Can You Refinance Your Mortgage Without Starting Over?
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Homeowners may refinance their mortgage to snag a lower interest rate, reduce their monthly payment or take out extra cash. But when you refinance, do you start over? What if you don’t want to reset your mortgage term when replacing your existing loan?
It’s possible to get a loan that has a term other than 15 or 30 years, but your access depends on your lender. Keep reading for what you should know about refinancing without starting over.
- Can you refinance without restarting your loan term?
- When it makes sense to refinance
- Getting your finances ready for a refinance
- The bottom line
Can you refinance without restarting your loan term?
You’ve paid down your existing 30-year mortgage for the past few years and are ready to refinance, replacing your existing loan with a new one. The problem is, you don’t want to restart your loan amortization schedule with a new 30-year term.
There are other terms available that fall outside the standard options with which you might be familiar, but not all companies offer those loan products, said Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich.
“Is it likely that people will do that?” she asked. “No. And do we advise people to do that? Not unless they can go in five-year increments.”
The reasoning for the five-year increment rule is the way pricing is set by mortgage agencies, she said. Conventional lenders use a Loan-Level Price Adjustment matrix to set prices, which are based on a borrower’s credit score, loan-to-value (LTV) ratio and the number of units in the property, among other things. There isn’t a price difference for terms in between 25 and 30 years, so a 28-year term, for example, is likely similar to the higher or lower increments. (Note that the matrix doesn’t apply to government-backed mortgages such as those from the Federal Housing Administration (FHA) or Veterans Affairs, however.)
“You might as well see what a 25-year is going to cost you, compared to a 27 or 28,” Leyrer said. “And if you’re going to do it, go ahead and push that button a little further and take a 25.”
Borrowers once could only get 15-, 20- or 30-year mortgages, but other increments have gained traction. Fairway Independent Mortgage, for example, offers fixed-rate mortgage terms in five-year increments from 10 to 30 years. Meanwhile, loanDepot offers 10-, 15-, 20- and 30-year mortgages.
Some lenders allow consumers to borrow even further outside the lines, so to speak. Crestline Funding’s MyFi product and Quicken Loans’ YOURgage both offer custom loan terms — between five and 40 years and eight and 29 years, respectively.
Beyond finding loans in various increments, non-standard mortgages — interest-only or negative amortization loans, for example — became less common after rules were adopted in early 2014 as part of the Dodd-Frank Act.
When it makes sense to refinance
There are several reasons why you might want to refinance your mortgage.
- You want a lower interest rate or mortgage payment
- Your credit profile has improved
- You want to remove private mortgage insurance
- You want to get rid of your adjustable-rate mortgage
You want a lower interest rate or mortgage payment
In instances when mortgage rates have dropped significantly since you first took out your existing loan, you might be able to take advantage of a lower rate by refinancing. You should double-check that the numbers work in your favor, though. Let’s look at an example:
|Existing Loan||New Loan|
|Monthly payment (principal and interest)||$1,304.12||$1,172.02|
A lower rate would save you $132.10 a month on your principal and interest payment.
There are closing costs for a refinance, which can range from 2% to 3% of the amount borrowed — or sometimes more. Using the example above, let’s say your closing costs for the new loan are $5,000. Although you’re saving on your monthly mortgage payment, you won’t realize those savings until you’ve recovered the refinance closing costs. To recoup the costs of the refinance, you’ll need to stay in your home for a minimum of about 38 months ($5,000 divided by $132.10), which is just over three years.
The same logic applies to situations in which you’d like a lower monthly payment. Be sure to figure out your break-even point before going through with the refinance. If you plan on moving a few years after the refinance, it may not make sense to go through with it.
Your credit profile has improved
If you’ve been diligently paying down and eliminating your non-mortgage debt, maintaining a good payment history and have seen a jump in your credit scores, a refinance could be beneficial. A higher score would likely qualify you for a lower interest rate.
Lenders pull a credit score from each of the three credit reporting bureaus: Equifax, Experian and TransUnion. You’ll probably need your middle (or second-highest) credit score — the one lenders use to help determine your mortgage rate — to be 740 or higher to qualify for your best rate. Still, check with your lender about their credit score cutoff for the lowest rates.
You want to remove private mortgage insurance
Conventional mortgage borrowers who put down less than 20% when they first borrow their loan must pay private mortgage insurance (PMI). Usually, you can drop PMI by requesting that your lender remove it once you reach 20% equity. Or, you can wait for it to be automatically removed when your equity reaches 22%.
If you’ve aggressively paid down your mortgage or have seen an increase in your home’s value, you can request that your lender remove PMI if you believe you have the required equity. You’ll need a new appraisal to verify the value of your home.
You want to get rid of your adjustable-rate mortgage
If you have an adjustable-rate mortgage, such as a 5/1 ARM, and you’re approaching the time for your initial rate adjustment, refinancing into a fixed-rate loan could save you money. This is especially true if your rate is expected to increase to a point that could make your mortgage payment unaffordable.
Other reasons to refinance might include switching from an FHA loan to a conventional loan, getting access to money through a cash-out refinance to cover education expenses or perhaps a divorce — for example, if you’d like to remove your spouse’s name from the loan.
Getting your finances ready for a refinance
You’ll want to position yourself to take advantage of your best loan terms possible before you start the refinancing process. Here are a handful of tips to help you get prepared.
- Improve your credit score: If your credit score was good when you first borrowed your existing mortgage, put in the effort to turn it into an excellent score. For example, you’ll need at least a 620 score for a conventional loan and a 580 score for an FHA loan, but the higher your score, the better.
- Reduce your DTI ratio: Lenders typically like to see a DTI ratio — the percentage of your gross monthly income that is dedicated to debt payments — below 43%. So if your monthly income is $5,000, you’ll want to make sure your total debt payments, including your mortgage payment, are $2,150 or lower.
- Boost your home equity: It will likely be more challenging to qualify for a refinance if you haven’t built very much equity in your home. Aim for at least 20% equity — you’ll not only get a better mortgage rate but avoid PMI.
The bottom line
While chasing a lower mortgage rate can seem like plenty of motivation to refinance your loan, there are several other factors to consider before you decide to do so. Those include analyzing the costs involved, determining whether you should refinance without starting over and figuring out whether you’ll stay in your home long enough to save on your monthly payment.
If you decide to refinance, take the time to shop around. Compare offers from multiple lenders to find your best deal.
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