Refinance Rates: What You Need to Know

You’ve likely heard in the news about historically low refinance rates – “Interest rates you can’t pass up! Act now! Don’t miss out!”

While it’s true that interest rates are incredibly low right now, that doesn’t mean that refinancing your home loan is the best option. Let’s break down what refinancing means, if it’s something you should consider, and what current refinance rates look like. 

Here are our current Refinance Rates at Focus Federal Credit Union.

What does it mean to refinance a home loan?

When you originally bought your home you worked with a lender to get a home loan to pay for the house. Refinancing your mortgage involves taking out a new loan to pay off your original mortgage loan and replacing it with a new loan with lower refinance rates.

The process of refinancing a mortgage is like the process you went through when you originally got a loan. You typically start by comparing your current terms on your existing loan and refinance rates with various banks and mortgage lenders to see which has the best offer.

When should you consider refinancing your home loan?

There are several reasons why homeowners decide to refinance. Before you go down this path it’s important to understand the advantages and disadvantages in order to make an informed decision. There are several reasons why it may be a good idea to refinance.

• Lower your interest rate and payment. You may be able to save money on interest with a lower rate and monthly payment. If interest rates have declined since you originally got your loan, then it may be time to consider refinancing. Additionally, if your credit has improved since you were approved for your loan, you have a good chance of qualifying for more favorable terms.
• Change the terms of your loan. If you can qualify for a lower interest rate you may be able to shorten your loan term. For example, if your original loan was for 30 years you may be able to reduce it to 20 or even 15 years. By shortening your loan term, you can save money on the interest over the life of the loan. You can also refinance to a longer term which would lower your monthly payment.
• Change your rate type. If your original loan was an adjustable rate mortgage refinancing could allow you to secure a fixed rate to avoid market fluctuations. A fixed-rate loan offers protection if rates are currently low but are expected to rise. Fixed rates also allow for a predictable monthly payment and better budgeting.
• To consolidate debt. It might make sense to consolidate multiple loans into a single loan. Having just one loan also makes it easier to keep track of payments and it could reduce fees associated with loans.
• Cash out the equity in your home. If you have built up equity in your home, you may be able to cash out some of the funds in order to finance a home improvement project, pay student loans, pay off debt, or purchase another property.

If you are still unsure read more about refinancing your home. 

What will the lender consider when you refinance your home?

To refinance the lender will look at similar criteria and documentation that they looked at when you did your original loan.

• Credit history and score. The lender will want to check your credit report to determine if there have been any significant changes. If your credit score has increased you will receive a better rate, however if your credit score has gone down you may have a harder time getting approved for more favorable terms.
• Payment history. The lender will look at your existing loan and review your payment history. The lender will be looking to see if you are consistently paying your bills on time and in full.
• Pay stubs and W-2s. Lenders will require copies of your recent pay stubs and tax returns. They will be reviewing to see if there are any differences from your original loan documents.
• Equity in your home. The more equity you have in your home the better. In general lenders are looking for more than 20 percent equity in your home but will want a minimum of 5 percent.
• Other debt obligations. Your mortgage is only one part of your debt and the lender will want to review any other debt obligations such as credit card balances, car loans, student loan debt, or other personal loans. The lender will be looking to see if you have paid off, or taken on, any debt since you took out your original loan.

Is it worth it to refinance your home?

There are a few things you should understand before you make a decision to refinance.

• Know your credit score. Credit scores range from 300 to 850. An excellent credit score of 750 or higher will likely get you more favorable refinance rates. You may still benefit from refinancing with a lower score but a higher score will provide you more options.
• Calculate what it will cost you to refinance. Refinancing isn’t free. You will want to understand closing costs and fees associated with refinancing. It’s not unusual to pay 3 to 6 percent of your outstanding principal in refinancing fees.
• Know extra fees. When you refinance you will need to pay fees and charges for things such as an appraisal, title report, processing fee, underwriting fee, and other closing costs.
• Understand your breakeven point. An important number to know is your break-even point. This is the point at which the costs of refinancing have been covered by your monthly savings.

In the first example, you spent $7,500 in closing costs to save an additional $100 a month. That means that you would need to spend 75 months in the home to “breakeven” and make refinancing worth the cost.

However, if you qualify for a refinance rate that gives you the opportunity to save $250 a month or your new mortgage, you will only need to stay in your home for 30 months to benefit from refinancing.

• Understand if you have any prepayment penalties. You will also want to understand if your current loan has any prepayment penalties. These can have a negative impact if you pay off the mortgage early or decide to refinance.

What are refinance rates at FFCU?

Focus Federal Credit Union is here to help answer your questions about refinancing your home loan. We will work with you to determine what makes sense for your situation; with historically low refinance rates it may make sense to weigh the options.

We can talk through mortgage rates, as well as terms and conditions so you can understand the full picture.

To find out more, call us today at 405-230-1328.