Why do banks always want you to refinance?
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender.
Mortgage refinance is a serious business. The bank or broker will make a tidy sum of money from your business. You owe it to yourself to get the best deal and service. This is part of a “How to Refinance” series of posts.
As a rule of thumb, experts often say that it's not usually worth it to refinance unless your interest rate drops by at least 0.5% to 1%. But that may not be true for everyone. Refinancing for a 0.25% lower rate could be worth it if: You are switching from an adjustable-rate mortgage to a fixed-rate mortgage.
When people refinance, they change the terms of their loan with their bank or lender so they are paying a lower monthly interest rate. While that means less in loan payments for lenders, homeowners must pay application and closing fees to get this deal, which is immediate revenue for those lenders.
One of the first reasons to avoid refinancing is that it takes too much time for you to recoup the new loan's closing costs. This time is known as the break-even period or the number of months to reach the point when you start saving. At the end of the break-even period, you fully offset the costs of refinancing.
Mortgage companies make money when they sell your loan to the investor. They can also make money when they “service” the loan. When they ask you to refinance for a lower rate, they will not only earn a profit when they sell your loan, but they will retain the servicing account. Servicing is long-term profit for them.
Some borrowers are able to reduce the term of their loan by refinancing. If you are a borrower who has had your loan for a number of years, a reduction in interest rates can allow you to move from a 30-year loan to a 20-year loan without a significant change in monthly mortgage payments.
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
So how much should mortgage rates fall before you consider whether refinancing is worth it? The traditional rule of thumb says to refinance if your rate is 1% to 2% below your current rate. Make sure to factor in your current loan term when considering refinance though.
The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, dropping to 6.6% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will continue to fall to 6.1% by the end of the year.
Where does money go when you refinance?
In the most simplistic explanation, the balance stored in your redraw facility is transferred to your new loan when you refinance. You will still have access to the funds you have accumulated in this facility, but now you might have to pay a slightly higher interest rate on the amount that you have drawn down on.
Mortgage lenders require you to provide them with recent statements from your account with readily available funds, such as a checking or savings account. In fact, they'll likely ask for documentation of any accounts that hold monetary assets.
If your final decree states that one of you will refinance the house loan, not doing so violates a court order. If a judge finds you in contempt of court, you could be subject to fines and even jail time on top of being forced to refinance at a bad time.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
Your credit score can change over time. If you've had some credit mishaps since you took out your existing mortgage and your score has dropped, there's a chance you can't refinance your mortgage. You may also be denied for a refinance even if your credit scores are acceptable, but you recently went through bankruptcy.
Whatever the reason, refinancing with someone you've worked with in the past has its perks. For starters, it should be a seamless process. Conveniently, your old lender will already have some of your financial documents and records on file, depending on how recently you worked with them.
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.
Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.
Legally, there isn't a limit on how many times you can refinance your home loan. However, mortgage lenders do have a few mortgage refinance requirements you'll need to meet each time you apply for a loan, and some special considerations are important to note if you want a cash-out refinance.
The cost to refinance a mortgage ranges from 2% to 6% of your loan amount, and you can expect to pay less to close on a refinance than on a comparable purchase loan. The exact amount you'll have to pay depends on several factors, including: Your loan size. Your lender.
Is it dumb to refinance to a higher interest rate?
In most cases, it makes sense to refinance to a new home loan only if the interest rate on the new loan is a lower one. After all, interest is the cost to borrow, and it may make little sense to take out a new loan that charges you more for the debt you've taken on.
Mortgage refinance rates are currently at their lowest since spring 2023, and they should keep falling in 2024. If you got your mortgage before 2023, your current rate might still be lower than if you locked in a new rate by refinancing now.
Conventional loans – you can do a rate-and-term refinance right away if you want, but typically not with the same lender. That's because, before 6-months, the lender may lose their original commission. On the other hand, if you want a cash-out to refinance, you'll have to wait for at least 6-months.
Mortgage rates are going to stay above 6% through 2025, according to estimates from Goldman Sachs. Goldman said the decline in mortgage rates should offer marginal improvements in housing affordability. The average 30-year mortgage rate fell to 6.62% last week after hitting a cycle-high of 7.8%.
“The housing market is off to a good start this year, as consumers benefit from falling mortgage rates,” said NAR chief economist Lawrence Yun in the association's December pending home sales report. NAR forecasts that sales will rise by 13 percent in 2024.
