Refinancing your mortgage is one way to save a lot of money. Lower interest rates, shorter terms, and different mortgage types can all be strategic cost-savings that make refinancing an appealing option. But just like the original loan, refinancing comes with high costs, so it is essential to do the math before jumping in.
Refinancing a mortgage can cost between 3% – 6% of the loan principal in closing costs. Plus, you may be on the hook to pay other fees. Some lenders require an application fee upfront or fees for an appraisal or title search.
What to Know Before Refinancing a Mortgage
There are many options and many lenders available to choose from when refinancing a mortgage. Unless your existing loan has a prepayment clause, there is no waiting period from one loan’s origin to refinancing with another.
But these decisions are not a one-size-fits-all solution. The principal on the loan, interest rate, creditworthiness, and many other factors determine whether a refinance will help or harm the borrower.
Related Link: Reasons to Refinance Your Mortgage
Just remember that there are significant costs involved in refinancing a mortgage, so the break-even point needs to make sense before you move forward. The break-even point is the costs associated with closing the new loan divided by the dollar amount of savings per month. This number tells you how many months it will take before you start seeing the real savings on the refinance.
Refinance Your Mortgage for a Lower Rate
The base interest rates fluctuate based on the health of the market. Even if your creditworthiness has not changed since purchasing your home, you may have bought at a time when rates were high and may benefit from a refinance when rates are lower.
In addition to market rates, your creditworthiness plays a significant role in the rates you can secure. If your debt-to-income ratio has changed or your credit score has significantly increased, this could add up to big savings on a refinance. Most homeowners who choose to refinance for a lower interest will see a 1-2% drop.
Lower interest rates mean that you are paying less for the money you are borrowing. This could mean that your monthly payments go down or that you pay off the loan faster — or better yet, both!
Check your rates today with Mares Mortgage. Refinancing may save you more money than you think.
Refinance Your Home to Change the Terms
Many homeowners initially sign up for the standard 30 year fixed loan. This type of mortgage breaks payments up into equal monthly payments over a longer period. It also leaves homeowners paying some of the largest sums of interest when compared to other financing options.
Switching from a 30 year fixed rate mortgage to a 15 year fixed rate mortgage will cut the time to pay the house off in half. And, contrary to popular belief, it doesn’t usually double the payment. It does save homeowners a lot of money in interest payments, though.
Similarly, switching from a fixed-rate mortgage to a variable rate mortgage can also lead to cost-savings. Instead of using one interest rate qualified for at the origination of the loan, a variable rate loan will fluctuate based on the market. It sounds risky, but studies have shown that variable rate loans tend to lead to greater savings.
Refinance a Mortgage to Change Loan Type
There are a handful of different mortgage programs to appeal to different buyers. First-time homebuyer programs are good for people with limited capacity to fund a down payment. USDA loans offer low or no-down-payment options and the option to finance closing costs into the loan.
Related Link: Can You Buy a Home with No Money Down
As good as some loan types sound, they come with extra fees and sometimes additional insurance that costs more money. If you are refinancing a mortgage to pay it down faster, you may need to choose a different loan type.
Refinance Your Home to Consolidate Debt
Another way that many people use a home refinance to save money is to consolidate higher-interest debt. If you have a major expense to tackle or need to get rid of a lot of higher-interest credit card debt, taking advantage of the equity in your mortgage is a viable option.
Refinancing to consolidate debt or fund major expenses like a home remodel or college tuition should be evaluated carefully. In one sense, homeowners are just trading one type of debt for another. However, there are some benefits to using a mortgage over other funding sources.
- Lower interest rates
- Tax-deductible interest
- Fewer monthly payments
When choosing to refinance your home to pay off debt, consider all of the factors. If you have a lot of debt, you may not qualify for the best terms. Evaluate if the terms of your current mortgage versus other available options are worth the refinance.
Related Link: Recast a Mortgage
Refinancing also incurs closing costs between 3% – 6% of the loan value. While you are probably better off consolidating the higher interest debt into a lower interest payment, you pay fees upfront to do so. You are extending your debt and the possibility that you will accrue new debt on top of it.
The Takeaway on Refinancing Your Home
Depending on how long you have been in your home and how much longer you plan to stay, refinancing can work in your favor. Many people take advantage of a mortgage refinance to save money, pay the loan faster, or finance major expenses.
Refinancing may not be necessary if you already have a historically low-interest rate and do not make sense if you cannot afford the closing costs. And, while it can be a useful tool to consolidate debt or finance major expenses, not all debt is equal.
Major renovations that increase the home’s value are a no-brainer, but consolidating other forms of debt is a lot riskier. Use the refinance option if you have a plan to make sure you do not accrue new debt, or you can afford a shorter term or variable-interest-rate loan, which can lead to more savings.
Check your rates with Mares Mortgage today and find out if refinancing your home makes sense.