Refinancing your mortgage can offer a number of benefits and could put you in a better financial situation. By capitalizing on the investment you’ve already made in your home, you could realize benefits from refinancing.
What Is A Mortgage Refinance? And What Are the Benefits?
Refinancing your mortgage can offer a number of benefits and could put you in a better financial situation. By capitalizing on the investment you’ve already made in your home, you could realize benefits from refinancing that include:
The first step in deciding if refinancing your mortgage is a good idea is to learn how the process works, what your options are, and the possible advantages and disadvantages before contacting a mortgage professional.
Mortgage Refinance: What Is It?
Refinancing – or refi for short – is the process of swapping your existing mortgage with a new mortgage, usually with more favorable terms and a different interest rate. You can refinance with your current lender or choose a new one. The mortgage lender you choose for the refinance pays off the existing mortgage with the new mortgage. Apart from now having different terms, things will essentially be the same on a month-to-month basis. You’ll have one loan and one monthly payment.
The goal is usually to get a new loan or new type of mortgage that has better terms than your old one. Meeting this goal hinges on several factors, like current mortgage rates, the amount of equity in your home (the difference between what you owe on a mortgage and the value of your home), and your credit score at the time you apply. The most common reason for refinancing is the interest-rate environment. Because interest rates can fluctuate, many people choose to refinance when rates drop.
How Refinancing Works
When refinancing your mortgage, the process of applying is similar to that of applying for a loan to purchase a home. The good news is that the overall refi process is generally simpler than getting a purchase mortgage. Here are the basic steps:
- Lender does a credit check.
- You submit any required financial documentation.
- You pay for a home appraisal.
- Loan goes through the mortgage underwriting process.
- Process will be completed in an average of 30 to 45 days.
Reasons To Refinance
Refinancing can be big decision. It’s important to consider the reasons why you’re considering making the move. Here’s a closer look at the four benefits/reasons highlighted above, plus a couple more to consider on why refinancing might be the right move.
Reducing Monthly Payments
If interest rates have gone down since you took out your existing mortgage, refinancing can get you a lower interest rate. With a lower rate, you could reduce your monthly payments while also spending less in interest payments, which could save thousands of dollars over the life of the loan.
Taking Cash Out
A cash-out refinance is a way to convert the equity in your home into cash while continuing to pay off your mortgage. You can use those funds to pay off or consolidate higher-interest debts, pay for repairs, make home improvements, cover unexpected expenses, or use them however you want.
A cash-out refinance can also be a way to reduce your mortgage rate and potentially save thousands of dollars over time. It works by replacing your existing mortgage with a new larger mortgage. You keep the difference between the two in the form of a lump sum of cash.
Eliminating PMI
If you made a down payment of less than 20% and were required to pay for private mortgage insurance (PMI), you could eliminate this extra monthly expense by refinancing. As home values have risen sharply, you might have more than 20% equity in your home, giving you a path to get rid of these premium payments to save money. If you have a Federal Housing Administration (FHA) loan, refinancing could help you stop paying a mortgage insurance premium (MIP) – provided you have enough equity built up.
Paying Off Your Loan Faster
You can pay off your loan faster and pay less interest overall by refinancing your mortgage into a shorter loan term, such as from a 30-year to a 15-year mortgage. If you can afford a higher monthly payment, a shorter term can get you a better interest rate and save you significant money over the life of the loan while also reducing the principal balance faster.
Other Reasons to Consider
- Switching Loan Types – if your original loan is an adjustable-rate mortgage (ARM) and you want to eliminate the uncertainty about future interest rate increases, refinancing to a fixed-rate mortgage can offer peace of mind.
- Consolidating Debt – refinancing could enable you to roll other high-interest debt (credit cards or personal loans) into your mortgage. By refinancing at a lower interest rate, you can pay off your existing debts and replace them with a single, more manageable mortgage payment. This not only simplifies your finances, but can also potentially save you money by reducing the overall interest you'll pay.
Finding The Break-Even Point
Getting a lower interest rate or any of the other reasons listed above should be part of your decision of whether to refinance or not. But, one of the biggest factors to consider is your break-even point. Simply put, that’s the point where savings from refinancing equal the costs that come with getting a new loan.
Knowing your break-even point can help decide if refinancing is going to be worth it. There is some math involved in calculating your break-even point, but it’s fairly simple. If you need more help with determining costs and with your calculations, contact one of our for assistance. Here are the steps:
Step 1: Add Up All the Costs
The first step is figuring out how much you’ll spend on fees and closing costs. When you apply to refinance, lenders will give you a Loan Estimate form that lists all the costs. You can use these numbers to estimate your total loan cost.
Refinance closing costs include:
- Lender fees – these could include an origination fee, as well as any discount points that you may choose to buy.
- Title costs – including a title search and insurance.
- Third-party costs – these could include an appraisal or attorney’s fees or the cost of a credit report ordered by the lender.
- Escrow services – for taxes, insurance, etc.
Closing costs and fees run anywhere from 3% – 6% of the total value of your loan, which is similar to the costs associated with a purchase mortgage. You can usually roll these costs into your mortgage and pay them over the life of the loan, so you’re not paying them all at once.
Step 2: Figure Out Monthly Savings
After knowing how much you’ll spend on refinancing your mortgage, the next step is to determine how much you could save. Your Loan Estimate will break down your new monthly payment, which includes principal and interest, mortgage insurance (if applicable) and escrow payments. To determine savings, compare your current monthly mortgage payment to your new payment after refinancing.
The math: old monthly payment - new monthly payment = monthly savings.
As an example calculation, if your old monthly payment was $2,500 and your new monthly payment is $2,300, you would save $200 per month.
Step 3: Calculate The Break-Even Point
Now, you can determine how long it will take to get back your refinancing costs. Divide the total refinancing costs by the monthly savings to determine how long it will take to recover the upfront expenses.
The math: total loan costs ÷ monthly savings = number of months to break even
If your refinancing costs are $5,000 and your monthly savings are $200, your breakeven point would be 25 months. ($5,000 divided by $200 = 25).
Even if the savings look good, you should factor in your future plans. For instance, how long do you think you’ll stay in your home? If you think you’ll be moving sometime soon, you might not realize savings before your break-even point. If you plan to stay in your home beyond that point, refinancing can lead to substantial savings over time.
Refinancing your mortgage can be a smart financial move if you want to reduce your monthly payments, lower your interest rate, pay off your mortgage faster, or use your home equity to access cash. Before making any decisions, it's important to examine your long-term goals, the costs associated with refinancing, and where your break-even point is.
Contact us today to learn more about your refinancing options and how you could improve your financial situation.
The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.
