Am I a Good Candidate to Refinance My Mortgage?

As mortgage rates rise and fall over time, you may be wondering how you can take advantage of the market as a homeowner. You probably hear the term "mortgage refinancing" brought up often, especially when rates are lower than they typically would be. But what exactly is mortgage refinancing, and how do I know if I'm a good candidate?

In this blog, we'll look at all you need to know about mortgage refinancing, and how we can help you here at American Heritage.

What is Mortgage Refinancing?

In order to buy a home, the majority of buyers take out a mortgage. A mortgage is a loan for the home or property that comes in a set term, generally 15 to 30 years. Over the course of the mortgage, you'll be charged interest. This percentage you'll be charged is known as the interest rate, and this helps determine your monthly mortgage payment.

When you see social media posts or hear the news talk about mortgage rates dropping, it means that the interest rate is lowering. This is beneficial, as a lower interest rate means you'll pay a little bit less on your mortgage each month. Mortgage interest rates rise and fall over time for a variety of factors, such as the market, inflation, and more.

Mortgage refinancing allows you to take on a new mortgage in place of your original one. If you decide refinancing is right for you, the interest rate on your new mortgage should be lower. It's a good idea to shop around for the best rate, as you don't need to stick with your original lender.

Mortgage Interest Rates vs. Annual Percentage Rates (APR)

There are two numbers you'll want to look at closely when it comes to mortgages—the interest rate and the annual percentage rate, or APR. While these may sound similar, they are vastly different when it comes to the amount of money you'll spend in the long run.

Your mortgage interest rate refers to how much interest you will pay depending on the amount you borrow. It's the price you pay for borrowing money and is a percentage tied to your loan's principal. The APR is connected to the total yearly cost of your loan—it includes the interest rate and any additional fees. It's a more accurate representation of your overall cost.

Reasons to Refinance

While a lower interest rate, which could mean lower monthly payments, is one of the most common reasons refinancing is popular, it's not the only one. Some other reasons to refinance could include:

• Changing your mortgage's term, or the length of time you have to pay off your mortgage
• Changing from an adjustable or variable rate (one that shifts as the market changes) to a fixed rate (one that stays steady and consistent)

Additionally, refinancing your mortgage can help lower your monthly payments. Extending your loan's term (from 15 years to 30 years, for instance) would bring your monthly payment down.

What Does Refinancing My Mortgage Include?

While it ultimately depends on what your lender looks for, there are a few standard elements you'll need to have in place to refinance your mortgage. This includes:

• Home equity: most mortgage lenders will want you to have at least 20% equity in your home. Equity is the amount of your home that you own and have paid off already in your mortgage.
• A strong credit score: while mortgage lenders will vary on their exact requirements, a good rule of thumb is to have a credit score in the high 600s or in the 700s
• A strong debt-to-income ratio: this is the amount of income you bring in each month in contrast to your monthly debts, which include your mortgage payment, bills, loan payments, and any other recurring monthly charges
• Closing costs: to refinance, you will need to cover closing costs
• Established income: lenders will look at your W-2s, tax returns, and other documents to verify your income

The Finances of Refinancing Your Mortgage

We mentioned closing costs above, and these are a financial element to consider when you explore refinancing. The majority of closing costs include loan origination fees, appraisal fees, credit check fees, title fees, and other charges that pop up when buying or refinancing a home. Most closing costs will amount to around 2-6% of your total mortgage, but this will vary depending on your lender.

Some lenders may roll your closing costs into the total of your mortgage. Before officially moving forward with refinancing, be sure to analyze your breakeven point. Essentially, you want to be sure that the amount you'll be saving each month makes sense given the amount you'll need to pay in closing costs.

If your closing costs are $6,000, and you'll be saving $150 each month in your monthly payment, it will take you 40 months (or more than three years) to break even. Be sure to factor this in when considering the timeline for your goals.

When Not to Refinance Your Mortgage

While it's certainly an attractive option, refinancing may not be for everyone. You may not be a great candidate to refinance if:

• It will take you too long to break even on the costs you'll be saving.
• You can't afford the closing costs.
• Interest rates are high.
• You don't have enough equity built up in your home.

Cash-Out Mortgage Refinances

There are different types of mortgage refinancing options. The most common is a rate-and-term refinance, which takes your current mortgage and replaces it with a new loan with a new interest rate. There's also a cash-out refinancing option, which allows you to maximize your home's equity.

With a cash-out mortgage refinance, you'll be taking on a new, larger loan for your home. The new loan's amount includes the remaining balance of your previous mortgage, as well as an additional amount that you'll have access to in cash. The cash comes directly from your home equity. Major repairs and home improvements are common reasons to pursue cash-out mortgage refinancing.

Mistakes to Avoid

If you decide that mortgage refinancing is right for you, there are some common mistakes you'll want to avoid. Some include:

• Not paying your closing costs up front: While this may sound tempting at first glance, all of those closing fees will be added to your new mortgage's principal, meaning a larger overall balance, a higher monthly payment, and more interest.
• Failing to negotiate: Leave no stone unturned when it comes to trimming costs where you can—some lenders may offer discounts for registering for automatic payments or paperless statements. Some fees may be non-negotiable, but others are at the lender's discretion.
• Failing to shop around: Just like you look at several homes before deciding where to move in, you should explore a variety of lenders to ensure you're getting the best rate and offer out there.
• Forgetting the Annual Percentage Rate (APR): Lowering your monthly payment and taking advantage of a lower interest rate is tempting. But don't forget about the APR, which takes into account the entire loan balance.

Whether it's to open some space in your budget or expand your vision for your home, mortgage refinancing is an excellent opportunity to fulfill your goals as a homeowner. Remember to shop around for the best rate, explore a variety of lenders, and keep an eye out for when refinancing may make the most sense for you!

¹The No Closing Cost Mortgage Refinance offer applies to loans with a completed application date of January 31, 2025 or later. Promotions effective as of January 31, 2025 and are subject to be cancelled, extended or changed without prior notice. The listed No Closing Cost Interest Rates are based on a $200,000conventional loan up to $832,750, a 80% Loan-to-Value, a minimum 660 or better FICO score, and a Debt-to-Income ratio no higher than 45%. For rates on loans greater than $832,750, please contact us. If you do not meet the stated criteria, other mortgage refinance programs may be available to you. Members who have refinanced a home under our previous No Closing Cost Mortgage Refinance program within six months prior to today are not eligible to apply for current No Closing Cost Mortgage Refinance program. Mortgage loan approvals are subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Each tax situation is unique, consult a tax and/or legal advisor for advice and information concerning your particular situation. Your rates may vary based on LTV, credit scores or loan amount. Loan rates are posted daily at AmericanHeritageCU.org and subject to change without prior notice. The mortgage loan payment obligations will be greater if taxes, homeowners insurance, or private mortgage insurance are included. The No Closing Cost Mortgage Refinance option: a) the borrower pays no closing costs, however taxes may need to be escrowed and property insurance is required; b) there is no cash out available; c) offer is only available for primary and secondary residences and does not include rental or investment properties. Choosing an origination fee option will increase the final APR. Other restrictions may apply, please contact an American Heritage Credit Union lender at 215.969.0777 for details.