The best time to refinance your mortgage is when current interest rates are significantly lower than the rate you have on your mortgage now. That’s because nearly all mortgage refinances come with closing costs you will need to pay or add to your loan amount. Make paying these costs worthwhile when you refinance your home—lowering your interest rate is often the best way to do it.
Our mortgage refinance calculator can help you decide when refinancing makes sense. The calculator lets you put in your current interest rate and loan information as well as the new interest rate you think you might get. It then estimates your savings and compares these savings to the potential costs. You might pay anywhere between 2% and 6% of your loan amount in closing costs when you refinance according to Forbes.com.
Also, look at the total amount of money you will pay in interest over the life of your new loan. Sometimes when you refinance, you can end up paying more for interest than you would have if you kept your old mortgage. For example, this can happen when you extend the term of your loan. If you have 20 years left on your current mortgage and you refinance to a new 30 year mortgage, you might end up paying more money in interest even with a lower rate because you are paying back the loan over a longer period of time.
Finally, think about how long you plan to live in your home before you refinance. Refinancing often does not make sense if you plan to sell your house in the near future. That’s because you might not realize enough savings from lowering your rate before you sell to offset your closing costs (this is called "breaking even"). Look at all the benefits and costs of a mortgage refinance before you make your decision. Freedom Mortgage’s experienced Loan Advisors will be happy to speak to you about refinancing!
Other reasons refinancing now might make sense
Lowering your rate and saving money on interest are two reasons homeowners refinance. But they aren’t the only ones. You can refinance to lower your monthly payments. You take the money you save on your mortgage and use it to pay for other things. You can switch from an adjustable to a fixed rate mortgage by refinancing, and get the peace of mind of knowing your interest payments won’t change. Refinancing from an FHA loan to a conventional loan can help you stop paying for mortgage insurance premiums.
What is the mortgage refinance process?
Refinancing your home requires getting a new mortgage. You pay off your current mortgage and replace it with a new mortgage that has better rates or better terms. Almost all refinances will require you to complete a new application, provide documents, review and sign disclosures, pay closing costs, and attend the closing of your new mortgage. You will also need to meet your lender’s credit, income, and financial requirements to get your refinance approved.
How much paperwork is required and how much it costs to refinance depends on the type of mortgage you choose. When you are refinancing a conventional loan, the process is similar to getting a mortgage to buy a house. You have to complete a new application, provide a new set of financial documents, and pay a new set of closing costs. For these reasons, conventional refinances are sometimes called "full document" refinances.
When you have a government-backed mortgage, such as a VA loan or an FHA loan, you may be able to use the streamline program to refinance your home. Streamline refinance let you get a lower rate with less paperwork and a faster closing. The credit terms are often easier too. Streamline refinances have closing costs, and there are restrictions and requirements you will need to meet.
If you are an existing Freedom Mortgage customer who qualifies for streamline refinancing, we can make it even easier with our pre-filled applications.
Refinancing a conventional mortgage
Refinancing with a conventional mortgage has many advantages. You can get a competitive interest rate when you have good credit and income. You can avoid paying for private mortgage insurance if your home equity is 20% or more. And you can refinance more types of loans with a conventional mortgage.
Conventional loans often have higher credit and financial requirements compared to loans that have a government guarantee. You will need to meet these requirements to get your refinance application approved. Lenders will often look at:
- Your credit score. A higher credit score can improve the chances your refinance will be approved and can help you get a lower interest rate too. Check your credit score and look for ways improve it before you refinance.
- Your debt and income. Having a moderate level of debt relative to your income can increase the chances your refinancing will be approved. One guideline is the 28% rule. Your debts should not exceed 28% of your income. Another number to consider is 36%. Your mortgage payments plus your other debts should be less than 36% of your pre-tax income.
- Your home equity. For conventional mortgages, lenders typically want you to have a certain amount of home equity which they measure using loan-to-value ratio (or "LTV"). For example, say your home is worth $250,000 and you want to refinance it with a $200,000 loan. In this case your loan-to-value ratio would be 80% because 80% of $250,000 equals $200,000. Lenders may have an 80% maximum LTV on conventional refinances. A lower LTV might make it easier to get your refinance approved too.
Refinancing a VA loan
Refinancing a VA loan with the streamline program (also known as "VA IRRRL") usually has easy credit terms and more flexible financial requirements compared to conventional refinances. Many times it is possible to streamline refinance a VA loan as long as you are current on your payments and have made your recent monthly mortgage payments consistently and on time.
There are requirements you will need to meet. You can only use the streamline program to replace an existing VA loan with a new VA loan. This is different than conventional mortgages, which you can use to refinance any type of loan. You also need to get a real benefit from streamline refinancing to get your loan approved. Learn more about VA IRRRL refinances.
Current Freedom Mortgage customers who streamline refinance their VA loans with us can choose to keep their current loan term the same.
Refinancing an FHA loan
Refinancing an FHA loan with the streamline has similar benefits and requirements. FHA streamline refinances have easy credit terms and more flexible financial requirements compared to conventional refinances. Many times it is possible to streamline refinance an FHA loan as long as you are current on your payments and have made your recent monthly mortgage payments consistently and on time.
Like a VA loan, you can only use the streamline program to replace an existing FHA loan with a new FHA loan. You need to get a real benefit from streamline refinancing to get your loan approved. And you’ll need to pay new mortgage insurance premiums when you refinance. Learn more about FHA streamline refinances.
Current Freedom Mortgage customers who streamline refinance their FHA loans with us can choose to keep their current loan term the same.
Ask us when refinancing makes sense for you
We are ready to answer your refinancing questions! We offer refinancing for conventional, VA, FHA, and USDA loans. To speak with a Freedom Mortgage Loan Advisor call us at 877-220-5533 or Get Started online.
Freedom Mortgage is the #1 VA lender and #1 FHA lender in the United States, January to September 2020, according to Inside Mortgage Finance.