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Mortgage Refinancing replaces your existing mortgage loan with usually lower interest rate mortgage for the same or different (in most cases higher) loan amount. Mortgage Refinancing can save you money when market interest rates drop.
Mortgage Refinancing can be used to:
- Reduce your interest rate,
- Change the term of your loan,
- Consolidate your debts.
You should know your mortgage refinancing goal because refinancing mortgage will change important features of your mortgage (e.g., your monthly payments, your mortgage interest rate, your mortgage terms and the time to repay your mortgage). It is important to be clear about your reason(s) to refinance so that you can decide if the changes will achieve your goal.
Why should you refinance your mortgage?
- Refinance to lower your monthly payments,
The most common reason for mortgage refinancing is to take advantage of lower interest rates and thereby lower the total interest paid over the life of the loan.
Note: Some mortgage lenders offer "no cost" and "low-cost" refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. These refinancing packages compensate with a slightly higher interest rate then the current market rate, or by including some of the costs in the amount that is financed.
- Refinance to build Home Equity Faster,
You may want to shorten the term of the mortgage.
Even at low rates, a shorter term means a higher monthly payment. If this is the case, we suggest you to try our 15 year fixed rate mortgage. The benefit is:
- you will build up equity faster,
- you will pay far less in total interest over the life of the loan.
- You can use your equity later, when you need cash to pay college tuitions or when you retire.
Note: Of course, this also means you have less interest to deduct on your income tax return.
- Refinance to consider different Mortgage loan
which serves better your current needs:
- Refinance for the security of a fixed rate loan.
An adjustable rate mortgage is a great way to get into a home with low monthly payments. But the periodic rate adjustments and possibility of rate hikes can be disconcerting.
- You may want to switch from a fixed rate to an ARM if you want to save money on your home loan payments for a two, three or five years before moving to another home.
- If you have an adjustable rate mortgage with high or no limits on interest rate increases you might want to switch to a fixed-rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.
- Refinance to take cash out of your home's equity,
You can free up some of this money for other purposes. You might need it for a child's college tuition, to invest in a second home, to start a new business, to pay off any higher-rate loans you may have or just to enjoy life when you retire, etc.
- Refinance to eliminate mortgage insurance
If you purchased your home with less than 20% down you probably have a monthly mortgage insurance payment along with your principal and interest. If you have
- made your mortgage payments on time for at least two years
- and
your current mortgage balance is now less than 80% of your home's current market value,
you can ask your lender to drop the PMI requirement on your loan or you can switch to another program.
Would Mortgage Refinancing Be Worth It?
Mortgage Refinancing can be worth while, but it does not make good financial sense for everyone. A general rule is that to let refinancing becomes worth your while you should consider the following:
- Is the interest rate low enough to save you money?
If the current interest rate on your mortgage is about two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.
- How long you plan to stay in the house.
The decision to refinance a home should be based on whether you will own the property long enough to recapture the expense connected with the new loan.
- How much can you save by consolidating your debts?
You may be able to save hundreds of dollars in interest expense by taking out a home equity loan and paying off your high interest rate consumer debts such as credit card bills, car payments, etc. In addition, your home equity loan interest expense may be tax deductible, while your consumer debt interest expense is not deductible.
- How much will it cost refinancing your mortgage?
With a new loan, you again pay most of the same costs you paid to get your original mortgage.
- How would mortgage refinancing affect the taxes you owe?
With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage. You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage.
Talk to a lender to determine the available mortgage rates and the costs associated with mortgage refinancing. Then determine what your new payment would be if you refinance. You can estimate how long it will take to recover the costs of refinancing by using our Refinancing Mortgage Calculator. You can use also our mortgage rates tracker tool.
If you decide that refinancing your mortgage is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by modification of your existing loan instead of a refinancing.
Fill out our Pre-Qualification application and a loan professional will assist you with all questions and concerns you have about refinancing.
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