If you're thinking about refinancing, then you'll want to do more than simply compare your current rate to the refinance rate. For example, when and why should you refinance? If it's right for you, here are some things to consider when refinancing your mortgage.
How Many Years Are Left on Your Current Mortgage
Remember, the goal of a mortgage is to ultimately own your home outright. Think twice before setting yourself back years just to have a little extra cash today. You also have the option to choose a 15-year term, but that comes with a higher payment you may not want to take on. If you're already halfway through and have a decent interest rate, it might be best to stay with your current mortgage.
Consider Your Future Income
This is especially important to think about if you're thinking about going from a 30-year mortgage to a 15-year to pay your home off sooner. In general, the shorter the repayment period, the higher the payments. Remember your future expenses and goals, like upcoming college costs, retirement, and the certainty of your current income before you opt for a shorter mortgage. As an alternative, making just one extra mortgage payment a year will shave off 5-10 years from your mortgage payoff date!
What is the Total Cost of Refinancing
Many institutions charge closing costs for all their home loans, so make sure you're still saving money AFTER factoring in applicable fees. This includes origination fees and closing costs, which can cost anywhere between 3-6% of the total amount of the refinance. As an example, if you are refinancing your home for $200,000 your fees could range between $6,000 and $12,000. If you didn't know, you do have the option to refinance your home for a lower amount if you choose, and you can also choose to do so at a 15-year or 30-year term. For example, if you want to do a cash out refinance and are eligible to refinance your home for $450,000 and you owe $300,000, you can choose to refinance for $350,000 rather than the full $450,000.
WaFd Bank's refinance calculator can help you get a ballpark idea of how much your new mortgage payment might be with different interest rates and loan terms.
Revisit Your Current Budget
If you want to refinance to save money each month, look at your other motives. Are you investing the money in a second property? Or are you simply looking for extra padding in your budget? If it's mostly to lower your payment, then consider other areas of your current spending that you could cut back or eliminate. Comparing your insurance rates or your phone plan is a good place to start to save hundreds of dollars a year. In that case, you won't need to go through the process of a refinance to save. If you're looking to do something else and need a certain amount of money to do it, you can also consider a home equity line of credit (HELOC) instead. WaFd Bank offers HELOCs with competitive rates and no annual fees—you can learn more and check out our HELOC calculator.
Refinancing Tips—What to Watch Out For When Refinancing
Where many people stop researching is with the interest rate. While a lower rate sounds amazing, there are still other costs to factor in that could make a refinance more expensive than its worth, especially if you plan to sell in a couple of years. The refinance rule of thumb says to consider a refinance when you're saving at minimum 1% on your interest rate. The lower the better! That being said, no two loan scenarios are the same, and you need to factor in the details of your existing mortgage alongside the new and keep in mind your future plans and goals. What you'll need to remember is that interest rates aren't everything, and with closing costs and other fees to think about it's not worth it in many situations to go through with refinancing. Thankfully, there are professionals to help you do the math! WaFd Bank's friendly loan officers are more than happy to help you find the right solution for you.
What to Know About Refinancing Your Home
One of the biggest factors to keep in mind is the equity in your home. It will be difficult to refinance if you have less than 20% in equity in your home, and if you are able to refinance, you'll end up having to pay for private mortgage insurance until you do have at least 20%.
Your credit score is the other thing to keep in mind. Having a lower score doesn't automatically count you out, but if you don't have a high score you'll likely end up with a higher interest rate. You'll want to have a score of around 750 or higher to qualify for the lowest interest rates available but be sure to check with your bank on their lending criteria.
Lastly, debt to income. This ratio is shown as a percentage; simply count up all your monthly debt payments and divide the total by your gross monthly income (before taxes). This percentage shouldn't exceed 40%. If it does, you'll want to pay off some debt before applying or talk with your lender to see what they can do to help.
What Documents Do I Need to Refinance My Homes
You won't need as much as you did when you bought the home, but refinancing still requires a decent amount of paperwork. If you want to refinance with your current lender, that does make things much easier, but if you're going with another company here are the documents that are usually requested:
- Copies of your ID, along with anyone else who might be on the loan
- Current mortgage statement
- Home equity line of credit statement, if applicable
- 2-3 months of pay stubs
- 2 years of tax returns, W2s, and/or 1099s
- Your current homeowner's insurance policy
- Bank statements
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Other documentation that may or may not be necessary:
- Letters of explanation for past credit issues or employment gaps
- Child support or alimony payment documentation
- Proof of rental income from any investment properties (minimum 2 years required)
- Gift letter or other documentation verifying deposit source
- Documentation related to a bankruptcy that's been discharged
WaFd Bank is Here to Help
If you're thinking about refinancing, we're here for you! At WaFd Bank, we don't sell our loans—unlike most banks. Why does that matter? Well, if rates fall in a few years, you could lower the rate on your existing mortgage with us easily.
Best of all? This can be done without refinancing! So you don't have to start over with your mortgage. And you can build equity faster and pay off your home on schedule. Talk to your local neighborhood loan officer or call us at 800-324-9375 to find out more.
All loans subject to credit approval.