Do I Need a Downpayment to Refinance my Mortgage?

If you are looking to tap into the equity built into your home or save money, you can consider refinancing your mortgage. When you refinance your mortgage, your existing home loan will be replaced with a brand new loan. Whether you are interested in cutting monthly payments, decreasing your interest rate, or making the most of your home’s equity, refinancing your mortgage is worth thinking about.

In some cases, it makes sense to refinance a mortgage to pay off the loan that much faster. Others take this route to move from an adjustable rate to a loan with a fixed rate or eliminate the dreaded FHA mortgage insurance from the picture. However, most people assume a down payment is necessary to refinance a home mortgage. Let’s take a look at whether this is true, a half-truth, or holds no truth at all.

Is a Down payment Really Necessary for Mortgage Refinancing?

In short, the answer to the question posed above is no. However, refinancing your mortgage will come with a cost. Refinance and you will have a new mortgage that pays the balance of the original home loan. However, you must qualify for the mortgage refinancing in the first place just as you had to qualify for the initial mortgage to move into the house to start with. This means you will have to fill out and submit an application for a mortgage refinance, complete the underwriting process, and proceed through closing just as it occurred when you originally purchased the home. It’s kind of like you are buying your house again, but under different terms and sometimes, depending on how much equity you have, you’ll walk away from the deal with money in your pocket.

Crunch the Numbers Before Making a Decision

Once the decision is made to refinance, it is time to crunch the numbers. The new loan amount as well as the new interest rate are of particular importance. Enter all the numbers in a mortgage refinance calculator to quantify the monthly savings resulting from the refinancing as well as the new monthly payment and savings across the lifetime of the loan once the estimated costs for refinancing are accounted for. Keep in mind, you will have to pay fees, possibly upwards of several thousand dollars, to refinance your mortgage. It might take a while to break even on the transaction after these fees are paid. Though you will enjoy monthly savings, the cost of refinancing in the first place will offset some or potentially all of those savings.

Get a Loan Estimate

The best way to approach refinancing your mortgage is to shop around for the best mortgage refinance rate. This means you should obtain a loan estimate from all potential lenders. Each prospective lender is mandated to issue such an estimate within three days of the submission of your information. Your loan estimates are straightforward documents that explain the terms of the loan, the estimated costs for closing, payments to be made, and fees. Once all the numbers are laid out, you might find you will need some savings to cover the costs tied to refinancing your mortgage, but in many cases you have the option to roll these fees into the loan itself. This would be an excellent question to ask potential lenders when shopping around.

What About No-closing Cost Mortgages?

There is the potential to obtain a no-closing cost mortgage. The only downside to this type of loan is the lender can charge a higher interest rate that makes refinancing that much more costly across the life of the new loan. There really is no such thing as no closing costs-but there are options to how you can agree to pay the fees.

The Moral of the Story: Consider Whether the Costs are Worth It Before Committing

Opt to refinance your mortgage and you will essentially take out a new loan while eliminating the old loan. This means you must pay the associated closing costs to complete the deal. Unfortunately, these closing costs can be quite expensive. It might cost upwards of 5% of the total loan value or as little as 2% of the loan value to close. If you’re thinking about refinancing your home loan, it’s a great time to do it. Contact our office today to get some answers to your refinancing questions and get the process started today!

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