How to Refinance a Mortgage: Helpful Refinance Tips for 2021

When you buy a home, you take out a mortgage to borrow the funds to pay for it. A refinance loan simply replaces your current loan with a new one, but instead of your loan paying the previous owner of the house, the new mortgage pays off your old loan.

A refinance can be for the same amount as your existing mortgage, but if your equity has grown and you’ve chosen to borrow more than you owe using a cash-out refinance, you’ll get a check or transfer for the extra cash when the mortgage closes.

And of course, there’s no down payment because you already own the property (but certain closing and loan-related costs may be required – check with your loan officer for details).

A refinance loan will have different terms – it could be with a new mortgage lender and it might have a lower interest rate, a longer (or shorter) loan term, or you might be switching from an adjustable-rate mortgage to a fixed-rate one.

• Access some equity – if the value of your home has risen, you may be able to get a cash-out refinance and tap into the equity to make home improvements, buy a big item or even make a down payment on another property.

• Reduce your monthly payment or interest rate – a rate-and-term refinance replaces your mortgage with one that has a lower rate. You’ll pay less mortgage interest so you’ll decrease your monthly mortgage payment and save money on the overall cost of the loan.

• Get rid of your mortgage insurance – if your down payment was less than 20% of your mortgage when you bought your home, then you were probably required to pay for mortgage insurance. If you now have more than 20% equity in your home, you can cancel your private mortgage insurance (PMI) without refinancing. But if you have FHA mortgage insurance, you’ll need to refinance into a non-FHA loan to drop your mortgage insurance.

• Switch terms – you could extend the length of your mortgage loan and have lower monthly payments. You could reduce the length of your mortgage and pay off your loan sooner. Or you could switch from an adjustable rate to a fixed-rate mortgage so that you’re in control of your monthly payments. Just decide on your financial goals before you start researching your refinance options.

The best time to consider mortgage refinancing is when interest rates are low and you can secure a better deal. Mortgage rates fell to all-time lows during the pandemic – the average 30-year fixed-rate mortgage rate was 3.86% at the beginning of 2020 but fell to 2.96% by the end of the year.

If you refinance to a fixed-rate mortgage while interest rates are low, even lowering your mortgage interest rate by 0.5% – 1.0% could give you long-term savings. You’ll also have the security of knowing that your monthly payment won’t be affected if and when interest rates start to rise again.

Although the Federal Reserve has announced that mortgage rates won’t increase substantially or suddenly in the near future, it’s expected that the uptake in vaccinations will cause a surge in economic activity.

Figures issued by Bankrate indicate that interest rates should remain low in the first few months of 2021, but will eventually rise during the year. The National Association of Realtors predicts that mortgage rates will average 3.1% in 2021, while the Mortgage Bankers Association predicts an average of 3.3%.

With these predictions in mind, you might want to take advantage of a great rate environment and look at your refinance options to see if you can benefit from fixed low interest rates sooner rather than later.

Most lenders have mortgage refinance calculators on their websites. This is the easiest way to estimate what your new mortgage payment may look like. You’ll need to input some information like the loan amount, the new interest rate, and what you earn and spend each month.

It will then calculate your new monthly mortgage payment – but remember, when you take out a new mortgage, even if you’re refinancing, you’ll usually need to pay some mortgage-related fees and closing costs. Also, if you have under 20% equity left in your property, you’ll likely be required to pay mortgage insurance, and you probably won’t be eligible for a cash out refinance.

Ask your loan advisor if an Escrow account would be a good idea. If you have an FHA or other government-backed loan, then an Escrow account is mandatory, but for a conventional loan it can be helpful. It’s an account that your lender pays a portion of your monthly payment into and that money is used to pay your taxes and mortgage insurance when those payments become due. The cost is spread over 12 months so it’s easier to manage.

If you’re planning to move now may not be the best time to think about refinancing your mortgage.

• Do the closing costs make it worth it?

Closing costs are unavoidable, so you’ll want to look at the cost of refinancing your loan relative to the savings you’ll see from the change to your loan terms – especially if you’re considering a move in the near future

Look at this example:

Your lender wants to charge you $6,000 in closing costs, and the refinance mortgage will lower your monthly payments by $250. It will take you two years to break even, so if you’re planning to move within that time, you could end up losing money. But if you’re going to stay where you are for another three or four years, a refi makes good sense.

A big consideration is how long the life of the new loan should be. If, for example, you have 25 years left on your mortgage, but you refinance into a 30-year mortgage, you’re extending the life of the loan. So, although your monthly payments might reduce, you’ll pay more interest in the long term.

You could ask your new lender to match the term you have remaining on your current mortgage, so following the example cited above, you could ask them to set the payments up so you pay it off over 25 years rather than 30. The key point is that if you can afford slightly higher monthly payments, try to reduce the term of your refinance mortgage. You’ll pay the loan off quicker and save money over the life of the loan.

If you decide the time is right to refinance your home loan

Before you start the refi process, take the time to think about your financial goals. This will help you understand the refinance loan type you should be looking for.

Do you want to pay your mortgage off sooner, or reduce your payments by landing a better rate?

Are you interested in a cash out refinanceso that you can release cash for something else, like home improvements or a down payment for another property?

Once you know your refinance goals, you can run some payment scenarios using our mortgage refinance calculator to get an idea of what your payment could look like, or you can speak to one of our loan officers to get a more precise determination of how much you could borrow and what your interest rate should be relative to your unique circumstances.

Just like your original mortgage, you’ll still have to qualify and meet the lender’s requirements when you refinance and take out a new loan. You’ll submit an application, provide supporting documents, have the value of your home reviewed, go through the underwriting process to show that you can afford the repayments, then go to closing.

Refinancing your mortgage – our top tips

• Shop around for the best mortgage refinance rate

Not all loan programs are available for home refinance so check the terms, and check for fees and costs too. Will you pay them up front or roll them into the mortgage? Factor in origination fees, mortgage appraisals, taxes and other fees.

• Think about a fixed interest rate

The benefit of a fixed interest rate is that you’ll know exactly how much your monthly payments will be for the life of your loan (but keep in mind that your housing costs can still change if your tax or insurance payments increase from one year to the next).

• Consider the closing costs

Your Loan Estimate and Closing Disclosure will contain information about the closing costs you’ll need to pay. Closing on a refinance mortgage is just like closing on a purchase loan – only this time, you already own the house.

Calculate how long it will take for you to break even relative to the costs involved. Even if a refi reduces your monthly payments, you won’t actually save money until you’ve recouped those closing costs.

• Check your credit score and history – a good credit report is as important when you’re refinancing as when you took out your original home loan. A higher credit score could help you secure a better interest rate and give you more loan options.
• Work out how much home equity you have. If house prices have risen – and real estate generally does over time – then it’s likely that you’ll own a greater portion of your home.
• How to calculate your equity: Look at your mortgage statement to see your current outstanding loan balance. Compare that to a current property valuation and your equity is the difference between the two amounts.