50KFix

First Time Home Buyers Knowledge Base

Refinancing Home Loan
Complete Guide

Introduction To Refinancing Home Loan

Let us start off with a small introduction video about refinancing a home loan. After the video we will look at finer details about different programs, qualification criteria, pros n cons, benefits, loan limits, fees, negotiation fronts.

How To Know When To Refinance Your Mortgage

What Is Home Loan Refinance (Or Mortgage Refinance)

Home loan refinance, in essence, refers to refinancing the current outstanding principle amount on your home loan. The loan refinance will close off the previous loan and start a new loan with different term and rate of interest. Since you have an existing loan, it is needless to say that most of those processes will repeat again when you opt to refinance your home mortgage. There may be many reasons for you to refinance your home:

  • Rates might have changed
  • Your credit score might have changed, allowing you to qualify for a lower rate
  • You might want to opt into a different mortgage program. Most common here being moving from FHA 203K to conventional mortgage
  • Converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, and vice versa
  • You can afford to pay higher monthly mortgage and want to shorter the term and vice versa
  • Debt consolidation, like paying off credit card or other debts

Whatever your situation is you have to be very careful as that house maybe one of the most valuable asset you may own. [1]

When Refinancing Your Mortgage Is A Good Idea

If you are planning to stay in the home for longer than the time it takes to break even with the closing costs

You can consider mortgage refinance

It is a great idea to refinance if you can save money either by lowering your monthly mortgage or by shortening the mortgage term or both. In this section we will focus on some scenarios when home loan refinance is profitable in long run.

  • To Secure A Lower Rate Of Interest : It is no-brainer to refinance if you are locked in at a pretty higher rate compared to current market rates. To calculate long term savings use refinance mortgage calculator to see how much you are going to save. Mathematically if there is a difference of 1% or more then refinancing will be profitable. With reduced rate of interest and keeping the same mortgage premium you will pay off your loan a lot earlier and will also save a lot in interest payments.
  • To Adjust Your Mortgage Term : You can increase or decrease the term of your mortgage depending upon your requirements:
    • Increasing the term : If you want to decrease your monthly mortgage payment you have to increase the term like going from 15 yr fixed to 30 yr fixed. One instant take away from here is that you will end up paying a lot more in interest amount. Sometimes this might be the best option as you need some extra funds to spend elsewhere.
    • Decreasing the term : You got an appraisal and can afford to pay more in monthly mortgage is one scenario, secondly by going to a shorter term you get better rates. Basically there are two advantages here, not only do you pay a lot less in interest amount but you also qualify for a better rate than your current mortgage.
  • Converting From Adjustable-Rate (ARM) to Fixed-Rate Mortgage and vice versa: It can be beneficial in changing from ARM to fixed-rate mortgage or from fixed-rate to ARM depending upon market conditions. Market conditions dictate what the current or future mortgage rates might be. Lets take up both the scenarios:
    • Moving from ARM to fixed-rate : Say when you first took home loan you opted for adjustable-rate [as they were cheaper] and the rates have dropped a lot since then, say by 1.5-3 basis points (1.5-3%), now might be a good time to get some stability with fixed-rate mortgage. The rates will not remain this low [like in COVID19 times or 2008 when we are in bearer market], they have in past and will start to climb backup and as will your monthly mortgage payments. So it is a great idea to lock yourself in fixed-rate when rates are low.
    • Moving from fixed-rate to ARM : If you are locked at a very high fixed-rate mortgage and rates are dropping then it can be a good financial strategy to opt for ARM, your financial advisor may be able to run through the exact numbers from savings point of view.
  • Opting For A Different Mortgage Program : Say initially you went through FHA 203K Home Loan, as the program suggests you did some upgrades on your home and have built enough equity to qualify for a conventional loan over a period of time. You will get better rates and also get rid of insurance premium and might also qualify for a partial refund from the 1.75% you deposited at the time of availing 203K loan provided you are within 36 months of your mortgage.
  • Debt Consolidation : This happens more often and does not need much of an explanation, when you want to get rid of 4-5 different monthly bills and consolidate everything into your mortgage.

To present the most accurate information we do refer whitepapers, government websites and other reputed publishers to gain deep insight on the subject matter. Reference materials used are as under:

  1. Federal Reserve “A Consumer’s Guide to Mortgage Refinancing” – Last Accessed July 7th, 2020

Latest In Refinancing Home Loans