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I recently closed with a lender for a mortgage refinance loan. I’d already gone through the process of taking out an initial mortgage, but I didn’t know what was involved in the refinancing process.
I was not excited about revisiting the mortgage loan process.
Before I refinanced, I wasn’t actively shopping around or researching lenders and rates.
But then I started to get a lot of letters in the mail and phone calls from lenders about refinancing. So I started shopping around. And I started researching.
Before I refinanced, I had a lot of questions. If you’re researching how to refinance your mortgage, you probably have similar questions.
“When can I refinance?”
“When does it make sense to refinance?”
Through the process of refinancing, I learned a few things. Now I have more answers than questions. And, honestly, the process was pretty easy.
I also learned a good rule-of-thumb for when to refinance. I’ll share my experience with you below.
What is Refinancing a Mortgage?
First, what does it mean to refinance your mortgage?
A mortgage refinance is where you take out a new loan with a new interest rate and new terms. This new loan replaces your previous mortgage. Your new lender pays off the existing loan, and you start making payments just like before.
When you refinance, there are some closing costs and other fees you’ll have to take into account when deciding if it makes sense to refinance. (See below.)
When Does It Make Sense to Refinance?
I wrote about when you should refinance your mortgage and include 7 reasons you may want to refinance. Read that article if you want a much deeper dive into when you should refinance and why.
In short, the main reasons you might want to refi are:
- Reduce your interest rate (and overall interest payment)
- Reduce your monthly payment
- Pay off your home faster
- Change your loan type (from variable to fixed, for example)
- Change your loan terms (30-year to 15-year)
- Access your home equity
- Reduce mortgage insurance
The 7 reasons are why you might want to refinance.
But the main rule of thumb for deciding if it’s the right time to refinance is:
Refinance when you can save an interest rate of 0.75% or higher.
Before you refinance, you should also consider how long you plan to stay in your home.
There are fees associated with refinancing, and you want to make sure that you’ll be in the house long enough to make refinancing worth your money. This is what people mean by the “break-even point” — the point in the time where the savings you get from refinancing offset the closing costs.
Imagine your refinance costs $2,000, and your new interest rate saves you $100 each month. It will take 20 months — almost 2 years — for your refinance to break even based on your savings.
After the break-even point, your refinance becomes worthwhile and you realize your monthly savings.
How to Refinance Your Mortgage
If you’re like me, you might wait until you start getting lots of mail and phone calls where the new interest rate is at least 0.75% better than the rate of your current mortgage.
The first time I started taking refinancing seriously is when someone told me I could refinance at 3.25% — my last mortgage was 4.25%.
When you’re ready to refi, there are plenty of options. Lenders will come out of the woodwork.
There are a few steps to refinancing which I group into these 3 steps:
- Know your goal
- Shop around and apply
- Pick your best option and close
Know Your Goal
Are you interested in having the lowest possible monthly payment? Or would you prefer a shorter payoff period?
If you want the lowest monthly payment, you may end up with a longer mortgage term and higher overall interest payment.
If you prefer paying your mortgage off faster, you can opt for a shorter loan term — and probably have higher monthly payments.
Are you just trying to change from a variable- to fixed-rate loan?
Know what you’re trying to get out of the deal will let you know whether refinancing makes sense.
Shop Around and Apply
There are a lot of lenders and services to connect you with lenders. I used one service that connected me with mortgage lenders in Texas, but I ended up going with a firm that contacted me and provided the best overall option.
(The lender I went with is called Freedom Mortgage. I used a VA IRRRL refinance.)
You’ll want to apply to multiple lenders to get loan estimates. Each lender will send you an estimate which includes your new interest rate, loan type (variable or fixed), and term period. Every estimate I received also included a breakdown of the closing costs and the break-even period.
The lenders I applied to gave me a “locked-in rate” and a period for that rate. The lock period gives you — and the lender — a time frame on when to close if you want to keep the offered rate.
A reminder on the break-even period: be sure that you plan on maintaining ownership of the house long enough to make the break-even point make sense. If your refinance closing costs take you 2 years to break even and you plan on moving in a year or two, refinancing probably isn’t going to benefit you.
Pick Your Best Option and Close
Once you have several loan estimates, all you need to do is compare the options and pick the best one. If you get a rate you’re happy with and you’re ready to refinance: go for it.
In my experience closing was extremely easy. The company I worked with sent a notary to my house, and it took 30 minutes to sign the closing papers. I was given a 5-day window to back out of the loan after signing the closing documents.
Once I signed my papers and the waiting period ended, I received a message from my previous lender that my mortgage had been paid off. March 2020 will be the first payment toward my new loan. Easy.
The Bottom Line
If you already have a mortgage, you’ve gone through the hardest part; refinancing was easy in comparison. If you’re curious about how to refinance your mortgage, keep it simple with these 3 steps:
- Know your goal
- Shop around and apply
- Pick the best loan option and close
There are a lot of reasons why you might want to refinance including lowering your monthly payment, paying off your home faster, or refinancing to a fixed-rate loan.
There are tons of options for refinancing, so shop around a bit and apply to several lenders. Many lenders will give you estimates without pulling your credit if you tell them your credit score range.
Once you have multiple loan estimates, pick the lender that offers you the best deal.
Keep in mind that there will be closing costs associated with refinancing and you want to make sure you keep your home long enough to realize your savings.