Refinancing Your Mortgage

There are a lot of financing options available to homeowners, so it’s understandable why refinancing may be confusing. In this article, we’ll cover what refinancing is, benefits, things to consider and examples of when it makes sense to refinance.

Refinancing replaces an old mortgage with a new one with terms that could be better for your situation – like lowering your monthly payment, securing a lower rate, shortening the term of your loan or helping you build equity faster. While the benefits are certainly attractive, there are some factors to consider when you’re thinking about refinancing.

Benefits and Things to Consider

The benefits of refinancing could include lowering your interest rate or monthly payment or changing the length of your term or type of loan.

Here’s an example that displays the benefit of refinancing to a better rate:

Suppose you’ve purchased a home with a $350,000 30-year fixed mortgage. You’ve been paying your mortgage for 5 years. Your interest rate is 7.5% and your principal and interest payment is $2,447 a month. Let’s say the market has improved and interest rates are now down to 6.5%. How much could you save if you refinanced?

In this scenario, refinancing would save you $354 a month or $4,248 annually in out-of-pocket expenses. Keep in mind, you'll need to pay closing costs to refinance. Additionally, extending the length of your loan will mean you'll pay more interest overall.

Another instance when refinancing could make sense is if your home's value and equity have increased and you may be able to take advantage through a cash-out refinance. With this option, you essentially sign a mortgage for more than you owe and take the difference in cash. This could help pay for home repairs or other expenses you may have.

While there are several benefits to refinancing, there are some things to keep in mind as well. Lowering your monthly payment may require you to extend the length of your loan. Extending your loan's term isn’t always ideal since you'll pay more interest overall. It's best to reach out to an expert to discuss your specific situation to decide if refinancing makes sense for you.

Additionally, you’ll need to apply for a refinance like when you previously applied for a purchase loan. You’ll go through a similar process where your lender will consider your income, credit history and credit score before making a decision. Keep in mind that you’ll likely need to pay around 2% to 5% of your loan in closing costs. If you can afford that in the short term and refinancing makes sense for you, you could save money in the long run.

Before you choose to refinance, make sure you fully evaluate how this decision could work out in your favor. Our Refinance Break Even Calculator could help, but don’t be afraid to ask one of our experts.

When to Refinance

The best time to refinance depends on multiple factors. If interest rates have dropped since you got your loan or if your credit score has improved significantly, it may be worth trying to lower your interest rate with a refinanced loan. If you’re struggling to make your monthly payments, lowering your payments by getting a longer term, even if it means paying more overall, can help take some of the strain off your budget.

Here are a few scenarios that may lead you to consider refinancing.

1. Mortgage rates have improved from when you secured your home loan.
   For many homeowners, the best time to refinance is when rates have fallen below the rate on their current loan. See above for a detailed example. Check out our Refinance Break Even Calculator to understand your potential savings. Or reach out to one of our experts for help.
    
2. You need to lower your monthly payments. 
   Consider refinancing if your financial situation has taken a downturn and you can benefit from a lower monthly payment. This could mean extending your loan term, so be aware that refinancing in this situation will increase the time it takes to pay off your loan.
   
   Here’s an example that displays the benefit of refinancing to lower your monthly payments:
   
   Suppose you’ve purchased a home with a $350,000 30-year fixed loan. You’ve been paying your mortgage for 10 years. Your interest rate is 7.5% and your principal and interest payment is $2,447 a month. Because of your consistent payments over the last 10 years, your loan balance is now $296,968. How much could you save if you refinance to another 30-year loan term at the same interest rate?
    

   Loan balance after 10 years of payments	$296,968
   New loan term	30-year fixed
   Interest rate	7.5%
   New monthly payment	$2,076

    

   In this scenario, refinancing would save you $371 a month or $4,452 annually in out-of-pocket expenses. Keep in mind you'll need to pay closing costs to refinance. Additionally, extending the length of your loan will mean you'll pay more interest overall.
    

3. Your salary or credit score has increased, and you want to pay off your mortgage sooner.
   When you bought your current home, you may have felt that a 15-year mortgage was less affordable than a 30-year term. But, if your situation has changed and you find yourself bringing home a larger paycheck, you might want to consider refinancing to a shorter term. While this will make your monthly payments larger, the length of your loan will be shorter, and you’ll pay less interest overall. Similarly, if your credit score has improved, you could refinance to negotiate a better rate. Keep in mind you'll likely need to pay around 2% to 5% of your loan in closing costs.
    
4. You’ve had a significant life change.
   Major events like marriage, divorce, kids going off to college or unexpected expenses could be a reason to consider refinancing. If you’re a homeowner and you get married, you may want to refinance to add your spouse’s name to the title. On the other hand, if you get divorced, refinancing may be required to release you or your spouse from the financial responsibility of the home. Other changes like your kids going to college or unexpected expenses might trigger you to think about refinancing too. Depending on your situation, lowering your monthly payments or shortening your term could be what you need to deal with what life throws at you.
    

5. If you’re ready to refinance and would like to talk to an expert, fill out the brief questionnaire, and an experienced Mortgage Loan Officer will reach out to you.

Sources: Banzai, Bankrate