Along with rising optimism comes rising mortgage rates, according to a recent report from FreddieMac, which also notes that rates “remain near historic lows.” So, if you’re considering a mortgage refinance, you haven’t missed the boat on historically low rates, but you don’t want to wait too long.
Why refinance your mortgage in New Mexico? Perhaps you want to save on interest by locking in a lower rate or get cash out to use for home renovations or debt consolidation. Whatever your reasons, New Mexico remains a very affordable and attractive place to live. Statewide, the median property tax is only $880.00 per year for a home worth the median value of $160,900.00. With New Mexico counties collecting an average of 0.55% of your home’s assessed fair market value in annual property tax, our state has one of the lowest median property tax rates in the U.S.
And while the New Mexico real estate market may still be rebounding from the 2008 crash, property values are rising and markets are heating up. For example, Albuquerque had the 7th hottest real estate market in the U.S. in 2020, according to KRQE. Santa Fe’s real estate market is also hot, classified as a seller’s market with more people looking to buy than is available. Have you checked your current property value lately? If it’s higher, you may have more equity in your home than you thought, making it possible to refinance. We’ll get into all that and more in this guide to refinancing your mortgage in New Mexico!
What is Mortgage Refinancing?
When you refinance a mortgage loan, you replace your current mortgage with a new one that pays off the balance on the old loan. You can refinance with your current lender or a different one; either way, the process of applying for and closing on a new mortgage is very similar to the process you went through to obtain your original mortgage. The only difference is that you already live in your home and don’t need to get it inspected or negotiate with the seller. Instead, your mortgage lender will appraise your home’s current value and let you know how much you can borrow. Depending on your reason for refinancing, you may be looking to borrow the same amount you already owe or more.
Will Refinancing Save Me Money?
Other than doing a cash out refinance to pay for a large expense or consolidate higher interest debt, the main reason people refinance is to save money. So, how does that work?
If you’re like most people, your mortgage payment is your biggest monthly expense. Let’s take a look at what goes into that bill (check your own mortgage statement for specific numbers):
● Principal: This is the amount of money that goes toward your principal balance (how much you borrowed to buy your home). So, every month your Outstanding Principal Balance will go down by that much.
● Interest: The amount of interest you pay each month depends on your interest rate and whether it’s fixed or variable. Generally, you will pay more interest upfront in the early years of the loan and then more of your payment will go to principal. This is why, with a fixed-rate mortgage, the payment amount is always the same but the amounts of principal and interest in each monthly payment will vary.
● Escrow for taxes and insurance: The escrow portion of your mortgage payment goes into a special account from which your lender pays your real estate taxes, home insurance premiums, and mortgage insurance premiums if you have PMI.
As you can see, lowering your monthly mortgage payment could reduce your overall monthly expenses. And there are two ways to lower that payment through refinancing: by getting a lower interest rate or a longer loan term.
It’s important to note that refinancing into a lower interest rate will only save you money if you keep your home long enough that the savings on interest exceeds the new loan’s closing costs (more on that later).
Also important is the fact that extending your loan term (for example, you have 20 years left on your current loan and refinance into a new 30-year mortgage) will reduce your monthly payment but you’ll end up paying more in interest over the long run. However, if reducing your monthly payment will make the difference between being able to afford and stay in your home or not, it could be a good option for you.
How Do You Qualify for a Mortgage Refinance?
Qualifying for a mortgage refinance is similar to qualifying for a regular mortgage. Here’s what you need to know about the home refinancing process:
● Your credit score and credit report will be checked. Avoid opening new credit accounts or taking out other loans while going through the refinance application process.
● Provide proof of income. W2s, federal tax returns, and recent pay stubs. If you’re self-employed you may need to provide different, or additional, proof of income.
● Prove your identity. Driver’s license or state ID and social security number.
● List your assets. This includes physical property such as your home and/or car as well as financial accounts such as checking, savings, and investment or retirement accounts.
● List your debts. This includes your current mortgage, HELOC, car loan(s), personal loans, credit card balances, and/or student loans. *If you are applying for a cash out refinance to pay off debt, you’ll need to specify the accounts and balances you will pay off after refinancing.
● Share other relevant documents such as your history of mortgage payments, a copy of the deed, homeowner’s insurance, etc.
● Check your debt-to-income ratio (DTI). To calculate this ratio, take your total monthly debt payments (including term loans and any credit card debt) and divide by your gross (pre-tax) monthly income. Generally, you’ll need a DTI of less than 50% to get approved for a new mortgage loan. If your DTI is higher, you could take some time to pay down debt before applying for a mortgage refinance.
Types of Mortgage Refinances
We’ve mentioned some of the different types of refinance mortgage loans so far in this article. Here’s a complete breakdown of your options:
● Rate-And-Term Refinance: For changing your mortgage interest rate, term length, or both. This option often carries lower interest rates than a cash-out refinance does.
● Limited or Partial Cash-Out Refinance: Similar to a Rate-And-Term Refinance option, except that the closing costs are added to the balance of your loan.
● Cash-Out Refinance: Convert a portion of your equity (the difference between your current mortgage balance and your home’s value) into cash and use that cash to cover the closing costs, consolidate debt, and/or finance a large expense such as a home improvement project at a low interest rate.
Costs of Refinancing
As mentioned earlier, it’s important conduct a cost-benefit analysis before proceeding with refinance. Just as there are costs associated with applying for a regular mortgage loan, you’ll have to pay many of these same costs again to refinance into a new mortgage. Use our mortgage calculators to test different scenarios and help weigh the pros and cons of your situation.
Your lender will provide you with a breakdown of all costs associated with your new mortgage, including closing costs. Overall, refinancing fees can amount to 3% to 6% of the remaining principal of the mortgage. Here’s what that covers:
● Application fees: The cost to process the loan and perform credit checks.
● Origination fees: A one-time fee for loan preparation and underwriting.
● Appraisal fees: Covers the cost of an appraisal to assess the value of your home.
● Inspection fees: A home inspection isn’t mandatory, but it’s highly recommended to catch any major issues with the house before you buy it.
● Title Search and Title Insurance: Covers the cost of examining public records to research the deed of your home, ensuring no one else has a claim on the property. Title insurance provides protection to the owner if someone sues and says they have a claim to the property from before the homeowner purchased it.
● Closing Costs: Includes attorney fees who handles the closing of the loan on behalf of the lender.
● Private Mortgage Insurance/PMI: Homeowners who have less than 20% equity in their home when they refinance will be required to pay private mortgage insurance. If your home has decreased in value since you purchased it, you may find that if you refinance the mortgage you will have to now pay PMI for the first time if you didn’t before.
Reasons to Refinance My Mortgage
Still not sure if refinancing is right for you? Let’s take a closer look at the potential benefits of a home refi:
● Faster payoff, eliminate PMI, refinance at a lower interest rate.
● A restructured loan can improve your financial situation in many ways. More manageable monthly payments allow you to save more money or pay off additional debt, lower interest rates ensure you’ll save more money over time, etc.
● With a cash out refinance, you’ll receive payment in cash for the difference and can use that money towards home improvements or for long-term financial goals like college savings or retirement.
● Mortgage interest rates are at an all-time low right now.
● If your credit score has improved since you initially got your loan, you could qualify for a lower rate than what you currently have.
● If you have additional debt with a high interest rate, and you have enough equity in your home, you could consolidate that debt into your home loan and pay the lower interest rate on the mortgage.
When Not to Refinance
Refinancing isn’t the right move for everyone. Here are a few scenarios when refinancing doesn’t make sense and could actually hurt your budget or credit:
● Does your current mortgage have a prepayment penalty? If so, you will have to pay the penalty if you pay your loan off early by refinancing.
● Is your credit score low? It’s best to refinance with a good to excellent credit score (unless you have another compelling reason, like debt consolidation) so you can qualify for the lowest possible interest rate. If your score is on the lower side, you may want to take time to build it up before refinancing.
● The same thing goes for a higher DTI. If your debt-to-income ratio is pushing 50%, you’re likely to get a higher interest rate if you get approved at all.
● Not enough equity: Generally, you need at least 20% equity in your home to get the best interest rate or to get approved at all.
Tips For Refinancing Your Mortgage
If refinancing is the right decision for you, do it the smart way by following these tips:
● Shop around for the best rates and terms, as well as the lowest closing costs. At DNCU, we are confident we can offer you the best loan option to meet your needs.
● Make a down payment. This is optional, but if you can put some money down, you may get a lower interest rate.
● Don’t refinance into a longer loan term unless you explicitly want to in order to reduce your monthly payment amount. Otherwise, you’ll end up paying more in interest over the life of the loan.
● Don’t get cash out to use for non-essentials like vacation. It may be tempting, but that “cash” isn’t money you’ve earned; it’s debt you’ll have to repay. Cash out refinances are best saved for paying off higher interest debt (as long as you can be sure you won’t run up your credit card balances again), financing a home renovation that will add value to your house, and/or dealing with emergencies such as a medical crisis.
● Understand the closing costs associated with the loan before finalizing it. Make sure you’re aware if you need to pay closing costs in cash or if it will be rolled into your loan.
Resources in New Mexico
If you are behind on your mortgage, Keep Your Home New Mexico is a program of the New Mexico Attorney General’s Office offering resources and help to homeowners in trouble.
Learn more about mortgage refinancing from DNCU!
Our mortgage officers are local, experienced, and ready to help with your refinancing goals. Meet our team and contact us to learn more or discover the convenience of an online application right now on our mortgage refinance page.