costs by 100 to calculate how many months it will take you to break even.

Will refinancing cost me more in the long run?

If you get a new 30-year mortgage several years into your original 30-year loan, you are, in essence, lengthening the term of your loan, and that can cost you. It makes more sense to shorten the term to 20 or 15 years.

Is it cheaper to refinance with the same bank?

Your lender might offer a slightly lower rate, but it’s a good idea to still see what competitors are offering by comparing loan estimates.

Can you negotiate closing costs when refinancing?

 

Yes. Many lender fees and third-party vendor fees are negotiable. On each loan estimate, Section A lists the lender charges. Try to negotiate the lowest total lender charge, keeping the rate in mind. And third-party fees in Section C are negotiable.

Related:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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Does refinancing hurt your credit score?

 

Most people want to refinance their student loan to help their financial situation. So, the possibility of hurting your credit by going through the process of refinancing is alarming.

 

Fortunately, any harm done to your credit in applying should be pretty minor–and temporary. It’s just a part of going through obtaining a loan.

 

As for whether student loan refinancing will inflict any other kinds of damage to your credit, it definitely shouldn’t. To make sure your credit score is safe, learn more about how refinancing works and how you can best protect yourself.

 

Related: Student loan refinancing: Pros and cons

 

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A credit score is the number assigned to you by any of the credit rating agencies. Those agencies include Experian, TransUnion, and Equifax.

 

Whenever someone looks at your score–a lender considering whether to give you a loan, a landlord deciding if you’d make a good tenant–they’ll see a number that tells them how good a risk you are. Credit scores are like a snapshot of your financial health.

 

If you have a good credit score, you’re going to get more green lights to what you want: a loan with low interest, an affordable car insurance policy, a high-limit credit card. On the flip side, if your score isn’t good, you’re going to be turned down for loans, lose out on homes and cars, and only be able to get high–interest credit cards.

 

Judgements vary, but anything 700 or above is considered a strong score. Your credit score is influenced by:

  • On-time payments for bills
  • Steady (but not excessive) use of credit
  • History of paying balances in full

 

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It’s all about choices in paying off student loans. With student loan refinancing, you take your existing loan, one you’ve been paying down, and approach a private lender to ask for a new student loan. The goal is to get a better deal: lock into savings-producing lower interest rates, sign up with more favorable terms. The lender–a bank or other financial institution–basically buys the old loan and issues a new one with you.

 

Student loan debt has reached staggering amounts in the U.S.

 

Generally, people refinance a federal student loan issued while they were in college and take out a private loan with lower interest. It should be noted that with student loan refinancing, if you do so, you lose the protections of federal loan forgiveness and cancellation programs.

 

Damir Khabirov / istockphoto

 

So, to dig deeper into the question “Does refinancing student loans hurt your credit?” we’ll  scrutinize the loan application process. The bank, credit union, or online lender you’ve gone to will perform what is known as a “hard credit check” when you apply for a loan. The intent is to see your number and the history behind the number.

 

Why does a hard credit check affect your number? After all, you didn’t do anything “wrong.” One explanation is that a hard inquiry means a lender is assessing your credit report and that creates uncertainty. You may be trying to get a personal loan, a student loan, or a mortgage. Something could be about to happen that could shake up your financial “health.”

 

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Sometimes this hard check doesn’t do anything to your credit. But other times the check will lower your credit score. How much? Occasionally as much as 10 points. More often 5 points or less. And fairly soon your score will return to where it was before the hard check.

 

The problem is if you submit multiple full applications for loans over the course of several months, your credit score could take a bigger hit. The reason is this suggests more volatility. So, if you put through these full applications over a long stretch of time, then the question of “Does refinancing student loans hurt credit?” carries the answer “Yes.”

 

There are proactive steps you can take to make sure your credit score makes it through the process in good shape.

 

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You can pre-qualify for a loan offer, and it won’t affect your score. Take advantage of that when you decide who you want to put in an application with. A full application is the only type that will nudge down your credit score. So try to submit to the lenders you consider your best options.

 

Also, and this is key, try to apply with your chosen few lenders for a student loan within the same month. That keeps the damage to your credit score to a minimum.

 

Note: Your FICO score won’t be significantly hurt by multiple inquiries if they occur within a 30-day window. Your Vantage credit score may have a shorter window of 14 days.

 

Anhelina Pikas / iStock

 

When you’re trying to refinance, your money moves are under a spotlight. You need to be meticulous about continuing to make payments on your loan throughout the process. If you are late with a payment now, your credit score might suffer just when you want it to be perfect.

 

Keep on top of the payments for your original student loan until you are totally sure that the refinancing process is complete.

 

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When you analyze the question of whether refinancing student loans hurts your credit, you need to acknowledge the importance of making payments on time.

 

Yes, the application process could be finished, but any late payments will be reported to the credit agencies and lower your score. When choosing the terms of the loan–which is how long you will need to pay it off–make sure the repayment isn’t going to be too hard for you to cover. When refinancing, some people choose a shorter loan term and higher payments to get their loan over with. But the most important thing is making payments on time. Then refinancing is unlikely to hurt your credit.

 

Be sure to weigh this priority when you study the pros and cons of refinancing student loans.

 

tommaso79/ iStock

 

How will refinancing affect credit score? When you refinance your student loan, the private lender will do a hard check of your credit, which could cause a dip in your rating for a short time. If you apply to as few lenders as possible and keep it within a short time frame, that will minimize the chance of any credit damage. And be diligent in timely loan payments.

 

Learn More:

This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.

 

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Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).

Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 05/01/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.

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