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Refinancing your mortgage can be a great, money-saving option for many homeowners, especially if your credit score has improved and you’re refinancing for a lower interest rate. However, there are also associated costs that must be considered, including fees which can range from 2% to 5% of your balance due.

Could this be a great time to refinance? How soon can you take advantage and possibly get into a lower rate? Even if you can refi, does it make sense for you? Learn how refinancing works, the benefits and drawbacks to refinancing, when the right time to refinance is, and if it’s the right option for you based on your financial goals and what you are looking to accomplish.

How Mortgage Refinancing Works

When you refinance, your current loan gets paid off and replaced with a new one which has different terms. In the transaction, several things about your loan could change including your interest rate, the length of your loan, the loan balance itself and even the type of loan you have.

In a refinance, a payoff check is issued by the lender handling your new loan to the originator of your current loan. When that happens, your relationship with the old lender ends and your new lender takes over from that point forward.

When you’re refinancing, the loans break down into two categories. We’ll get into these in more detail later, but for now here are the basics.

  • Rate/Term Refinance – If you’re looking to lower your rate or payment or even change your term without changing your existing mortgage balance, this is the mortgage option for you.
  • Cash-out Refinance – If you want to convert the existing equity in your house into cash in order to make home improvements or boost a college or retirement fund, you can take out money with a cash-out refinance. This is also commonly used to consolidate high-interest debt like credit card balances because mortgage rates are typically some of the lowest loan rates you’ll see.

Options for Refinancing with Low Equity

Most loan options will require you to have a certain amount of equity in the home in order to refinance, but if you have very little equity or even owe more than your home is worth, you may have other certain options.

In this situation, the thing you can do most often is a streamline. That means the investor in your mortgage (e.g., Freddie Mac, FHA, VA, etc.) stays the same, but you may be able to lower your rate or change your term. Talk to your Home Loan Expert about any possible mortgage options you may have.

Why Should I Refinance?

There are many benefits and reasons why you might consider refinancing your mortgage. Here are the most common reasons people decide to refinance:

Lower Your Payment – A refi can be an opportunity to give your finances some breathing room. You can refinance your loan so that it has a lower monthly payment. And that extra cash can go toward your other financial goals, such as saving for a car, putting money into a retirement account or whatever other objectives you may have.

Lower Your Rate – Your interest payments make up a large portion of your monthly payment, especially in the first ten years. The higher your interest rate, the larger your monthly payment and the more you’ll pay over the life of the loan. When you refinance your mortgage to a lower interest rate, you’ll pay less in interest. When rates drop below your current rate, it may be a great time for you to swoop in and get a lower one. It’s always good to keep track of interest rates so you know when you can save the most money!

Change Your Loan Type – Sometimes we need a change of pace in life. If you’re interested in getting out of your fixed-rate loan, you may be the perfect candidate for an adjustable rate mortgage (ARM), which provides a lower interest rate than a fixed loan. After a period of time, though, this rate adjusts based on market conditions. Converting between adjustable and fixed can be a great way for you to save money while taking advantage of the lower rate during the fixed period. On the other hand, switching to a fixed rate gives you certainty.

Get Rid of Mortgage Insurance – If you have an increase in property value based on a new appraisal, you might refinance in order to remove private mortgage insurance (PMI). Meanwhile, once you reach 20% equity, converting from an FHA loan to a conventional one could help you ditch FHA mortgage insurance payments.

Cash for Repairs and Home Improvements – If the hot water heater went after years of service and the roof needs replacing soon, taking cash out of your home can make more sense than putting these bills on a credit card with a much higher interest rate.

Give Your Savings a Boost – Things like a child going to college or retirement age can sometimes sneak up on us faster than we know. If you find yourself behind the eight ball from a savings standpoint, a cash-out refinance can be a good low-interest way to give your accounts a much-needed infusion of green.

Consolidate Debt – If you have additional debt that has a high interest rate and you have enough equity in your home, you could consolidate that debt into your home loan and pay interest at a much lower rate.

Knowing what you’re trying to accomplish with a mortgage refinance will help you understand if it’s the right option for you.

What Should I Consider Before Refinancing?

Before you’re ready to refinance, there are several things you need to think about, including the following:

  • Current EquityHome equity is the amount of your home’s value that you own. You’ll need 20% equity to remove your PMI through refinancing. If you’re interested in refinancing for a different reason, your situation will depend on specific loan programs. Reach out to a Home Loan Expert to discuss your options.
  • Credit Score – Much like buying a home, you’ll need to consider your credit score when refinancing a mortgage. You’ll need a credit score of at least 620 (or 580 in the case of an FHA loan) in order to refi your home.
  • Length of Time in the Home – Not only do you need to wait a certain amount of time before you can take cash out if you just took over the title, but you also need to consider how long you want to stay in your home and whether refinancing will make sense. For example, do you really need to pay more for 15 years of rate certainty if you only plan on staying in the home for five years? An adjustable rate mortgage (ARM) is a loan with a 30-year term with a low teaser rate that stays fixed for a period of time – typically five, seven or 10 years – before it adjusts up or down, depending on what the market is doing. If you only plan on being in the home for 10 years, you would be able to get a lower rate with an ARM then you could with a fixed-rate mortgage and be ready to move before it ever adjusts. If you plan to own your home for two years or less, it’s likely not worth refinancing unless you refinance to a much lower rate.
  • Other Outstanding Debt – A mortgage lender will have to take a look at your debt-to-income (DTI) ratio. The less income you have going toward debt, the better your chances will be to qualify. You can also look at taking equity out of your home for debt consolidation.
  • Closing Costs – Closing costs on a refinance will typically be a bit cheaper than they are on a purchase, but they can still be significant. When talking to lenders about loan options, don’t overlook this. You may see lenders make reference to no-cost refinances. Know that there is no such thing. While you can often get a refinance with little to no closing costs, there’s a drawback. The lender will either charge a higher interest rate or roll the closing costs into the loan amount. For some people, it still makes sense to refinance this way and every situation is different. Just be aware that to get the lowest rates, you’ll typically have to pay higher closing costs. Be sure to speak with your Home Loan expert about all options.
  • Mortgage Prepayment Penalties – Some lenders charge a penalty if you pay off your mortgage before a certain point in the term, say within five years of getting it. If you plan on refinancing, look at the terms of your current mortgage and see whether you’ll have to pay a penalty, because they should be factored into your decision as to whether a refinance makes financial sense.
  • Loan Term – While there are exceptions if a financial change has made you want to drastically lower your payment, most people like to have a loan term that’s at least equal to the number of years they have remaining on their original mortgage if they can afford it. While many lenders only offer loans in set terms, Quicken Loans® is able to offer fixed-rate financing for conventional loans in terms anywhere between 8 – 30 years.

When you’re getting ready to refinance, the monthly payment shouldn’t be the only consideration. Make sure you’re also factoring in your goals, the loan’s term, your interest rate and closing cost. Not sure where to start? Our mortgage refinance checklist can help.

How Much Money Will I Save by Refinancing?

The most common reason to refinance is to save money. Naturally, one of the most common questions then is how much you’ll save by refinancing.

Every situation is different, but let’s run through a couple of scenarios just so you have things to think about. You can put in your own numbers with our refinance calculator.

Let’s say you wanted to pay off your mortgage faster and had $200,000 left on a home worth $250,000. You have 20 years left on your term and want to pay off your home faster. You have excellent credit.

You could refinance into a 15-year conventional fixed mortgage at an interest rate of 3.75% (4.227% APR) and have a monthly payment of $1,454.45. There are $7,057 in closing costs. However, by paying those closing costs and getting that rate you save more than $40,000 in interest.1

On the other hand, if you were to lengthen your term to lower your payment, you would save every month, but you would end up paying more in interest. It doesn’t work this way in the real world, but let’s keep everything the same except the term. If you had a 3.75% interest rate on a $200,000 loan, because the term is longer, you pay about $30,000 more in interest. In reality, this number is higher because a longer-term loan also means a higher interest rate.

What Are the Costs of Refinancing?

When you set up a mortgage, there are various associated costs you have to think about. Among the costs you can expect to pay are origination fees. These vary from lender to lender and depend on the type of loan you get. Other costs include:

  • Appraisal fees
  • Mortgage discount points
  • Prepaid tax
  • Insurance payments (combined with prepaid taxes to set up an escrow account)
  • Any title insurance changes that may be necessary
  • Loan origination fee
  • Any upfront fees or payments for mortgage insurance if you have it

When Can I Refinance?

Before you can refinance, there’s sometimes a waiting period and lenders will say that your mortgage has to be “seasoned” for a certain amount of time. Seasoning simply refers to the age of your mortgage. Age requirements most often apply in cash-out transactions, but it may also apply in other areas, such as when you can have your equity recalculated based on a new appraisal.

In the following sections, we’ll go over how your options to refinance are impacted by how long you’ve had your current loan.

Cash-Out Timeframe

If you’re looking to take cash out, you have to be on the title of the property for at least six months if you have a conventional, jumbo or VA loan. If you have an FHA loan, the waiting period on a cash-out refi is one year.

On a rate/term refinance (taking no cash out of your equity), there’s no waiting period.

If you recently moved back into your former investment property, the FHA also requires you to prove you’ve lived there for at least a year. If you haven’t been back for at least a year, you can only do a rate/term refinance, and the maximum loan-to-value ratio (LTV) is 85%. In the case of a refinance, LTV is the ratio of the loan amount compared to the appraised value.

One thing to note is that if you inherited the property, there’s no waiting period necessary unless you had an FHA loan and rented the property out at any time since you inherited it.

Using a New Appraisal

If you’re looking to use a new appraisal to prove an increase in your equity that’s based on increased property value, there are special waiting periods involved depending on the type of loan you have.

If you have an FHA, a jumbo or a VA loan and you want a new appraisal to determine a value increase, you have to own the property a year before requesting the appraisal.

On agency loans from Fannie Mae or Freddie Mac, there is no specific timeframe you have to wait. The appraisal just has to be supported by changing market conditions and/or documented improvements made to the property.

Factoring in the Costs

Once you know what the costs are, it’s a matter of just doing the math. If you’re doing a rate-term refinance with the goal of lowering your payment, simply divide your cost to close the loan by the amount you’re going to save every month.

This will tell you the amount of time to stay in the house in order to break even on the deal. If you see yourself moving before you reach breakeven, refinancing may not be a great option.

As an example, if refinancing lowers your interest rate and saves you $50 per month on your payment, but it has $5,000 in closing costs, you would need to stay in the home 100 months – a little over eight years – to break even. If you were to move out before that point, refinancing isn’t right for you under the terms of that deal. It’s a matter of balancing the cost against both your plans for the refinance and your long-term goals.

Before you break out the slide rule, though, we can help you with this math problem. With Rocket Mortgage®, you can compare a customized mortgage solution with your current mortgage loan in order to quickly and easily see if refinancing makes sense for you. You can also speak with one of our Home Loan Experts at (888) 980-6716. If you’re a current Quicken Loans client, you can call (888) 980-4576 and we would be happy to compare any options to your existing mortgage with us.

We also always encourage you to take the opportunity to speak with a financial advisor before making any big moves affecting your future monetary planning.

If you want more information, view our refinancing options. If you still have questions, let us know in the comments below.

1 Calculations current as of 05/17/2019.

 

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This Post Has 106 Comments

  1. My current mortgage interest rate is 4.7%. I’d like to refinance to get a lower interest rate and possibly pull out some equity! With that being said, my credit is a little bruised! I’d like to speak to someone to see if I qualify….

  2. Been told in past that I dont qualify for harp (story of my life) I would like to refi, currently in a 30/40 @ 5.9% but my pmt increased about $175 a month this year. Would like low cost or no cost oop. 30 yr fixed possibly without pmi as I have insurance policy to cover. Credit rating 698-703 depending on credit agency.
    Looking mainly to drop payments as much as possible.
    Nancy

    1. Hi Nancy:

      We can definitely help you look into your options. There are programs that will help you avoid monthly PMI payments. I’m going to have someone reach out to you.

      Thanks,
      Kevin Graham

  3. I owe 53k and would like to get a cash out refinance to pay for foundation work and pay off debt. How does the foundation issue effect my appraisal? Home value should be around110K

    1. Hi Glenn:

      These questions are best answered by a Home Loan Expert. I’m going to have someone make contact.

      Thanks,
      Kevin Graham

  4. I HAVE A MORTGAGE WITH QUICKEN LOANS AT THE PRESENT TIME at 4.6% CAN I REFINANCE AT A LOWER RATE?

    1. Hi Robert:

      We’d be happy to look into your options and see if anything makes sense for you at this point. Someone will be reaching out.

      Thanks,
      Kevin Graham

  5. My wife and I paid cash for our house last fall, then took out a home equity line to purchase new vehicles and do some work on the house. We have come to realize, recently, that we need a little more than we have left in our line of credit.
    Does it make sense for us to take out a mortgage, pay off the home equity line and complete the work on the home? We currently don’t have a fixed rate and are not used to having to sort out the details of payments and finance; right now we are only required to pay interest

    1. Hi Bill:

      I would be happy to have someone reach out and look into the best possible option for you. We’ll be in contact.

      Thanks,
      Kevin Graham

    1. Hi Michael:

      It depends on when the bankruptcy was discharged, but I’m going to have someone reach out to you to go over this.

      Thanks,
      Kevin

  6. I currently have an FHA loan with a 8.1% interest rate & owe around $89,000.00. I would like to refinance, but have had some credit issues with my current mortgage holder Ocwen. Credit Rating is high 5’s low 6’s. I didn’t know if I would qualify for a lower rate since my credit rating isn’t above 700. Should I even try to get it lower?

    1. Hi Sandy:

      Every situation is different, but we can definitely help you look into your options in this area.

      Thanks,
      Kevin Graham

  7. I purchased my home in 2008 under a first time home buyers program and looking for some help getting the 2nd off my home my interest rate is at 6.25%. I got divorced a few years back and my credit score has decrease due to illness and late payments. I’m Looking to do some Consolidation with my credit cards as well as past due medical bills

    1. Hi Kishia:

      I’m going to have someone reach out to you. Every situation is different, but we can look into your options.

      Thanks,
      Kevin Graham

    1. Hi Paul:

      You have enough equity. The issue is going to be your credit score. You have to get up to 580 in order to qualify under FHA and 620 for conventional. I’m going to have someone reach out to you to go over your credit situation and your eventual options. In the meantime, here’s a blog post with some tips on raising that score.

  8. Been in house 2 yrs at 30yr FHA at 4.25 and would like a lower rate / payment but was told based on refinance charges if the rate decrease is less that 1% it would not be worth it… I owe 124k…… Is there a rate in the 3.0% ?????

    1. Hi M:

      It’s very difficult to give concrete information on rates in the comments section because your rate is dependent on several factors. We can have someone look into your situation and help you determine if refinancing makes sense, though. Someone will be in contact.

      Thanks,
      Kevin Graham

      1. Why can’t you give M a straight answer about the interest rates. Just tell him if it is worth him refinancing his home for one percent difference. When I had that done I did not see a difference in my monthly payment, so I told the mortgage company no thanks. What are some of the several factors that his loan will depend on. Ok say he do this and you all charge him Ten thousand dollar to do this loan for another thirty years and his payment go down one hundred dollars. That is not a saving. So tell me how is that helping some one. Thank you

        1. Hi Clarence and Rhonda:

          I see that you’re working with us and one of our Home Loan Experts could give you a very detailed answer on this, but among the factors affecting rates are things like a person’s credit score, debt-to-income ratio and whether or not they choose to buy any mortgage points to pay down the rate ahead of time. This blog post has further details on the factors affecting your rate. I’m also going to pass this along to someone that would be happy to answer any questions you may have.

          Thanks,
          Kevin Graham

  9. I currently have an interest rate of 5.25%. I want a lower interest rate . Need to pay off debt. I’m in a large home. The home does need cosmetic improvements. Equity about 60,000. Do I refinance or move. I would like to downsize. I’m not sure what would be best.

    1. Hi Joan:

      I can definitely have someone go over loan options with you and you can use that as part of your decision in terms of what might be best based on your situation. Someone will be reaching out.

      Thanks,
      Kevin Graham

  10. My question is i filed for bankrupcy 5 years ago.I,m with Bank America . I went through a modification which the Housing Urban payed what i was behind now i have a second mortgage. I want to refinance to pay off that second mortgage. I need to know if I can do the harp or what can I do.Ive lived here 20 years.I would like to refinance. thank you

    1. Hi Rhonda:

      Every situation is different. I’m going to have someone reach out to you to go over your options.

      Thanks,
      Kevin Graham

  11. We have an FHA loan and have been in the home for a year. The interest rate is 3.45%. My husband and I are both on the mortgage and we may possibly be getting a divorce. I will be getting the house in the settlement. Do I need to requalify or refinance the mortgage to have his name removed?

    1. Hi Janet:

      You would most likely refinance to get his name off, but I’m going to pass this along to someone who can give you further information.

      Thanks,
      Kevin Graham

  12. I have a harp loan at 4.25 is it possible to get a loan at a lower rate without paying cost great credit and never been late on payments. But am upside down still would be nice to lower payments

  13. Kevin,
    Back in 2007 I refinanced my house and pulled over 450k out of the equity in my house. I need the money ASAP because my business grew so fast. The company told me since I needed the money in 10 days it was going to be a crazy rate but could refinance when I had the time. I never did. The mortgage is a 50 yr at 8.75. I am paying over 2k a month more than a conventional loan at this time. I need out, help.

    1. Hi Mike:

      That does sound like an incredibly high rate over a long term. I’m going to have someone reach out to you and see if we have any options that fit your needs. Thanks!

      Kevin Graham

  14. Hi.

    I own a couple properties outright. I got sick several years ago and got behind on my property taxes. To make a long story short, I would like to borrow on those properties to simply catch up the property taxes and stop the penalties which are such that I can never catch up! Are there any options for me?

    1. Hi Herman:

      If you have liens on your house due to the unpaid property taxes, that may limit your options to get a mortgage, but you can also take a look at getting a personal loan. I’m going to have someone reach out and help you look into your options.

      Thanks,
      Kevin Graham

  15. I have a hamp loan now on my home but also in 2034 i have to pay 60,something thousand dollars or have that amount refinanced.my payments are really low and intrest rate is 2% now but I have to pay on 27 thousand now and still have it on 18 more years I’m really totally confused on what to do because I can’t start paying on the 60 thousand until I have paid of the 27plus thousand at the time I got the loan it was I thought to be the government harp program because I was not behind on my payments but at some point I was lead to think that the 27 thousand supposed to be dropped so far it’s not been.I can’t find alot of information about the hamp loans. Do you all have any information about this?

    1. Hi Mixie:

      I can definitely have someone look into this and offer any advice they may have. They’ll be in contact.

      Thanks,
      Kevin Graham

      1. I wound like for that question to be answered as well. I was told the same thing! Also I would have to be behind at least 3 months. Then I was offered a trial period of a lesser amount for mortgage payments for 4 months. My credit would state partial payment which will destroy my over 700 credit store. So what’s the purpose of the hamp program?

        1. Hi Tammy:

          Every situation is a little bit different, but I’m going to have someone reach out to you to go over any options you may have or any advice we can give.

          Thanks,
          Kevin Graham

  16. Im thinking of buying a 2ed home later this year but dont know if i should refinance the one i have or just leave it if i refinance it i would like to do it for 15 years any help with this

    1. Hi Mario:

      I can have someone reach out to you and help you look into whether it would be best for you to refinance or not. They’ll be in contact.

      Thanks,
      Kevin Graham

  17. If a mortgage is upside down, does Quicken Loans offer refinance options? Condo prop purchased in March 2007 @ 6.6% FHA.

    1. Hi K:

      Being upside down may make the financing difficult, but I’m going to have a Home Loan Expert reach out about your options.

      Thanks,
      Kevin Graham

  18. Hi I have credit card debt and not a great credit score I own my own home and am looking for a consolidation of sorts so I can pay off the cards any help would be appreciated

  19. I own my house but have a lot of credit card debt. My credit score is low because of the debt to credit ratio. I would love to get some type of home equity loan to put all of my bills in one plan with a lower percentage rate. Is this possible?

    1. Hi Daria:

      We can definitely help you look into your options. Someone will be reaching out.

      Thanks,
      Kevin Graham

    1. Hi Joseph:

      The requirements vary based on the type of loan you’re trying to get. We can definitely help you look into your options. Someone will be reaching out.

      Thanks,
      Kevin Graham

    1. Hi Sally:

      I can tell you that HARP only applies in very specific circumstances. You also have a very good rate at 3.25% depending on the type of loan you have. That said, I’m going to have someone reach out and we can see if refinancing makes sense for you.

      Thanks,
      Kevin Graham

    1. Hi Denise:

      You can definitely do something like a cash-out refinance. An appraisal is done on the home to determine the value and you can get a loan based on that. I’m going to have someone reach out to you with more detailed information.

      Thanks,
      Kevin Graham

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