Becoming a first-time homeowner can be a great source of joy for most people. Having your own home can bring a sense of security and comfort. We understand that it is a significant milestone for many American families and are proud to assist them in their journey to homeownership. For new owners, it is a good idea to be financially savvy as it can be quite a daunting task to juggle all finances. Therefore, one of the most important concepts that new owners need to grasp is rate-and-term refinancing. This type of refinancing is a good option to manage your mortgage and save money.
What is a Rate and Term Refinancing?
The Rate and Term refinance is a type of mortgage loan option, in which you replace your current mortgage option with a better one which offers lower interest rates, adjustable loan term or both. The original principal amount of the mortgage does not change and unlike cash-out refinancing you cannot cash out the equity of your house. Rate and term refinance is a good choice for those who are looking to reduce their monthly expenditure.
Reasons for Refinancing Your Current Mortgage:
The reasons why homeowners want to refinance their mortgage options can vary. Refinancing is a personal choice. However, it is typically done when market conditions are favorable. Let’s take a look at when a homeowner should consider refinancing their mortgage to reap benefits.
To Eliminate Private Mortgage Insurance:
When you were buying your house, you applied for a conventional loan (non-government backed loan options), which comes with Private Mortgage Insurance. PMI is unusually reserved for those borrowers who pay less than 20% of their down payment. This insurance is set in place by lenders who want to ensure that you will be able to repay the mortgage. Typically, you will have to repay the PMI monthly, which can be an extra expenditure for most owners. The way to eliminate the PMI is to hold about 20% of the property’s equity, which can be done by either paying off the principal balance or switching to a new mortgage. By refinancing, you can lower the overall interest rate, which you can use to pay off the equity.
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Better Interest Rates:
The average inflation rate in the first quarter of 2024 should an average inflation rate of 3.3% which is higher than the Federal Reserve’s target rate of 2%. This indicates that the prices of consumer goods are increasing. Therefore, it can significantly impact housing prices as well as mortgage interest rates. There is a silver lining: due to the expected federal cuts in September, the average interest rates on mortgages are dropping. So, it is a good idea to refinance, especially if you currently have an FHA loan.
But before you sign the new mortgage make sure that you thoroughly go over the closing costs. If the closing costs on the new mortgage are higher then there’s no point in refinancing.
Lower Monthly Repayments:
Repaying your mortgage each month can be quite the burden especially with juggling all the other expenses. Therefore, it is a good idea to refinance, especially if you have an FHA loan. You might have taken out an FHA loan because you have low credit score. But if you have improved your credit score since then, it is a good idea to refinance. It will lead to lower interest rates that can reduce your overall monthly repayment.
Use Your Equity:
Once you have built up some equity in your home, you can apply for a cash-out refinance if you need the cash. Cash-out refinance is a good option if you have a good source of income and can make consistence repayments each month. You can use the cash on home improvements, medical expenses or to repay educational loan. On top of that, if you use the money towards improvements of the property, you might be eligible for tax reduction.
No Time Like the Present:
If you are looking to refinance your current mortgage, it is the perfect time to do so. This is all thanks to the Federal Interest Rate Cuts which are going to happen in September. This has led to overall drop-in interest rates since early February. The lower interest rates can help reduce your monthly repayments saving additional costs in the loan run. Therefore, you should take advantage of this situation to secure a better deal and reevaluate your financial situation.
The Process of Rate and Term Refinancing:
Refinancing typically has the same procedure as getting your original mortgage.
- Organize Your Finances: Before applying for the rate and term refinance, make sure you have all your financial documents ready. These include your source of income, assets and documents of current mortgage.
- Contact Our Mortgage Broker: The best decision you can make is to hire an industry-leading mortgage lender to assist with your case.
- Apply for Refinancing: Once you have all the required documents and funds, you can apply for the process of refinancing.
- Get an Appraisal: You will need to get an appraisal to estimate the current market value of your home.
- Underwrite: After that your application will be reviewed by experts and your appraisal will also be taken into consideration.
- Close the Deal: If you get approved, you will get a new loan and pay the necessary closing fees.
Costs Associated with Refinancing Your Current Mortgage:
Refinancing might take a few extra bucks, but it isn’t expensive. While refinancing, you might have to pay the following costs:
- Closing Costs: The closing costs usually fall between the ranges of 2% to 5% of the loan amount, which can be in the form of appraisal fees and title insurance. In the state of Texas, you will only pay 2% closing fees.
- Penalties: Some loans tend to have a penalty in place if you pay back the loan early therefore make sure that you thoroughly read your loan terms.
- Break-Even Point: Before you apply for the refinance, you should calculate the break-even point. The break-even point is the time period required for the savings from the new mortgage to pay off the closing costs.
Credit Score and Refinancing:
When you apply to buy a house, lenders will take your credit score into consideration, which is the same as when you apply for refinancing.
Let’s take a look at the impact refinancing might have on your credit score:
- Hard Inquiries: Applying for a refinance can typically lower your credit score because lenders tend to perform a hard inquiry on your credit history.
- New Credit Account: When you open a new mortgage account, your credit score will be affected.
Get approved to see what you can afford.
Dream Home Mortgage® lets you do it all online.
Pre-Qualify NowDo not be overwhelmed by these temporary changes as you will reap the long-term benefits. This financial change is better for you in the long term as it will save costs.
Book A Free Consultation Today!
Are you still unsure about the rate and term refinancing? No need to worry. Navigating the landscape of refinancing is a tricky business. Therefore, you need to have a good mortgage broker by your side. Mr. Hussein Panjwani, our senior loan consultant, has spent over 25 years helping thousands of Americans refinance their properties for better rates and terms. So, what are you waiting for? Book a free consultation today and unlock your financial potential.
