To Refinance or Not to Refinance, That Is the Question

Owning a home is a big responsibility. Along with the cost of maintaining the home, you also have the sizable mortgage to worry about. If you are like many Americans, making your monthly mortgage payment can at times be difficult. If you want to save a little money every month when it comes to your monthly house payment, or want to cash-out a portion of your home’s equity to pay off some of your other debt, you may want to consider refinancing.

Why Refinance?

There are several reasons you should consider refinancing the mortgage on your home.

  • To shorten the term of your loan – While this may seem counterintuitive, refinancing to shorten the term of your loan will decrease the amount of interest you will have to pay on the loan. Many times the interest rates that are attached to 15-year mortgages are significantly lower than those that you’ll find with a 30-year mortgage.
  • To lower your interest rate – This is the main reason why people make the decision to refinance. Securing a mortgage with a lower interest rate than your current mortgage can save you tens of thousands of dollars in the long run.
  • To cash-out home equity – If you can use some of the equity that you have in your home to pay off some of your higher interest debt, refinancing your mortgage is a great way to put some extra cash in your pocket. If you could combine this with a lower interest rate, then you can save even more.
  • Switch from an adjustable-rate mortgage to a fixed-rate loan – Adjustable-rate mortgages (ARMs) have their advantages, but if interest rates are expected to rise, it is definitely beneficial to refinance and get into a fixed-rate loan.

When to Refinance

This is the million-dollar question. When is a good time to refinance your mortgage? If you believe that refinancing is in the cards, the first and most important thing you need to determine, according to Don Taylor, Ph.D., is what you want to accomplish by refinancing. Too many homeowners jump into refinancing without taking the time to figure this out and they end up spending more money than they save. Once you have determined what your goal is with refinancing, then you can start looking at whether or not it is a good time for you to take the next step.

Here are some key factors to look at when deciding if the time is right for you to refinance.

  • How long you plan to stay in the home – Any savings that you may be getting by refinancing could be flushed down the drain if you aren’t planning on staying in your house for more than a year. You need to be able to stay in your home long enough to recoup the closing costs associated with the refinancing.
  • The difference between your old rate and a new rate – While you want to get the lowest possible interest rate you can, refinancing to obtain an interest rate that is only slightly lower than what you currently have will more than likely cost you more in the long run. Not only will you be spending money on the closing costs, but you will also be extending the life of the loan. The longer you take to pay off the loan, the more interest you are going to pay over the life of the loan. If the difference between your old rate and a new rate is less than half a percent you shouldn’t refinance.
  • Other financial goals – Betsy Billard, an advisor at Ameriprise Financial in Manhattan, advises those wondering when it would be beneficial to refinance to look at the big picture and acknowledge any other major financial goals that they may have. You may be trying to save for college or looking at retirement. Make sure you have a firm grasp on your entire financial picture.


How to Refinance

Once you’ve got a handle on what you want to accomplish by refinancing your mortgage, and you have a firm grasp on your entire financial picture, the next step is to begin the process of refinancing. The paperwork that you will need to fill out remains the same as that of your first mortgage. It is the process of finding a bank to finance your loan that is different. You never want to go with the first offer you receive. When it comes to refinancing, you always want to shop around to find the best deal; however, in order to qualify for the best deals, it’s important to look up your credit score on sites like Credit Sesame to check out where you stand pertaining to your overall credit score.

These tips can help you get started finding the best deal for refinancing your mortgage.

  • Talk to your current lender – No company wants to lose its customers to its competitors. This holds true for the lender who holds your mortgage as well. Let your current lender know that you want to refinance your mortgage; they may be willing to reduce or completely eliminate some of the typical costs associated with refinancing in order to keep you as their customer.
  • Start shopping around – Head to the Internet to start comparing interest rates and costs that each lender charges. By having the most up-to-date information at hand when you begin to speak to lenders you are interested in, you can save thousands of dollars. When you find deals that you are interested in, give those lenders a call and ask them to provide you with written information about each loan. This could save you from shelling out money for non-refundable fees for loans that may end up not meeting your current needs.
  • Get a good faith estimate – When you’ve made a decision on a lender, ask them for a good faith estimate. Under federal law they are required to provide an estimate for the closing costs within three days of receiving your application. Review the costs associated with each lender before making your final decision.

Deciding to refinance your mortgage is a major decision and not one that should be taken lightly. There are many factors that need to be considered and a lot of work that needs to be done. But if you take the time and do your research, there is no reason why you shouldn’t enjoy the benefits of refinancing your mortgage.

Leave a Reply