Refinancing your mortgage offers a path to potentially significant financial savings through a lower interest rate, or it can help you reach the goal of full homeownership sooner. Alternatively, it might be an effective way to convert some of your home’s accumulated equity into cash for other large-scale endeavors. To determine if refinancing aligns with your personal objectives, gaining a deeper understanding of its mechanics is crucial. At Space Coast Credit Union (SCCU), we are ready to assist you in evaluating all the advantages and disadvantages and guiding you through each step of the process.
What is Mortgage Refinancing?
Mortgage refinancing involves the act of replacing your existing home loan with a new one. Some individuals opt to stay with their current lender, while others seek out a different financial institution, often driven by who offers more attractive rates, reduced closing costs or fees, special promotions, or superior customer service. However, in most instances, people pursue mortgage refinancing primarily to capitalize on the benefits of a lower interest rate.
Consider this example of how mortgage refinancing operates: Imagine you have an outstanding balance of $160,000 on your home loan. You then identify a new lender prepared to offer you a loan for that exact amount but at a reduced interest rate. After successfully navigating the application and approval stages, your new lender will settle your debt with your previous lender. You will then owe $160,000 to your new lender. This shift will likely result in greater financial savings over the remaining duration of your loan.
It’s important to remember that you might still encounter closing costs and other associated fees, similar to those you paid with your original mortgage. This is why it’s advisable to compare offers from various lenders, as some may waive certain costs. Ultimately, if your primary aim is to save money, it’s essential to perform the necessary calculations to confirm that the total cost of refinancing will be less than the cost of maintaining your current loan.
The three primary categories of mortgage refinancing include:
- Rate-and-Term Refinance: As the name suggests, this loan type is typically focused on securing a lower interest rate or modifying the loan’s repayment period (or both). Most individuals pursuing this option are looking to achieve cost savings.
- Cash-out Refinance: This is chosen by homeowners who wish to convert a portion of their home’s equity into liquid cash. You will refinance your remaining loan balance, plus the additional cash amount you intend to withdraw, resulting in a larger new loan.
- Cash-in Refinance: With this type, borrowers make an additional payment to the lender at closing. This action is taken to decrease their loan-to-value (LTV) ratio, enabling them to qualify for a lower interest rate or a shorter loan term (or both). Often, the goal is to reduce the loan balance to 80% LTV or less, which can also lead to the cancellation of their mortgage insurance premium (MIP) during the refinancing process.
Advantages and Disadvantages of Refinancing a Mortgage
Financial experts generally suggest considering a mortgage refinance if you can decrease your current interest rate by at least 0.75% to 1%. Furthermore, it’s wise to ensure you don’t plan on moving shortly after refinancing to allow sufficient time to “break even” on the associated closing costs. A mortgage refinancing calculator can be a valuable tool for inputting your numbers and assessing if a new loan will be financially beneficial. Alternatively, you are always welcome to consult with one of our mortgage experts at SCCU to assist you with these calculations. Simply give us a call at 800-447-7228, ext. 8976.
Pros of Refinancing:
- Achieving Greater Savings with a Lower Interest Rate: If your financial profile has improved—particularly your credit score and payment history—you are more likely to secure a more favorable interest rate. Lower interest rates often translate into faster equity accumulation and reduced overall payments throughout the loan’s lifespan. SCCU offers competitive mortgage refinancing rates.
- Accessing Your Home’s Equity: Homeowners can tap into their home equity when its value surpasses the outstanding mortgage balance. This can occur due to significant principal payments, an increase in property values, or a combination of both. This available cash can be extremely useful for paying off high-interest debts, funding home improvements, covering college tuition, or addressing other substantial expenses, all while potentially securing a lower interest rate on your new mortgage loan.
- Changing the Type of Interest Rate: Shifting from an adjustable interest rate to a fixed-interest rate can provide greater financial stability, especially when planning for long-term costs and budgeting. Conversely, moving from a fixed-rate to an adjustable rate might result in lower initial monthly payments.
- Eliminating FHA Mortgage Insurance Premiums: If you do not intend to sell your home in the near future and possess sufficient equity, you can frequently remove mandatory FHA premiums by refinancing your loan.
Cons of Refinancing:
- Incurring Closing Costs: Unfortunately, with most refinances, you’ll need to account for closing costs, just as you did with your original home loan. These expenses typically range from 2% to 6% of the new loan amount and encompass fees such as origination fees, appraisal fees, title insurance fees, credit report fees, and more. It may be possible to find a lender who will discount or waive some or all of these charges.
- Facing Cash-Out Drawbacks: Opting for a cash-out refinance usually means a larger loan amount and potentially higher monthly payments.
- Experiencing a Lengthy Refinancing Process: The average refinance process can take between 50 to 60 days, depending on the loan type. It can also extend further if a high volume of homeowners are simultaneously seeking to refinance to benefit from lower interest rates.
- Impact on Your Credit: Regrettably, applying for a mortgage loan can temporarily affect your credit score, potentially causing it to drop a few points. However, multiple similar inquiries within a short timeframe typically count as only one inquiry. If you are rate shopping, it’s best to limit your inquiries to your top-choice lenders within that condensed period.
Steps to Refinance Your Mortgage
- Assess the Financial Viability of Refinancing: First, it’s prudent to ensure that mortgage refinancing genuinely serves your primary objectives without incurring greater costs in the long run compared to retaining your current loan. If your aim is to shorten your loan’s term, be prepared that you might need to adjust your budget for increased monthly payments. You’ll also need to verify that you meet the necessary qualifications for refinancing. Generally, this includes maintaining a debt-to-income ratio below a certain threshold, possessing at least 20% equity in your home, and having a credit score of 620 or higher. As an SCCU member, you can conveniently access your FICO score for free within your Online Banking account.
- Explore and Compare Lenders for Optimal Rates: With your mortgage refinancing goals firmly established, the next step is to investigate your available options. You can reach out to your current lender, various banks and credit unions, non-bank lenders, and solicit referrals from your personal network. Feeling overwhelmed by information? Creating a spreadsheet that organizes different lenders’ mortgage refinancing products, their interest rates, fees, terms, and requirements in side-by-side columns can be immensely helpful. Fortunately, some lenders, like SCCU, may waive prepayment penalties.
- Submit Applications to Your Preferred Lenders: The subsequent phase involves initiating the application process. You’ll need to compile a comprehensive set of documents for the lender to verify your eligibility and determine your specific rate. As a reminder, it’s best to limit your applications to only a couple of top lenders to minimize any negative impact on your credit. You will most likely need to provide proof of income (such as W2s, tax returns, bank statements, and paycheck stubs), proof of insurance, debt statements, and proof of assets. SCCU provides a convenient checklist detailing the necessary paperwork. Each lender will issue a Loan Estimate document, providing an approximation of your closing cost expenses.
- Secure Your Interest Rate: Once your lender has approved your application (congratulations!), you can request to lock in an interest rate based on that day’s available options. However, the lender can only guarantee this rate for a specific timeframe, and they will work to finalize the closing before this expiration date. This ensures that your lender honors that rate, even if market rates happen to increase during your mortgage refinancing process. Rest assured, you will still retain flexibility when it comes to selecting the loan type and making other adjustments to your application.
- Navigate the Loan Processing Phase: Just like when you obtained your first mortgage for your home, your property will need to undergo an inspection, an appraisal, and a title search. The lender’s underwriting team will meticulously review all documentation and might contact you for clarification or to request additional verification. They will scrutinize every detail to ensure everything is in perfect order. This process can take some time, but at least you won’t have the added stress of moving!
- Finalize the Loan at Closing: After your lender has completed the processing of your loan, you’ll need to schedule a closing day with them. You will then submit any remaining necessary documents, pay the closing costs, and sign the final paperwork. And then it’s time to celebrate! You’ve successfully completed the mortgage refinancing process!
Why Choose SCCU for Mortgage Refinancing?
The optimal time to refinance your mortgage ultimately hinges on whether it will help you achieve your specific financial goals, while also meeting the necessary qualifications. SCCU offers a diverse range of mortgage loan options and competitive interest rates to support you. If you are unsure which option is best suited for your needs, we are more than happy to assist you in any way we can.
Whether you prefer to apply online or over the phone, we will guide you through the entire process. Furthermore, we value your time and aim to make quick approval decisions. The SCCU Member Service Center will be available to you throughout the life of your loan should you have any questions. Feel free to connect with us using the method that best suits your needs.