Mortgage Refinancing 101

As mortgage interest rates have increased the past year since the Covid boom many Charleston families bought homes under the idea that they would refinance their mortgage rates once those rates decreased. But what does that really mean, how does that work and what would it entail?

What is refinancing your home?

“Refinancing the mortgage on your house means you’re essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment.” – according to Rocket Mortgage  

While there are a few reasons you may want to refinance your home – cash in hand, shortening your loan term, eliminating PMI (private mortgage insurance) or to transfer the name on the mortgage – by far the most popular is to lock in your mortgage at a lower interest rate.

How does refinancing work?

Refinancing your home is a similar process to purchasing your home. There is a ‘closing’ period for refinancing that typically lasts 30 days. There is an application process that includes the same information as when you apply for your mortgage (income, debt, credit score, etc) so it’s good to have all these items ready before you begin the process. When applying for refinancing you can choose any lender that offers the best rates, you do not have to use your same lender.
*Expert tip: ask your lender to lock in your rate. This will guarantee you the lowest rate they quote for the ‘closing’ period.

Your lender will submit your information for underwriting where your home will be appraised to determine the current value (hopefully it’s increased!). The appraisal process is the same as when you purchased your home- make sure to make any needed repairs and make your home ‘show ready’ to ensure the best home appraisal value.  

If your appraisal comes in equal to when you bought your home or higher the process is done and you can then choose the type of loan and rates you want from your lender. IF the appraisal falls lower than your purchased value it’s most likely the refinance rate will be too high for refinance approval.

When should I refinance my home?

Current rates in Charleston, South Carolina are 7.17% for a 30 year fixed loan, 6.41% for 15 year fixed loan and 6.66% for a 5 year ARM according to realtor.com. Based on what your current interest rate is the best time to refinance is when the rates drop below your current rate, at a substantial amount.

Just as when purchasing a new home if you’ve just made other substantial purchases, had a hard hit to your credit or are in a job transition it’s probably best to wait.

Another opportune time to refinance (especially if you’re looking for a cash out refinance) is when you’ve made significant updates or remodeled your home increasing the value.

If you purchased a home at peak interest rates and are looking at your refinancing options I would love to put you in touch with one of our preferred lenders in the Charleston area. We work with only the most knowledgeable lenders and they would be happy to direct you on your refinancing journey.