Why should you refinance your mortgage?

Many homeowners choose to refinance their mortgage to get a lower interest rate or lengthen their loan term, while others refinance to take advantage of the equity they've built up in their home. Refinancing to a lower mortgage rate can save homeowners a considerable amount of money over the life of their loan. And those with a large amount of mortgage equity can leverage it to pay for home renovations, repairs, debt consolidation, and more.

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What are some common reasons for refinancing a mortgage?

  • Getting a lower interest rate: If interest rates have dropped since you bought your home, then you could secure a lower interest rate by refinancing your mortgage.
  • Paying off more expensive debt: A cash-out refinance allows you to exchange your equity for cash, allowing you to pay down higher interest debt (such as credit cards). With this type of refinance, you borrow more than you currently owe and can use the cash to pay off other debts.
  • Changing your loan term: Switching to a longer loan term can lower your monthly payments, which can make your mortgage payments more manageable. However, you'll generally end up paying more in interest over time.
  • Paying for home repairs & remodels: A cash-out refinance, home equity loan (where you borrow against your home's equity), or a HELOC (where you receive a line of credit against your equity) can give you an affordable way to pay for expensive home repairs or renovations.
  • Switching from an adjustable rate to a fixed rate: An adjustable-rate mortgage (ARM) typically has a lower interest rate upfront during the fixed period, saving you interest early on, but your interest rate can go up or down after the fixed period. Switching to a fixed-rate mortgage can give you consistent monthly payments.

CONSIDER A HELOC FOR MAJOR EXPENSES

A Home Equity Line of Credit (HELOC) is different from a home equity loan. Instead of receiving a lump sum loan that you pay back over time, a HELOC allows you to use your equity as collateral for a revolving line of credit, similar to a credit card. This allows you to continue borrowing as needed (up to your credit limit for a set time period). Learn more about HELOCs.

What else should I consider before refinancing?

  • Is it the right time for you to refinance? If you're looking for a lower interest rate or longer term, check if current mortgage interest rates are lower than the rate on your existing mortgage. If you need to cover major expenses, verify how much equity you have in your home to see how much you can realistically borrow or cash out.
  • Are you moving soon? If you plan to move soon, then you may be better off keeping your current mortgage. You may not have enough time to realize the benefit from a refinance to offset the associated closing costs.
  • Have you considered the cost of refinancing? It's important to carefully evaluate the costs associated with refinancing, including closing costs, and compare them with the potential benefits, such as lower monthly payments or interest savings. Consulting with a mortgage professional or financial advisor can help you make an informed decision based on your specific circumstances.
  • When can you refinance? Some types of loans may have a six-month waiting period before you can refinance, while others may let you refinance as soon as you want. The waiting period generally depends on the program and type of loan you have.

FIND THE RIGHT REFINANCING OPTION

Mr. Cooper® offers several ways to refinance, including options for those with existing FHA and VA loans. Take a look at all the ways you could refinance your mortgage.

How to refinance a mortgage

  1. Shop around

    Refinancing a mortgage starts with shopping around for loan offers. First consider the type of refinance you're after. You may have several refinance options if you meet the requirements. If you have a conventional loan and you're looking to lower your interest rate, then you may want to shop refinancing options for a conventional loan. If you need to pay for a home renovation or pay off debts, a cash-out refinance may suit your needs.

    Important note: Compare mortgage interest rates between different lenders to find a better loan offer than your current mortgage.

  2. Apply

    To apply for a mortgage refinance, you typically need the same documentation you provided for your original loan, including:

    • Recent W-2s and tax returns from the last few years
    • Recent pay stubs
    • Recent bank statements

  3. Lock in your rate

    Once you've started the refinance process and submitted an application, you can choose to lock in your rate for a certain amount of time (ranging from a couple of weeks to a couple of months) while your loan application is being processed.

    Though not common, some lenders may give you the option to "float" your rate instead, which allows you to keep your rate unlocked until you're ready to close on your new mortgage. If you decide to float your rate, your final rate may be lower or higher than the initial offering, making it a riskier option.

  4. Underwriting & home appraisal

    Your lender will start verifying the information you provided in your application, including confirming your income and other financial information, as well as the details about your property. For refinance applications, you'll also generally need to get your home appraised. The appraiser will assess your home's market value, which your lender will use to ensure its appraised value is high enough to secure the amount you're borrowing.

  5. Closing on your loan

    This step entails going over the finalized details of your new loan with your bank's representative, as well as paying closing costs if they're not included in your new loan amount. Double-check documents, including your loan term, interest rate, and payment schedule. If everything looks good, you'll sign the paperwork and officially close on your loan.

    Important note: You have three days after signing to cancel the refinance if you so choose. After that three-day grace period, you're locked into your new loan.

How refinancing a mortgage affects mortgage insurance

Private mortgage insurance, known as PMI, is typically required on a refinance of a conventional loan if your primary mortgage amount is greater than 80% of your home's value. However, if you’ve accumulated equity in your home and your new mortgage amount doesn’t exceed 80% of the value, you might no longer have to pay PMI.

How refinancing a mortgage affects homeowners insurance

Your homeowners insurance policy won't necessarily change due to refinancing. However, if your refinance involved an appraisal and the value of your home changed, contact your insurer or agent with the new information. A change in your home's value could affect your policy's coverage limits and price.

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