Refinancing Your Home in 2021
Refinancing - or replacing an existing mortgage with a new one, is a great tool for real estate investors and homeowners to build financial security. Refinancing your home can help generate long-term wealth and increase savings quickly.
The 2021 housing market is very competitive, and homeowners and investors alike are scrutinizing the best options for their properties and future investments. Here’s what you need to know when considering refinancing in 2021.
How is Refinancing in 2021 Different?
A change in interest rates is often a catalyst for many homeowners to consider refinancing. In 2020 and 2021, the real estate market in Hampton Roads (and across the country) saw mortgage interest rates drop to record-breaking lows. This not only encouraged many buyers to get out and look for houses, but also motivated many homeowners to consider refinancing their current home loan.
Note: Refinancing outcomes consistently differ across loan types, and interest rates can change monthly, weekly, or even daily depending on the housing market. It’s always a good idea to work with a real estate consultant to make sure you know how refinancing will benefit you!
What Are the Benefits of Refinancing?
The goal of refinancing a home loan is to provide the homeowner with more secure financial footing and the advantage of building wealth and saving more quickly. However, there are many benefits to refinancing than just a lower interest rate.
The benefits of refinancing include:
Lower monthly payments (from less interest owed per month)
Reduced length of loan (ability to pay off the principal more quickly)
Consolidating other debts into a mortgage (to access the lower interest rate across your debt)
Establishing a Home Equity Line of Credit (which will let you borrow cash to improve and repair the home based on credit)
Removing private mortgage insurance (if the new financing shows that you’ve built 20% equity in the home)
What Does it Cost to Refinance?
The refinancing process does come with several up-front and out-of-pocket costs. Here are the most common costs associated with refinancing - but keep in mind your lender may have others:
Loan Application Fee: Check with your lender to see if they charge an upfront fee to apply for a new loan, and what it will cost. Policies vary significantly by lender.
Processing Fees: These fees, issued by the lender, will be variable based on the new loan and the amount being refinanced. Make sure to ask your lender for a full breakdown.
Appraisal: Lenders often require a new home appraisal when you refinance. If you have some decent equity in your home and you’re not taking out cash as part of the refinance, you might be able to have them waive this step.
Closing Costs: Similar to closing on your original house loan, lenders apply closing costs to refinancing loans as well. These will be determined by the loan amount and the length of time on the new loan.
Even if your refinancing plan is approved and processed by your lender, you may not see the savings right away. To determine if refinancing makes financial sense for you, determine your break-even point (the time when your new lower payments will kick in).
How to know when refinancing your home makes sense?
Let’s say you purchased a house with a $400,000 loan from a mortgage lender with an interest rate of 4.25%, and you have $390,000 left to pay off. Interest rates near you have dropped, and you can refinance and replace your existing mortgage with one that has an interest rate of 3.75%. Doing so would save you $162 per month!
In order to refinance, let’s say you have to pay $1,200 in taxes, fees, and closing costs. It will take 8 months to pay off those fees before you start seeing your savings ($162 x 8 = $1,296). Therefore, your break-even point would fall on the eighth month. In this scenario, it would make financial sense to refinance your mortgage if you plan on owning the home for longer than 8 months.
How do I Prepare to Refinance My Home Loan?
Here are the steps you should take to prepare to refinance your mortgage:
1. Define your goals. Here are a few questions to help you determine them:
What benefit(s) am I hoping to get by refinancing now?
Can I afford to pay the closing costs and fees?
What payoff will I receive from refinancing?
2. Prepare your documents. To refinance, your lender will need to see these (and potentially more):
Tax returns (W-2, 1099)
Statement of debt
Statement of assets
3. Meet with your lender. Discuss these items in detail with your lender to make sure you are making a wise investment move:
What kind of fees and closing costs can I expect if I refinance?
How long will the amortization cycle of my new loan be?
What will my new monthly payment be?
Am I able to establish a Home Equity Line of Credit?
Am I eligible to have my private mortgage insurance removed now?
When will I start seeing the savings generated by refinancing?
The Bottom Line
Refinancing when mortgage rates are as low as those we’re seeing in 2021 can help the savvy real estate investor and homeowner build wealth more quickly. To determine if refinancing is the right choice for you, it’s always a great idea to speak with your real estate consultant to fully consider your options.