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Refinance a mortgage at the right time and for right reasons

Are you burdened with rising monthly payments and seeking better terms and conditions on your mortgage? Or, are you looking to consolidate your unpaid debts and get rid of them faster? All these mortgage scenarios and many more can be accomplished by mortgage refinancing. To get the basic idea on refinancing, go through these topics:

Do it yourself!



What is mortgage refinance?

With mortgage refinancing, you can replace your original mortgage with a new one with better terms and conditions but the new mortgage should be within your affordable limit. The same property that you used as collateral to secure the original mortgage is used to secure the new loan also. The new loan proceeds are utilized to pay off the existing mortgage. In case there is any remaining money after paying down the original mortgage, that amount can be used to meet other financial obligations.

Example: Suppose each of the two borrowers A and B took out mortgage loan worth of $500,000. Again, say after 5 years, both A and B paid down $250,000. So, for both these borrowers, remaining unpaid mortgage amount is $250,000.

Borrower A then took out another loan worth of $250,000, so as to repay the remaining balance on the existing mortgage. This depicts a case of simple refinance.

Borrower B then took out another loan worth of $350,000. Out of this new loan amount, B used $250,000 to pay down the original mortgage. B could use the remaining $100,000 to meet other financial obligations. This describes a case of cash out refinance.

The first scenario is a simple refinance while the second is that of a "cash-out refinance".


5 Reasons that make refinancing sensible

There are some strong reasons which make mortgage refinance a very sensible move. Here we delve upon 5 of those -
  • To reduce monthly payment:
    If the mortgage rate is lowered or if the mortgage term is extended, your monthly payment amount gets reduced. With reduced monthly payment, you can pay off your mortgage with more ease. In case the term of the loan is extended, you have to however pay more in interest during the whole life of the loan.
  • To switch from ARM to FRM:
    Fixed rate mortgage (FRM) offers you the certainty of making fixed payment over the term of the loan. Whereas, in case of adjustable rate mortgage (ARM), the monthly payment amount may rise or fall, depending upon the prevailing mortgage rate. So, in case of ARM, the monthly payment amount is not fixed; rather it is uncertain. If you are looking for certainty in payments, then you can convert your existing ARM to an FRM through mortgage refinance.
  • To repay mortgage faster:
    If you want to pay down the mortgage early, then you can shorten the term of the loan. However, here your monthly payment amount increases. Here, over the term of the loan, you save more in interest payments. You also attain property ownership early.
  • To combine two loans into one:
    If you have adequate equity in your property, you can then consolidate your first mortgage and the second mortgage into a single mortgage. The main advantage of this type of consolidation is that the monthly payment on the single loan is less than the combined payments on the 1st mortgage and the 2nd mortgage.
  • To pay off high interest debts:
    If you have sufficient equity in your home, you can opt for a cash out refinance. You can use the remaining money to pay high interest debts such as credit card bills, car loans, installment loans etc.


What is the best time to refinance?

You may not always be eligible for refinancing or the situation may not always be conducive for refinancing. You have to time your move correctly so as to reap its benefits. You need to check out these crucial things carefully before applying for mortgage refinancing -
  • If you have built up equity:
    You may be eligible for refinancing when you have built up equity of at least 10% in your home. However, for mortgages owned by Fannie Mae, the equity requirement is 5%. It is possible to get the refinance approval even with less than 5% equity, but in that case you may have to pay a certain sum of money to compensate for the deficiency in equity.
  • If the refinance rate is sufficiently low:
    If the current mortgage rate is sufficiently lower than the rate on the original mortgage, then it may be wise to opt for refinancing. Here, you need to follow the 2% Rule. As per the 2% Rule, refinancing is beneficial for you in case the refinance rate is 2% lower than the rate on the original loan. Here, the savings accrued from low rate outweigh the costs of the new loan after a certain period of time, which is called the break-even period. To get benefits of refinance, you have to stay in the house at least till the break-even period.
  • If you have removed negative items and paid off debts:
    Before plunging into refinancing, obtain your credit report from the credit bureaus and review it carefully. If you find some negative items such as collections or late payments, dispute those items immediately and get those items removed from your report. Prior to refinancing, pay down as much debts as possible. All these will work in your favor in getting the refinance approval.
  • If you have no late payments in past 1 year:
    If you have history of late payments in the past 1 year, then your refinance appeal may be rejected. So, before refinancing, make sure you don't have any late payments in the past 1 year.


When refinancing is not a good idea?

Despite the fact that refinance has several benefits, it is not always a good idea to go for mortgage refinancing. There are some cases when your refinance appeal is rejected by the lender or it may not fetch the desired returns. Here are some cases when refinancing is not a good idea at all-
  • If the property value has declined sharply:
    If the value of your property has declined appreciably, the remaining balance on your original loan may be higher than the refinance loan amount. In other words, with the new loan proceeds, you won't be able to pay down the original mortgage loan.
  • If you have already used up your equity:
    Your equity is the key to get approved for refinancing. If you have already used up your equity by taking out a home equity loan (HEL) or a home equity line of credit (HELOC), then going for refinancing would not be a good idea.
  • If you have only a few years left on the existing loan:
    It does not make good sense to go for refinancing if you have only a few years left on your existing loan. It is not rational to refinance the loan which you have almost paid off. If you have almost paid down a 30-year fixed rate mortgage, then it is unwise to opt for refinancing. After all, refinancing is just like taking out a new loan and all the costs associated with taking out a fresh loan are applicable here too.
If you have the right reasons and if the time is right, then you can surely seek for mortgage refinance. However, before making the final decision, do the necessary research, take quotes from different lenders, make a comparative analysis and choose your lender.
Related Readings
Related Forum Discussions
Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have an interesting situation. We have a first and a second that is almost used up. The first is $220,000 the second $248,000. We have approximately $70,000 in credit card debt and $200,000 in personal loans from friends/family. Our house was worth $565,000 but after a remodel it should be around 1 Million. Wht is the best approach to refinance and consolidate these debts? It's been suggested to pay off the credit cards and refi the 1st and 2nd. Then later get an equity line. Any thoughts?

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Wayne!

Welcome to forums!

You should appraise the property in order to find out whether or not there is equity in your property. If there is equity in your property, then you can refinance both the 1st and the 2nd loans and get cash out loan in order to pay off your credit card debts and personal loans. If there is further equity in your property, then later you can again go in for an equity line.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We have only owned our home for just over a year and have paid less than 5% on the principle. Our interest rate going in is fixed at 4.25. With interest rates a few percent lower, is it worth it to refinance? Can we refinance so soon?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Kay,

You will be able to refinance your mortgage provided you have equity in your property. Also, while you refinance, you will be liable for paying the closing cost. You won't be able to offset the closing cost unless you stay in the property for next 4-5 years. So, unless you plan to stay in the property for the next 4-5 years, you shouldn't refinance the mortgage.

Thanks

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

petekolackovsky1's picture
petekolackovsky1 | Joined: September 14, 2011 12:05 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

The general rule of thumb for refinancing is 2%. If your current interest rate is higher than the market interest rate by 2% or more, you should consider a refinance. However, in the time you wait for that much of a difference to happen, you could have already spent thousands waiting.

If you're unhappy or unable to keep up with your current mortgage terms and the rates are at a stand still, talk to your lender about a loan modification.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

:?

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi billy!

Welcome to forums!

I guess you're asking this in respect to refinance. If there is no equity in your property, then you won't be able get a refinance.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Divorce to remove spouse off title

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Anne!

Welcome to forums!

You don't have to file for divorce in order to remove your spouse from the property title. You can negotiate with your spouse so that the person signs a quitclaim deed and transfers the property to you.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

currently i have a tx [url=http://www.mortgagefit.com/home-equity.html]home equity loan[/url] at 8.375%. have been trying to do a va refinance and no one will tough me with a 50 foot pole. am told that a va refinance of a tx home equity loan is not possible in texas. they say, one a tx cash out, always a tx cash out. i spent 42 years in the army and yet i cannot get a va loan to refi my home? kow why or suspect why? thanx...

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

As far as I know VA refinance is possible in case of a Texas home equity loan. It is quite surprising as to why you're not getting such a refinance.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I took out a 30 year loan for $289,000 @4.5% interest. My PI is $1489 per month and I have been in the house for almost 2 years. My current principal is $269,000. I am starting to pay an extra $800 to principal each month to pay the loan early and save on interest.

With interest rates dropping to 3.5% for 30 years and 2.5% for 15 years.
1. Is it worth me refinancing?
2. How much would it cost to refinance? And, how long would it take me to recoup the cost?
3. What would my monthly PI be?
4.If I pay about $500 extra a month on the principal how long would it take me to pay the loan off and how much interest would I pay over the life of the loan?
If you think of other things I should consider, please let me know.

Thanks.

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Amybooks!

Welcome to forums!

If you plan to stay in the property for a longer period of time and want to lower your interest rates, then refinancing your mortgage will be a good option. The cost of refinance may vary from one state to another. You should stay in the property for at least 2 years in order to recoup the costs.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We had a 2nd mortage that we neg. down and paid off for less. (18 mos ago) How long do we have to wait until we can refinance our home loan. (Never missed pmt on 1st mortage)

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Guest,

You can contact the lenders now and apply for a refinance. It will depend upon the lender as to whether or not he will consider your request and help you refinance the loan.

Thanks

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can 80,000mtg.refy 20 years left rate5.25 now

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi dannyboy!

Welcome to forums!

You will be able to refinance your mortgage provided you have a good credit score and income. Apart from this, you should also have equity in your property in order to get a refinance.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am trying to refinance (cashout) 3 yrs after chapter 7 due to business closure. Have a primary which is top end mobile home but also have second home. What lender would consider providing a mortgage for one of these?

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi!

Welcome to forums!

As 3 years have passed since your Chapter 7 discharge, you may not qualify for a conventional loan. You should contact the local FHA lenders and check out your options.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

All I want to do is refi my modular home. I just want the lower intrest rate and to be able to pay it off sooner. Why is it so hard to find someone who does refi on modular homes...

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome sheila,

Most modular homes lose their value very sson.. As a result most of the lenders are not interested in giving you a mortgage refinance. This community has a large number of lenders. You can seek a no obligation free mortgage quote from them and check out if they can help you in this regard.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I was almost finished with a $50,000 cash-out refi for my condo. My son lives in one room and the other 2 rooms are rented out. So it is a 'rental' for IRS tax purposes. It is a 1976 built building, 12 Units in bldg, only my unit is a 'rental' property (all others are owner occupied vacation units), 25+ buildings in project. Building is 'operated' by its own HOA which levies all operating and maintenance and improvements to the owners.
The 'last' glitch I ran into was that the Underwriter would not accept the risk because the HOA only has a $12000 reserve and they tell me the Freddie Mac REQUIRES the HOA have a 20% reserve based on the Appraisal. My unit appraised for $190,000 so the Underwriter will not 'do' the refi unless the HOA has a reserve of at least $38,000.
I don't understand this 'requirement' because that reserve only relates to 'my' appraisal. If they want the HOA to have a 20% reserve, I would think that would relate to 20% of all 12 units in the building, which should push about $400,000 (Bldg insured for $2.2M). That will not happen.
Is there some other information I should look for? or another Mortgage company to look to for refi? :(

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I will suggest you to look out for other lenders in order to get a mortgage refinance.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

igot a 2012 moudle home i have my on land i owe 70,000 on it it is finace at 6.59 i looking to refince at a lower rate my credit is fair it is 635

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi UNIQUE!

Welcome to the forums!

You will have to get in touch with the local lenders in order to know whether or not they will refinance mobile homes. It is true that not all lenders will be ready to refinance mobile homes.

Feel free to ask if you've further queries.

Sussane

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gregor212's picture
gregor212 | Joined: September 14, 2014 07:05 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

myself along with my brother & sister own a property in Michigan and my sister lives in the property left by our father. My sister wants to refinance the home and the bank is requesting that my spouse also has to sign on the mortgage even though she is not on the title. The bank says its Michigan law that requires a spouse to sign. My sister refinanced the home in 2006 and the bank didn't require my spouse to sign then. Is this a new Michigan law.

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