Refinancing your home is a major financial move that could result in some significant savings for you OR it could make your situation worse. There are typically 2 types of refinancing options:
- A rate and term refinance with a goal to save money. You refinance your remaining balance for a lower interest rate and a term (number of years it takes to repay the loan) that you can afford.
- Cash-out refinancing, where you take out a new mortgage for more than you owe and take the difference in cash, for example, to pay off existing debt.
The decision to refinance your home hinges on your personal financial situation and a few external factors. Before you get the paperwork rolling, look at the big picture and access these 5 questions.
Will your current mortgage rate decrease by at least 1%? If your interest rate is more than 1% above current rates, it usually makes sense to refinance. If you’ve had your mortgage for more than a few years, your interest rate could very well be above over that 1% difference.
That 1% can be a huge difference. Savings can range from a few dollars to more significant amounts that could add up to over $10,000 for the life of the loan. You can use our refinance calculator to crunch the numbers of your own mortgage and see how much you’d save.
Are you paying mortgage insurance?
If you couldn’t put a 20% down payment on your home when you purchased it, you’re most likely paying private mortgage insurance or PMI– an additional monthly premium that typically costs between 0.3% and 1.15% of your home loan. If you have at least 20% equity in your home now, you may be able to eliminate mortgage insurance – which can save you hundreds of dollars each month. Whether you paid down your mortgage principal on your own or your home has appreciated significantly over time, it typically doesn’t matter as long as you hit the 20% equity threshold.
Are you planning to stay in your home for a while?
The answer can play a large factor in determining if refinancing makes financial sense. Why? Because refinancing costs money. A standard 30-year fixed mortgage would typically have closing costs in the amount of 3% to 6% of your loan amount. So, you’ll need to live in the home long enough to recoup that money with your lower interest rate. On average, it can take about three years to recoup the closing costs, but each break-even point can vary.
Are you looking to shorten the life of your loan?
Most people opt for a 30-year fixed-rate mortgage, BUT if you can afford the higher monthly payments, a 15-year loan could allow you access to a substantially lower interest rate and you’ll save money in the long haul.
Do you need cash now?
A cash-out refinance requires you to take out a new mortgage for more than how much you owe on your current loan, and you get to keep the difference. You can spend the cash however you’d like, but, you should have a solid reason for why you need the money. Many people opt for this route to pay off high-interest credit card debt, student loans, or performing home improvements that will increase your home’s value. You shouldn’t do a cash-out refinance to fund an extravagant vacation or buy recreational vehicles like boats or ATVs.
There are situations where you may need to refinance your home even if the timing isn’t ideal. Life changing events such as divorce or converting from an adjustable rate to a fixed rate mortgage or vice versa are just a few examples. Your lender can be instrumental in determining if the timing is right and if you’ll save money in the long run.
Navigating the refinancing process can be confusing since every mortgage is different, but our staff is always happy to help you get the answers and solutions you need. Call or stop into any of our branches!
Vice President, Senior Mortgage Lender
NMLS MLO ID: 532621