Benefits of Refinancing Your Mortgage

What Is Mortgage Refinancing? 

Refinancing a home loan is the process of trading out an existing mortgage for a new one. It is not the same as taking out a second mortgage, which lets you access your home equity to pay off outstanding debts or remodel your home. Instead, your new lender pays off the old mortgage and replaces it with an entirely new one, hopefully with more favorable terms that save you money in the long run. 

Benefits of Refinancing Your Mortgage 

By understanding why people refinance their home loans, you can get a feel for whether it’s the right choice for your situation. Here are the top reasons to pursue a mortgage refinance: 

• Take advantage of low interest rates: This is the most common reason to refinance a mortgage. If rates have fallen significantly since you were approved for your loan, taking out a new mortgage at a lower rate could be worthwhile.  
• Put your improved credit score to good use: Even if interest rates haven’t changed much in general, you could qualify for a lower rate if your credit situation has improved. 
• Decrease your monthly payments: With a lower interest rate, your monthly payments should go down. If this is an important outcome for you, you may want to extend the payoff date to spread out the loan as far as possible. 
• Switch from an ARM to a fixed-rate loan: If you currently have an adjustable-rate mortgage, you may be interested in switching to a fixed-rate loan to eliminate the risk that comes with fluctuating interest rates. The best time to do this is when interest rates go down. Then, you’ll enjoy lower, more stable loan payments for the lifetime of the new mortgage. 
• Pay off your mortgage faster: Many homebuyers start with a 30-year mortgage and then refinance to a 15-year loan after a few years. While this tactic may raise your monthly payments, you’ll build equity faster and pay less interest over the course of the loan, saving you money in the long run. 
• Tap into your home equity: With a cash-out refinance, you can borrow money against your equity to fund home improvement projects or pay off high-interest debts. Since mortgage interest rates tend to be lower than other loans, and they’re tax-deductible as well, this can be a very cost-effective way to borrow. 
• Combine two mortgages: Perhaps you took out a second mortgage in the past, and now you’re ready to consolidate back into one monthly payment. Refinancing is the best way to do this. 
• Eliminate private mortgage insurance: If you put down less than 20% on your original loan, your lender may have required you to obtain private mortgage insurance (PMI). Once your loan-to-value ratio is less than 80%, you can refinance to remove PMI payments from your monthly bill. 
• Take someone off the mortgage: After getting divorced, or when a co-signer wants to be freed of liability, it may be necessary to remove someone’s name from the mortgage. The only way to do this is by refinancing. Divorce may also require you to pay your ex-spouse their share of the home equity, which you can do with a cash-out refinance. 

Costs Associated with Refinancing  

Closing costs don’t just apply to buying a house — you also owe them when you refinance an existing home loan. These fees cover a range of services and can easily total several thousand dollars. Depending on your situation, the fees involved with refinancing a home loan could outweigh the benefits, so it’s important to know what to expect: 

• The application fee typically costs $75 to $500, and you won’t receive a refund if your application is denied. 
• The loan origination fee covers the lender’s administrative and financing costs. This usually equals 1% of the refinanced loan amount. 
• A prepayment penalty could apply, even when refinancing. Depending on your lender, the fee could amount to several months’ worth of mortgage payments. 
• Other fees associated with refinancing your mortgage include a title search fee, inspection fee, flood certifications, attorneys’ fees, and recording fees. All together, these can total several hundred dollars or more. 

Is It Worth Refinancing Your Mortgage? 

A home loan refinance isn’t right for everyone. That’s why every homeowner should know about the pros and cons of refinancing a mortgage before deciding to go this route. Running the numbers is the best way to help you make the right decision. Figure out how much you’ll save based on the terms of your new loan and decide if the upfront fees you’ll have to pay are worth it. 

For instance, if you’ll save $200 a month by refinancing, but you have to pay $4,000 in closing costs, it will take 20 months to break even. If you’re planning to stay in your home much longer than this, a mortgage refinance could put far more money back in your pocket than you paid in fees. On the other hand, if you think you’ll move fairly soon, it might not make sense to refinance.