Last Updated on April 21, 2021 by Maggie Looker
When you bought your home, you took out a mortgage loan for the cost of your house. If it was your first home, maybe your credit score was lower, and you had a higher interest rate. If it was a few years ago, you almost surely had a higher interest rate, as current rates are at or near historic lows. Maybe you’ve put a lot of work into renovating your house, and it will appraise for more money. All of these are good reasons to refinance your mortgage as a physician. You’ve heard it can save you money, but what does refinancing your mortgage even mean?
What Does it Mean to Refinance a Mortgage?
Refinancing just means that you are replacing your current home mortgage loan with a new home mortgage with more favorable terms. When you refinance, the new mortgage will pay off the remaining balance of your current mortgage, and you will start paying your new mortgage with your monthly mortgage payment.
So what would “more favorable terms” be? This can be the type of loan, interest rate, payback term, or a combination of all these. When you bought your home, if you didn’t have money for a down payment or not so great credit and used an FHA loan for example, you can refinance for a conventional loan. If you did this type of refinance, you’d also remove the added fees you see with FHA loans, adding onto your savings.
If your original mortgage has a high interest rate, you can refinance to get a lower rate. This can save you thousands of dollars over the life of your loan, plus monthly savings. Or, if your mortgage has a 30 year term, and you can afford larger payments, you can refinance to a 15 year mortgage. This not only gets you a new interest rate, but will save you money because you’ll be paying it over less time. Sometimes, depending on what your previous interest rate was and what the current interest rate is, your monthly payments could stay almost the same or only slightly go up.
So, what do you need in order to refinance your mortgage now that you know what it means?
Define Your Goal
The first thing you need to do is identify the reason you’re refinancing. Your goals will have a tremendous impact on how, and if, you refinance. Just thinking or hoping that refinancing will save you money isn’t going to cut it. Refinancing your home should be a strategic move based on current market factors and your own unique situation. Do you want a lower interest rate, shorter mortgage term, or need cash from your home’s equity? Defining your goal at the outset will help guide your decision-making and ultimately lead to better results.
For example, if you want to use some of your home’s equity as cash, that will impact the type of mortgage you get. If you’re hoping to refinance, then turn around and sell, you’ll want to limit closing costs. If you don’t care about saving month-to-month and just want to pay off your home sooner, it will affect the loan term you choose.
Break Even Point
The amount you pay in closing costs is also important in determining whether refinancing your house will even be worth it. This concept is called the break-even point, and it essentially works like this: If you refinance your home and save $100 per month on your mortgage payment, but it costs you $4,000 in closing costs, your break-even point is 40 months. That means if you plan on moving in less than 40 months, it wouldn’t be worth it financially to refinance. Try to determine what your closing costs will be early to make sure refinancing is really worth the effort and in line with your long-term goals.
When refinancing your home, you’ll need to pay closing costs in the form of mortgage fees, title fees, appraisal, inspection fees and more. The average cost to refinance a home is between 2 and 4 percent of the loan’s balance. That means that on a $250,000 mortgage, you could expect to pay between $5,000 and $10,000. These costs are generally paid at closing. This means you’ll need to make sure you have enough cash on hand to cover the cost before you start.
There are a lot of expenses that make up your total closing costs. Here are just some of the items you can expect to pay when refinancing your house:
- Application fee
- Document fees
- Origination fee
- Recording fee
- Attorney fee
- Survey fee
- Title search fee
- Title insurance
- Appraisal fee
- Home inspection fee
- Flood certification fee
Not every refinance will involve all of these fees. What you end up paying will depend on your lender and the unique circumstances surrounding your property and loan type.
These costs can be significant, but if you’re able to reduce your monthly payment, you will be able to make up the difference. If you’re not lowering your monthly payment, but rather shortening your loan term, you’ll need to do some math to see how much you could save in the long run and compare that to your refinance closing costs. Remember, if you’re moving before reaching your break-even point, it probably won’t be worth it to refinance.
Review Your Credit History
The interest rate you receive on your new mortgage is based on a number of factors, but a major one is your credit score. The better your credit history, the lower the rate you’ll likely receive. So, if you’re thinking about refinancing your home, improving your credit score can help you secure a better rate and save you money over the life of your loan as well.
Your credit score impacts the type of mortgage and interest rate you get, so it’s important to know your score. Many banks and credit card companies offer free credit score checks, and every American is entitled to one free credit report per year from each of the three major credit reporting bureaus: Equifax, Experian and TransUnion. You should request one or all three, and review it to make sure there are no errors. If there are errors, or items you were unaware of, these could be bringing down your credit score.
Know Your Home Value and Equity
Understanding exactly where you stand on your current mortgage will play a big role in your refinancing too. Lenders will often make decisions based on the debt-to-value ratio of your home, or how much you still owe compared to how much equity you have. Some lenders will not refinance a mortgage where the home owner has less than 5% equity. If you have less than 20% equity, you’ll likely receive a higher interest rate, or continue to pay Private Mortgage Insurance, or both.
You can see the balance of your loan on your monthly mortgage statements, and you can try to determine your home’s value by using online real estate resources to compare your home to similar homes in your area. These tools are great for a general estimate. If you decide to go through with the refinance, you’ll need an appraisal so the bank has a more concrete value to go off of. The appraisal is another bill you’ll need to add to the list of costs associated with refinancing.
Compare Rates and Costs
When refinancing your home, you need to do some legwork to find the best possible deal. Some home owners refinance with the same mortgage company simply out of convenience, but that can be a mistake. Even a small difference in the interest rate could save you thousands of dollars in the long run.
This is especially important when considering “no closing cost loans”. In these deals, the lender will waive the closing costs. But, in exchange, you may receive a higher interest rate on your new mortgage. The lender can also roll your closing costs into the balance of the loan, and you’ll simply pay them off as part of your monthly mortgage payments. A no closing cost refinance can be good for owners who would rather pay slowly over time instead of now. But remember, even a small increase in your interest rate can add up to a lot of money over the life of your loan.
Take the time to shop around and compare both interest rates and lending fees to get the best deal. And, remember Homes for Heroes mortgage specialists reduce their fees for physicians and other heroes, so register today to see how our mortgage specialist in your community can take care of your mortgage refinance and save you money in the process. There is no obligation to sign up, but you will have a change to talk to our mortgage specialists and ask any questions you might have.
Plus, when you refinance with Homes for Heroes, you’ll get a Hero Rewards check after your closing. This is straight money in your pocket that can be used on anything you’d like! It’s the least we can do for physicians looking to refinance their mortgages.
Compile Your Finances
One thing that often takes people by surprise when refinancing their homes is the amount of paperwork required. Many people think there would be less administration and paperwork when refinancing. On the contrary, you could end up signing more documents than when you bought the house the first time. This is because you are basically trading in your current mortgage for a new one. This requires the same amount of paperwork as when you bought the home, plus all the paperwork to take the new loan to pay off the old loan.
To get through the process, you’ll need to compile all of your relevant financial information. This includes proof of income, bank statements, tax returns, and any information about outstanding loans or other debt. Your mortgage specialist will be able to tell you what information you need to collect to refinance your house.
Prepare for Home Appraisal
As part of the refinancing process, you’ll likely need to have an appraisal done on your house. Talk to your mortgage specialist about any repairs, improvements or other changes that may have increased the home’s value since you bought it. You should also follow best practices for getting your home ready for an appraisal, because presenting your home well can increase its appraised value. If you need a little refresher, we have some helpful tips on how to prepare for a home appraisal.
How to Refinance Your Home and Save
If you’ve done your research and accounted for the costs, you should be able to save money when refinancing. Even if your monthly mortgage payment doesn’t change significantly, if you shorten your term, you can still save on interest. But perhaps the best way to ensure you save the most money possible is to work with Homes for Heroes.
When you register with Homes for Heroes, you’ll be automatically matched with a mortgage specialist in your area who can help you save on all the costs associated with refinancing your home. They will be your dedicated lending partner, helping you navigate the refinancing process and save you money. They also reduce their fees for physicians, healthcare workers, and other heroes looking to refinance their mortgages. This program is free, easy, and most importantly saves you money on refinancing, all for being a hero!
Ready to refinance your home and save money in the process? Sign up with Homes for Heroes for more information and let our mortgage specialists put their expertise to work for you.