Are you considering a refinance of your mortgage? Interest rates rose significantly this year but could drop in 2024, so now may be the time to apply for a refinance mortgage. If you are considering a home refinance, you will want to save as much money as you can to make the process worth it.
Last year saw a significant surge in mortgage refinance rates, more than doubling, and this trend has persisted throughout 2023. That is why so many homeowners decided to take out a HELOC loan this year rather than refinance their home. While the current lending environment may not be optimal for all borrowers considering replacing their existing home loan with a new one, there are compelling reasons that might prompt you to explore mortgage refinancing. Understanding the mechanics of refinancing, familiarizing yourself with available options, and weighing the pros and cons are essential steps in navigating this financial decision.
How Does Mortgage Refinancing Save You Money?
Refinancing your mortgage provides an opportunity to save money or access your home’s equity. Establishing clear refinancing goals is essential, whether you aim for a reduced monthly payment, a shorter loan term, or leveraging the equity in your home. To achieve your objectives, it’s important to compare rates and fees diligently as part of a smart refinance strategy.
The main point of mortgage refinancing is to save you money with lower interest rates and lower monthly payments. However, home refinancing offers numerous benefits, including the potential saving on interest costs, accelerated mortgage payoff and access to your home equity for cash needs. However, it’s crucial to be mindful of the associated closing costs, as they can impact your decision-making process. For the purposes of this article we are going to focus on how a refinance mortgage can save you money.
Below are some easy tips to save money when you refinance your home loan in 2024.
#1 Know the Amount You Owe on Your Mortgage
Before you sign off on a mortgage refinance application, carefully review the terms and balance of your current mortgage. This will help you to decide how much you can save when you are looking at new mortgage rates, the total payoff with your mortgage lender, and any fees and closing costs you need to pay. Being familiar with the details of your current loan will make you more knowledgeable as you negotiate a new mortgage, and this will help you save money.
#2 Check Your FICO Score
If your credit score has gotten better since you got your first mortgage, you may be able to save money on your refinance interest rate. Lower rates tend to go to borrowers with the highest credit scores. If you have an FHA mortgage, your credit score may not affect your rate that much, but you still can save significantly on mortgage insurance if you need it; this is a requirement for many FHA loans.
Go over your credit history by getting a complimentary report online, with a simple Google search. This is the official federal government website that has been established. You are entitled to a single credit report per year. After that, you may want to pay for more credit reports from the other credit bureaus. There are three credit bureaus and your score can vary significantly.
Note that many credit card companies now offer free FICO scores for their customers, but these services are now always accurate and up to date with their information.
#3 Do Not Take on New Debt
If your FICO score looks good, it is important to not take on more credit card debt. If anything, we advise saving as much cash as you can and pay down debt as much as possible. The less debt you have, the better your credit score. And the more likely you will be approved for a loan.
Also, do not even make inquiries to open new credit accounts while you are going through the loan approval process. Each inquiry on your credit report will lower your score by several points.
#4 Talk to Several Refinance Lenders
Mortgage research has shown that borrowers save the most on their refinance when they get quotes from at least three mortgage refinance lenders. For example, the Consumer Financial Protection Bureau found that nearly 50% of consumers only get a quote from a single lender when getting a new loan. You could easily pay thousands more in interest and fees by only getting one refinance quote. Get educated on the pros and cons of refinancing vs home equity loans.
#5 Get Rid of Mortgage Insurance
If you made a down payment of less than 20% of your mortgage, you are probably paying monthly mortgage insurance. This is a program that shields the lender from financial consequences if you default. If you do not pay the loan, the lender will be reimbursed part of the loan principal. The no PMI mortgage is a unique loan program.
It is possible your home appreciated to give you sufficient equity so you do not need mortgage insurance. But bear in mind that not all lenders will end your mortgage insurance unless the loan falls to 78% of the price you paid for the home, or the midway point of paying off the loan.
When you refinance, you might be able to dump mortgage insurance or at least reduce the payments. If you have an FHA loan, you will probably not be able to get rid of PMI at all until the 11th year of the loan if you made a 10% down payment. If you made a 3.5% down payment, you may not be able to cancel mortgage insurance at all.
#6 Don’t Pull Out Cash
Many refinances involve pulling out equity, but we encourage you to resist the temptation. When you are raiding the equity in your home, this can present problems if home values start to go down. Cash-out refinancing offers you additional money but in most cases it raise your monthly payment. You also will have a higher mortgage balance and a higher payment usually. The last thing you want is to owe more on the home than it is worth. If you do not pay the mortgage, you will lose your home. Another problem is when you want to move, you may find you have almost no equity or negative equity in the home. This will prevent you from selling the home or make it very difficult to do so.
#7 Don’t Extend the Loan Term
Yes, you can lower your payment, but if you make the loan term longer, you are paying thousands more in interest. The end goal when you buy your home is to have it paid off as soon as you can and get rid of interest payments.
#8 Review Your Mortgage Strategy
Everyone’s needs, and situation is different. Look over your mortgage strategy to see if it fits your long term financial goals. If you have an adjustable mortgage, for example, you may want to consider refinancing into a fixed rate product. The economy has been struggling with inflation, and that adjustable rate could go up. Or, perhaps you have a fixed rate and want to take advantage of the lower adjustable rates. This might make sense if you are sure you will move before the mortgage adjusts to a new rate.
If you keep these above tips in mind, you should be able to save big on your mortgage refinance in 2024.