Mortgage rates have been going up recently, and they’re likely to go up further in 2022. If you want to refinance your mortgage before that happens, you’ll probably want to act quickly.
The following are some things to know about refinancing while rates are at historic lows and what to know about the process in general.
What is Refinancing?
When you refinance, it means you’re replacing your current mortgage with a new one. There are some core reasons people tend to refinance. They might want to lower their monthly payments, tap into their equity or reduce their interest rate.
You could also decide to refinance to pay off your loan faster or move from an adjustable-rate loan to one with a fixed rate.
When you initially buy a home, you get a mortgage to pay for it, unless you’re buying with all cash.
The money goes to the seller of the home. When you refinance and get a new mortgage, rather than going to a seller, the new mortgage is used to pay off the balance of your old loan.
When you refinance, you have to meet the lender’s requirements for the loan, just like you did when you got an original mortgage.
You’ll apply, go through the process of underwriting, and you’ll have a closing.
Reasons to Refinance
If you do want to capture the low rates before they go up, the following goes into more detail about why people refinance:
- You can lower your monthly payment, so you have to put less of your income toward your mortgage payment every month. You can also extend your loan term if you want to lower your payment, but then you’ll end up paying more interest over time.
- Refinancing allows you to tap into equity. If you refinance and you’re borrowing more than what’s owed on your current loan, the lender will give you a check for the difference, which is known as a cash-out refinance. You can get both a cash-out refinance and a lower interest rate simultaneously.
- You can pay off your loan faster if you refinance to go from a 30-year loan to a 15-year loan.
- The Federal Housing Administration has a mortgage insurance premium you pay on FHA loans. You usually can’t get rid of it unless you sell the home or refinance your loan with enough equity.
- If you have an adjustable-rate mortgage, your rates can go up over time, whereas fixed-rate loans will stay the same. You might want a fixed-rate loan so you can make steady payments and you’ll know what to expect.
What to Consider Before You Refinance
Before you refinance, one of your most significant considerations will be the difference between the original interest rate on your mortgage and what you’d get if you refinanced currently.
The interest rate you’ll get will depend not only on the current environment but also personal factors like your credit score. You need to ensure it will make financial sense for you to refinance before you apply.
There’s no guarantee you’re going to save money.
You also have to remember that you’re restarting the clock on your mortgage. Whether or not this is a bad thing depends on how long you’re planning to own your home.
If you do refinance, it might give you the opportunity to invest in your home. Many people who refinance to tap into equity will then reinvest those funds into the home. You can make improvements or renovations that can help the home meet your needs, and if you decide to sell at any point, they can add value.
Another way you can invest wisely when you refinance is to put the money you get toward an investment property to take advantage of low-interest rates.
If you’re going to refinance, you should have a goal going into the process. For example, is your primary goal to shorten your loan term? Maybe it’s to reduce your payments. Regardless, make sure you’ve outlined this goal because it’ll help you compare your options more effectively.
From there, you can start to shop for the best refinance rates. Aim to apply for a mortgage with at least three to five lenders. When you submit all of your applications within two weeks, it’ll mitigate the effects on your credit score.
Finally, compare the offers you get and don’t forget to think about things like closing costs. You’ll want to lock in the interest rate, which can’t be changed during a specific period of time.