If you’re a homeowner and haven’t refinanced your mortgage yet, you may wonder what the process is or if it makes sense for you to refinance with rates as low as they are. As a new homeowner, I’ve wondered the same, and sat down with my friendly Webster banker, Belinda Greco, to learn about the process, and how to determine if it makes sense so I could pass along my knowledge to our readers. Here’s what I learned:
Calculate the Savings of Refinancing
In order to determine if refinancing is right for you, you need to calculate the long-term savings. A great way to compare is to look at an amortization schedule for both your current payment schedule and what your new payments would be once you refinance. You can use an online amortization calculator to give you an idea or have your banker calculate it for you. Have your current and future loan amount, loan term and interest rate handy to compare how much you would save by refinancing over time.
Lower Your Interest Rate to Save
Since rates are so low right now, you’re probably thinking you should take advantage of that and refinance to lower your monthly mortgage payment. Your interest rate is determined by a few factors, which we’ve explained in this post. Generally speaking, if your credit score has increased since you’ve obtained your mortgage, and rates have decreased, you may be able to lower your monthly payment if you refinance. For example, if your current mortgage is for $200,000 for 30 years at 5%, and you were able to lower your interest rate to 4%, you would save $118.81 per month, which calculates to a savings of $42,771.60 over the life of the loan. Not too shabby!
Adjust the Loan Term
However, it’s not always about the rate. Other factors can change your monthly payment, including your loan term. If you have a 30 year mortgage and refinance to a 15 year mortgage, your interest rate may decrease while your monthly payment will most likely increase. But you’ll end up paying a lot less in interest over time, which can save you a lot of money in the long run. Keeping with our example above, if all other things being equal, you changed your loan term from 30 years to 15 years, the monthly payment would go up $507.95, but you would end up paying $101,824.20 less over the life of the loan.
Another way to reduce your interest payments and term length is by paying more than your monthly mortgage payment and applying it to the principal. Try adding $50 to your monthly payment to pay down that principal.
Home Is Where the Equity Is
Another factor to consider is how much equity you have in your home. A good milestone to reach is having 20% equity in your home. This is when you don’t need to pay PMI (private mortgage insurance) any longer, which can help when refinancing.
Average Costs of Refinancing
So you’ve calculated the savings, but what about the expenses to refinance? Belinda said that you should set aside about $5,000-$6,000 total to refinance, which includes a variety of different expenses including the bank, your attorney, (which on average are about $2,000 - $3,000), and the rest is for things you need to pre-pay, like your home-owner’s insurance and property taxes, which can vary greatly depending on the value of your home owners insurance and taxes. You can choose to finance some, all or none of your closing costs depending on the amount of equity in your home.
The Process of Refinancing
Here are the steps that take place when you refinance your mortgage at Webster Bank:
Fill out your application, also known as your Financial Statement, and submit your documentation, which includes your pay stubs, bank statements and W2’s, etc.
Next, the bank will pull your credit score. It’s a good idea to request an annual copy of your credit report so you can fix any discrepancies before the bank pulls it. Check out our post on the 6 C’s of Credit for some tips.
Next, the bank will order an appraisal on your property to figure out the current market value.
Once all your documentation is in, your application will go to an underwriter for a decision. This process typically ranges from 45-60 days, depending on if you have all your paperwork submitted.
If you get approved, and there are no other conditions outstanding, we will contact your attorney’s office to prepare for the closing.
The closing is where you’ll sign all the paperwork and make it official.
If you’re thinking about refinancing your mortgage, you’ll want to do the math and calculate your long-term savings. Compare the amortization schedules to see how much you will save over the life of the loan, and figure out if those savings outweigh the cost to refinance. Everyone’s situation is unique, so in order to figure out what works best for you, come in to Webster and we’ll walk you through it. You can find a mortgage rep in your area by clicking here. All loans and lines are subject to credit approval.