Are you considering refinancing a mortgage?
Refinancing can be an awesome option if you want to lower your monthly mortgage payment or tap into home equity to pay down debt or make investments. There are some things to be aware of when considering a refinance. You may end up lowering your payment but paying more in interest over time.
This list of refinance mortgage tips will help you find out if a refinance is right for you. These refinance mortgage tips cover running the numbers on a refinance, working with lenders, taking cash out, and much more.
What Is A Mortgage Refinance?
A refinance of a mortgage involves replacing your current home loan with a new loan. You will need to shop for rates and work with lenders to find the best loan for you. We’ll jump into those topics a bit later.
Refinance Mortgage Tips – Should I Refinance My Mortgage?
We’ve put together a few of the most common reasons that people refinance their mortgages. Think about these options and see if one of them works well for your financial situation. You should reach out to an accountant or financial advisor when you are considering refinancing.
1. Lowering Your Monthly Mortgage Payment
Would you like to put some extra cash in your pocket every month? You can easily obtain this by refinancing your mortgage. Maybe you’ve taken a hit financially and need to lower your living expenses. Or you might just want to save more money every month. Either way, a lower loan payment can help you save money every month.
Whatever the reason, you can potentially save hundreds of dollars a month or more just by financing. Stay tuned to check out how my wife and I saved $1200 a month by refinancing 2 loans.
You do want to consider how much more in interest you might pay. If you extend the length of the loan you will more than likely pay more interest over the life of the loan.
2. To Refinance Out Of Private Mortgage Insurance
If you purchased your home and put less than 20% down, you are most likely paying for PMI (Private Mortgage Insurance). The loan institutions add this fee since they consider your loan riskier due to having less equity and a higher payment.
PMI payments are usually a few hundred dollars or less depending on the amount of your loan. Check out this PMI calculator to get an idea of what that payment will look like. Your lender will add the PMI into your monthly mortgage payment so you don’t have to worry about paying it separately.
Refinancing out of PMI can easily save you $100 or more a month. Check your current mortgage statement to see if you what you are paying for PMI. If you’ve been paying down your mortgage and had some good appreciation, you might have more than 20% in home equity. Hitting that 20% in equity can allow you to refinance out of PMI.
Refinance Mortgage Tips – Find Comparables
Use Zillow or Trulia to look at comparable homes to yours that have sold within the last 30 days. Make sure these homes are similar in size, bedrooms, baths, square footage, and condition. The comparable homes should also be near your home. This gives you a fairly accurate estimate of what your home will appraise for.
Calculate Your Equity
Take the number you got from the comparable listings you found and plug the numbers into a simple equation to figure out your home equity. For the following example, we have an existing home loan with a remaining balance of $200000. We find comparable homes in our area selling for $275000.
Existing Equity = $275000 – $200000 = $75000
20% In Equity Target = $275000 x .20(This is the 20%) = $55000
You would need at least $55000 in home equity to refinance out of your PMI in this example. Having the $75000 in home equity would easily allow you to refinance out of the PMI.
3. To Cash Out Home Equity
Maybe you have a considerable amount of existing home equity and want to tap into that equity. This can be done by doing a cash-out refinance.
Take the cash and pay down other debts or put the extra cash towards investments. Real estate investors use this strategy to help scale building up a portfolio by using the cash to purchase more rental properties.
Most lenders will only cash out up to 75% of the current value of the home. You will need to have a good amount of home equity built up to leverage a cash-out refinance.
Refinance Mortgage Tips – Getting Started
1. Use A Calculator To Run The Numbers
Use a mortgage refinance calculator to help you understand if a refinance makes sense for you. Balance out the monthly savings versus the extra interest that you might be paying over the life of a new loan. You can work with a lender to keep the same term as your current mortgage so that you don’t end up paying extra interest.
Knowing the current amount of home equity you have helps you run the numbers on the new refinance.
2. Know Your Credit Score
Knowing your credit score can help you figure out what your new monthly loan payment will be. Providing your lender with your credit score will allow them to give you a ballpark estimate of your new monthly mortgage payment. This is good to do before they actually run your credit to approve your new loan.
You can use a free tool like Credit Karma to get your credit score. In my experience, this number has always been about 20 points higher than my actual score. Most credit card providers also offer credit scores that might be more accurate. Check with yours to see if you can find your credit score that way.
3. Reach Out To At Least 3 Lenders – Shop Rates
Reach out to multiple lenders to get a few different quotes. I do this with everything! Getting more quotes can lead to extra savings every month. Try doing this within a short span of time. They will do a credit check and it’s better to have those hits all at the same time rather than spacing them out.
This might allow you to get a better rate and thus a lower monthly payment. Any extra money saved is a bonus! Rates have been at all-time lows so now might be a good time to refinance into a lower rate.
Reach out to anyone that you know that works with lenders to help find a quality lender. I have a rockstar real estate agent that is my go-to source for finding an awesome lender.
You can also do a quick google search to find highly rated lenders in your area. Contact a few from the search to start the process.
4. Have Money Set Aside For The Appraisal
Depending on the lender, you might have to pay for the appraisal out of your own pocket. Communicate with your lender to understand if you need to cover this cost or if it will be rolled into the costs of the new loan.
Appraisals usually start around $200 and go up depending on the size and type of property. Make sure to put a few hundred dollars aside to account for this cost if you do need to pay for it.
5. Refinance Mortgage Tips – Get All Of Your Documents Together
The lender is going to ask you for an insane amount of financial documents. Avoid scrambling to find these documents by getting most or all of them together when you start looking for a lender.
Here’s a list of common documents that a lender might ask for.
- 90 Days Of Bank Statements
- Last 2 Paycheck Stubs
- Current Mortgage Statement
- Previous Year Tax Return
- Information On Investments
6. Keep Following Up With The Lender
Lenders can get super busy and might not reach out to you for every step in the lending process. Make sure that you are persistent and keep contacting them to understand where you are within that process. You don’t want to be a bottleneck and hold up your refinance because you didn’t send the proper document or you missed something.
If your lender is very unresponsive, consider moving on to another one. This might be painful but necessary if they aren’t getting the job done.
7. Account For Closing Costs
Closing costs can be a considerable amount of money. You will either need to pay for those costs out of your own pocket or have them rolled into the costs of the loan. I’ve always had the closing costs rolled into the loan for a refinance.
PRO TIP: See if you qualify for special loans or rules that help with closing costs. There are some companies that work with people in the education and health care fields to help cover closing costs.
8. Enjoy Your Month Of No Mortgage Payment – Save The Money
When you refinance your loan you should get a 1-month break from making a payment! It’s really nice to get a break and not have to pay a mortgage.
Be wise with the money that you saved! Use the savings to help build up an emergency fund or pay down existing debts. Making smart financial decisions can pay off down the road!
How We Saved $1200 By Refinancing 2 Loans
In June of 2019, my wife and I decided to purchase a new home and turned our first home into our first rental. I had been doing a ton of research on real estate investing and decided that it was a good option for us to add income and build wealth. I’m not going to lie, it was a bit stressful but it was easily one of the best financial decisions that we’ve made.
Let’s take a look at the numbers before we refinanced.
Loan 1 – Our Primary Residence
term: 30 years
Loan 2 – Our Rental
term: 15 years
Now let’s look at the numbers AFTER the refinances.
Loan 1 – Our Primary Residence
term: 30 years
Loan 2 – Our Rental
term: 30 years
$4750 – $3550 = $1200 in monthly savings!
There are a few things to consider here. We extended both of our loans out to new 30 year terms. This means that we will end up paying more interest over the life of the new loan. We are perfectly fine with this though! This is due to our tenants covering the mortgage costs of the rental. We won’t have to pay any of that interest out of our own pocket.
For our primary residence, yes we will be paying the extra interest ourselves. However, we do plan on turning our current home into another rental property or vacation rental when we purchase our next home. We are using the nomadic strategy to slowly build up a rental portfolio in Colorado where we live. Check out our article on finding a real estate investing strategy if you are interested in learning more.
Wrapping Up The Best Refinance Mortgage Tips
We hope that these refinance mortgage tips have helped you figure out if a refinance is a good option. Remember to balance the monthly savings versus the amount of added interest that you might pay if you extend your loan timeline. Effective communication with your lender is also crucial to ensure a smooth refinance process.
We wish you luck on your next mortgage refinance!
What is your reason for wanting to refinance your mortgage?
Hi, I’m Richard. I’m passionate about figuring out how to make my money work for me and getting outdoors into mother nature.