As interest rates reach historic new lows, many homeowners are trying to figure out if they can benefit from refinancing their mortgage.
Refinancing needs to be considered on a case-by-case basis for each homeowner, weighing the benefits of refinancing against the possible drawbacks - and also comparing your potential new interest rate and terms to what you have with your current mortgage.
Most homeowners refinance their mortgage for one or more of the following reasons:
To secure a lower interest rate
To change the length and other terms of the loan
To cash out equity for investing or other large purchases (to invest in a second property, college tuition, home remodel, a new car)
To consolidate high-interest debt for long-term savings
To remove mortgage insurance
Like any major financial decision, there are benefits and advantages to refinancing that homeowners need to consider.
The obvious benefits of refinancing include the ability to save money over time by securing better terms, consolidating debt, or getting rid of a monthly mortgage insurance payment. Alternatively, refinancing is one of the most reliable ways to access large sums of cash to cover major purchases.
But refinancing may come with added expenses of closing costs, points, or fees – although this isn’t always the case. And in the wrong situation, refinancing can end up costing you more money in the long run. If you sell the home shortly after refinancing, for example, you won’t generate enough home equity to cover the cost of the refinance.
Is refinancing right for you?
It depends on your personal financial situation, as well as your refinancing goals. If you’re looking for help, use our decision tree to figure out whether a refinance makes financial sense.
QUESTION 1: Can you save at least 1 percent on your mortgage interest rate?
YES - Great! Even when adding in closing costs, a 1-percent rate reduction will likely save you money.
NO - Even though you might not be able to lower your interest rate, a refinance could provide an opportunity to change your term or even take out cash to pay for home improvements, school expenses, or debt consolidation
QUESTION 2: How long do you plan to stay in your home?
NOT LONG - Not very long or I’m not sure: Refinancing might still make sense if your loan rate is variable and those rates are on the rise.
A LONG TIME - A long time: If you plan on staying in your home for a while, you will likely end up recouping the money you spend on refinancing.
QUESTION 3: Do you want to access the equity in your home?
YES - Refinancing can allow you to cash out some of that equity to put toward other goals, such as investing or paying for home renovations.
NO - Even if you don’t want to access your home equity, refinancing can still help you lower your interest rate, change your terms of repayment, and remove costly private mortgage insurance.
QUESTION 4: How has your credit score changed since receiving your current mortgage?
GONE UP - My score has gone up: Great! This might earn you an even better interest rate.
STAYED SAME - My score has stayed the same: You can expect an interest rate inline with how rates have changed since you took out your first mortgage.
GONE DOWN - My score has gone down: Though this could affect the interest rate you’re eligible to receive and the potential value of refinancing, you may still benefit from refinancing, depending on the rate you qualify for. Alternatively, consider taking time to rebuild your credit before pursuing a refinance.
QUESTION 5: Are you interested in a mortgage that offers a different repayment length, or a fixed vs. variable rate?
YES - The ability to change your mortgage terms can offer additional value on top of interest rate savings. In cases where you don’t plan on being in the home long term, you might even want to switch from a fixed-rate mortgage to a variable mortgage.
NO - If seeking similar terms as your current mortgage, interest rate savings will factor more heavily into your decision.
QUESTION 6: Can you afford to cover closing costs?
YES - Great! This will allow you to maximize the value of a refinance.
NO - You may be able to roll the costs into the refinance or utilize an impound account balance to pay the fees. Talk to a financial advisor to make sure this is a good move given your circumstances. In many cases, you can also push out your first payment for up to 60 days, which can give you extra money to cover these costs.
If you’re interested in refinancing your mortgage, the first step is to contact your credit union, bank, or mortgage lender to discuss your goals of refinancing and to get the process started.