What Is Refinancing, and Should You Do It in 2022?
As of January 2022, mortgage rates are still at historic lows, encouraging homebuyers to buy and homeowners to refinance even as real estate prices continue to climb. If you’re a homeowner, you’ve likely received a spam call or 2,000 inviting you to refinance your home. We’ll walk you through what refinancing is, the benefits of refinancing, and when you might want to call up your mortgage lender to take the leap.
What Is Refinancing?
Refinancing is the process in which you replace existing debt with another debt that has different terms. As a homeowner, refinancing means you’re replacing your current mortgage with a new mortgage that has a different interest rate, term length, or type, such as switching from an adjustable-rate mortgage to a fixed-rate mortgage (or vice versa).
For example, FHA and VA loans require personal mortgage insurance (PMI). Homeowners paying off these types of mortgages will often refinance to switch to a conventional loan to avoid those insurance payments. Some people refinance their home so they can finance a large purchase, consolidate their debt, or to get short-term relief from high monthly payments. There are a variety of reasons why someone would refinance their home, and there are a number of refinancing options as a result.
Here are some examples of different types of refinancing, as outlined in the above video by U.S. Bank:
- Cash-out refinancing lets you replace your current mortgage with a new, bigger mortgage, which gives you a chance to take the difference between your old and new mortgage out in cash. You’ve built equity in your home, and this method allows you to take out a new mortgage and cash out on the equity that you’ve built.
- Rate and term refinancing is exactly what it sounds like - you are able to change the rate, term, or both of your existing mortgage without advancing any money. Rate and term refinancing is often called “no cash-out refinancing.”
- Streamline refinancing occurs when you refinance an existing FHA loan with another FHA loan. Because you’ve already met the requirements for your first FHA loan, this refinance should be more “streamlined” than other methods, getting you a lower interest rate in a timelier manner.
If you’re curious about the requirements you must meet before refinancing, check out this Rocket Mortgage article.
To further contextualize refinancing and what it could mean for you, let’s look at how your monthly payment can change on a 30-year fixed mortgage. Say your original loan amount, or principal, was $225,000. Your interest rate is 4.0%, making your monthly payment $1,074. You refinance with a new principal amount of $200,000 and an interest rate of 3.25%, bringing your monthly payment down to $870. Before taxes, PMI, insurance, or HOA fees, you’ll be saving $204 per month.
If you’d like to determine what you could save by refinancing, check out this mortgage calculator to see how your monthly payment can differ based on term length and interest rates.
Why You Should Refinance Now (If It Makes Sense)
Refinancing can be a smart financial decision, as it can secure a lower monthly payment for you while building equity in your home. The main reasons homeowners refinance are to obtain a lower interest rate, to increase or decrease their mortgage term, or to build up equity in their home in order to pay off the mortgage faster and make monthly payments lower. 2022 will be a particularly good year for many people to refinance because the mortgage rates remain so low. Experts predict that mortgage rates will not fall further this year, but they’re also not projected to increase dramatically.
Since most refinancing is encouraged when the interest rate is 1% lower than your original rate, now is a fantastic time to revisit the terms of your mortgage, even if it’s just for your own peace of mind.
If you decide that you’d like to refinance your home loan, keep in mind that the refinancing process requires some of the same steps as the original mortgage application process. These steps will cost you money, usually around 2-6% of your loan’s principal, so be sure to calculate if these fees exceed the savings you get from refinancing. The most common fees you’ll come across include an application fee, appraisal fee, title search, and insurance fees, and some states require an attorney to oversee the paperwork for your refinance. While there is no limit to how often you can refinance your home, you’ll want to be sure it’s a financially smart decision to make each time.
The process of refinancing can differ based on what kind of mortgage you have, but here are the basics:
- Apply for refinancing with your lender
- Your lender will start the underwriting process
- You’ll lock in your interest rate once approved
- Schedule and prepare for a home appraisal
- Close on your new loan
We recommend checking in with your trusted mortgage professional to see if you could save money by refinancing your home this year. Best of luck!
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