[2023] Should I Refinance My Mortgage?
Pros, Cons, and Tips

Part 1: What is Mortgage Refinancing?

A mortgage refinance means paying off an existing mortgage with a new one that has a more favorable term, such as lower interest and a shorter repayment term.

Mortgage refinancing is also done to change a loan's interest type, from a fixed rate to an adjustable rate, or vice versa, or access the equity of a property.

During a mortgage refinance, you essentially pay off your current loan and create a new one, which could provide you with better conditions or meet your financial goals more effectively.

There are several types of mortgage refinances, including rate-and-term refinancing, cash-out refinancing, and cash-in refinancing.

Borrowers take a Rate-and-term refinancing loan to get a lower interest rate or a lower loan term, or both in place of their existing mortgage. For instance, you can refinance a 30-year mortgage that has a 12% interest with a 20-year loan that has a 6% interest. That way, you can have a shorter loan term and a reduced interest rate.

A borrower may take the cash-out refinancing loan to access cash while settling an existing mortgage with a new one. For instance, if the value of your home is $200,000 and you owe $120,000 on your mortgage. Your mortgage refinance lender can give you $40,000 cash, making your new mortgage $160,000.

Lastly, a cash-in refinance entails replacing your current mortgage with a new one too but you make a lump sum payment while closing the new mortgage to reduce your new loan balance.

For instance, if you owe $80,000 on your current mortgage and you take an equivalent loan to refinance it. You can make a $20,000 payment so that your new loan balance will be $60,000 instead of $80,000.

Part 2: When Does A Mortgage Refinance Make Sense?

You Have A Better Credit Score Compared To When You Borrowed The Original Mortgage

A mortgage refinance can be a reasonable option if your credit score is higher by significant points compared to when you took out the first mortgage. With a higher credit score, lenders will view you as less risky and may borrow you loans with a more favorable term.

In this case, you can take out a new loan with a lower rate to pay off the initial mortgage which probably has a higher interest rate.

Mortgage Rates Have Dropped Significantly

If current mortgage rates are lower than when you initially took out your loan, refinancing could lead to substantial savings in interest payments.

For example, let's say you took out a 30-year fixed-rate mortgage for $300,000 at an interest rate of 4.5%. Your monthly principal and interest payment would be approximately $1,520. However, if mortgage rates have dropped to 3.5%, you could refinance your loan for the remaining balance at the new lower rate.

By refinancing at the 3.5% interest rate, your new monthly principal and interest payment would be approximately $1,347, resulting in a monthly savings of around $173. Over the remaining life of the loan, you could potentially save tens of thousands of dollars in interest payments.

There's An Increase In Your Home's Value

Let's say your home's value has increased since the time you bought it. This would mean that your current home equity is higher than what you have paid.

In this case, you can take out a cash-in refinance mortgage to cover the remaining debt while accessing some cash. The cash can be used to cover other financial obligations, like home improvement, investments, and debt consolidation.

You Prefer A Shorter Loan Term

Mortgage refinancing can help you switch from your lengthy loan term to a shorter one. You can simply take a Rate-and-term refinancing loan to adjust the loan term and even access a lower interest rate.

For instance, you could pay off a 30-year loan with a 15-year loan. This technically results in bigger monthly payments but has greater benefits, like lower interest and faster equity build-up.

You Want To Change From Adjustable-rate Mortgage To A Fixed-rate Mortgage

Adjustable-rate Mortgages generally have fluctuating interest rates. This means that you cannot readily predict your next mortgage payment since the rate can change at any time.

If you have an ARM but would prefer a more stable monthly payment, you can use mortgage refinancing to switch over to a fixed-rate mortgage. That way, you can escape from the fluid rate and know the exact amount you're to pay next.

You Want To Cut Out Private Mortgage Insurance

A Private Mortgage Insurance is paid monthly by a borrower to protect their lender in case they default. This usually happens if your pay less than 20% down payment when purchasing your home. Since it is charged monthly, your monthly mortgage payment is higher.

However, you can always eliminate the PMI if your home value increases and you have at least 20% equity.

For example, let's say you bought a home for $250,000 with a 10% down payment ($25,000), and you have a mortgage balance of $225,000. You would be required to pay PMI since your down payment was less than 20%.

Now, assume that your home's value has increased to $300,000. Your mortgage balance has also decreased over time to $210,000 through your regular payments.

To calculate your equity, you would take the current value of your home ($300,000) and subtract your remaining mortgage balance ($210,000), resulting in $90,000 of equity. Your equity now represents 30% of the home's value ($90,000 / $300,000), which is more than the 20% threshold.

By refinancing your mortgage, you can eliminate the PMI from your new loan, potentially saving you hundreds of dollars per year.

Keep in mind that refinancing will involve costs such as closing fees, so it's essential to weigh the savings from eliminating PMI against the expenses associated with refinancing.

You Need Cash To Pay Off Debts

A cash-out refinance allows you to replace your current mortgage with a new, larger loan, and receive the difference in cash. This cash can then be used to pay off existing debts.

By using the cash-out refinance to pay off your high-interest debt, you may be able to lower your overall interest rate and monthly payments, making it easier to manage your finances.

Let's say your home value is $350,000 and you owe $200,000 on your mortgage. In addition to that, you have a $50,000 high-interest credit card debt. Refinancing your mortgage to pay off the credit card advance seems like a reasonable option to escape the accruing high interest.

So, you opt for a Cash-Out refinance, which covers your $200,000 balance on your existing mortgage and also gives you $50,000 cash. You can then use the $50,000 cash to settle the high-interest credit card advance. Consequently, your total debt on the new mortgage will be $250,000 but with a lower interest rate.

However, it's essential to consider the costs associated with refinancing, such as closing fees and the potential extension of your loan term. Additionally, keep in mind that by taking cash out, you are increasing your mortgage balance, which could affect the amount of equity you have in your home.

You Need Cash For Home Improvement Or Renovation

If you need to do some home improvements but don't have cash laying around, opting for a Cash-Out refinance can be a great option. It allows you to access some cash that can be channeled into increasing the value of your home and general living.

Let's say your current mortgage cost you $100,000 on purchase and you owe $40,000 now. You can take out a Cash-Out mortgage refinance to pay off the $40,000 and get a $10,000 cash sum in the process. Your new mortgage will now be $50,000.

You Want To Save More Towards Your Retirement

If you're looking to invest more in your retirement savings, cash-out refinancing can provide the extra funds you need to contribute to your investment accounts. By doing so, you could potentially secure a more comfortable retirement.

Part 3: When Is Mortgage Refinance A Bad Idea?

You're moving soon

If you plan to move in the near future, refinancing may not make sense. The costs associated with refinancing, such as closing fees and appraisal costs, can take time to recoup.

If you sell your home shortly after refinancing, you may not have enough time to recover those costs through the savings you gain from a lower interest rate or reduced monthly payments.

There's A Prepayment Penalty On Your Existing Mortgage

Some lenders charge prepayment fees if you pay off your mortgage early, whereby refinancing or making extra payments. They do this to make up for any interest that may be lost as a result of your early payment.

If your lender charges a prepayment fee, it may not make sense to refinance such a mortgage. The reason is, the prepayment penalty may be costlier than the amount you hope to save by refinancing.

Refinancing Fees Are Outrageous

Refinancing a mortgage comes with various fees, including loan origination fees, appraisal fees, title insurance, and other closing costs. These fees can add up to thousands of dollars. If the cost of refinancing outweighs the potential savings, it may not be in your best interest to refinance.

It's essential to calculate your break-even point, which is the point at which your savings from refinancing outweigh the costs.

You Already Have A Home Equity Loan

It is not advisable to opt for a mortgage refinancing option when you have an existing home equity loan.

The reason is, the process becomes more complicated. You would most likely have to meet another set of requirements, which could be stricter than when you took out your first mortgage. You may also have to go through another underwriting process and pay extra fees to get it done.

All these can make refinancing less appealing, especially if you're relying on the home equity to settle other financial obligations.

You're Close To Completing Your Mortgage Payment

If you're close to paying off your mortgage, refinancing might not be the best option. Refinancing typically extends the loan term, which means you'll be making mortgage payments for a longer period.

In this situation, the savings from a lower interest rate may not be worth the additional time and expense associated with a new mortgage. Instead, consider making extra principal-only payments to pay off your mortgage faster without refinancing.

Part 4: How Do I Know Whether To Refinance Or Not?

Evaluate Your Financial Capability

Before considering a refinance, evaluate your overall financial situation. Review your credit score, debt-to-income ratio, and current mortgage terms to determine if refinancing could benefit you. It's also essential to consider your financial goals, such as paying off your mortgage faster or accessing funds for home improvements.

Know The Ins And Outs Of Mortgage Refinancing

Knowing all that there is about mortgage refinance can help your decision-making process. You must learn about the refinancing options available and see if any of them fits your situation. Also, learn the potential costs associated with refinancing, the risks, and the benefits. That will help you make an informed decision faster and much easier.

Use A Mortgage Refinance Calculator

When you want to find out all the potential costs and figures associated with choosing a refinance option, you can get answers by using a mortgage refinance calculator. You can find out your important information, like your potential monthly payment, interest savings, and break-even point.

With the figures in view, you may find it easier to decide whether or not refinancing is best for you.

Pay Attention To The Timing

The current circumstances surrounding your mortgage can help you decide whether or not to refinance. If the timing is right, you will enjoy benefits, like lower interest, high Cash-Out, shorter loan term, and more.

To determine whether the timing is right, you must check factors, like the mortgage refinance rates vs. your existing interest rate. A lower refinance rate would mean that you can save money if you opt for it. Additionally, consider how long you plan to stay in your home. If you plan to move out soon, refinancing may not be the right step to take.

Part 5: How Do I Refinance My Mortgage?

If you're ready to refinance your mortgage, follow these steps to ensure a smooth process and maximize your potential savings.

Step 1: Determine Your Credit Score

Your credit score plays a significant role in determining your eligibility for refinancing and the interest rates you'll be offered. Before starting the refinancing process, review your credit score and take steps to improve it if needed, such as paying off high-interest debts, ensuring on-time bill payments, and correcting any errors on your credit report.

Step 2: Determine Your Home Equity

Your home equity is the difference between your home's market value and your current mortgage balance. Knowing this figure is important as it can help you discover which refinancing options are available to you.

For instance, conventional mortgage lenders usually require that borrowers have at least 20% equity to qualify for refinancing. Government-backed mortgages, on the other end, may consider you for refinancing with equity lower than that.

Step 3: Compare The Rates And Fees From Lenders Offering Refinancing Options.

Shop around and compare interest rates, fees, and terms from multiple lenders. Obtain rate quotes and review the loan estimate documents provided by each lender.

These documents will help you compare the costs and potential savings associated with each refinancing option. Be sure to consider not only the interest rate but also the loan term, points, and other fees.

Step 4: Get Your Documents Ready

Gather all the necessary documents for your refinance application, including:

• Proof of income: Recent pay stubs, W-2s, or 1099s for self-employed individuals.

• Tax returns: Usually the last two years of federal tax returns.

• Bank statements: Typically, the last two months of checking and savings account statements.

• Asset statements: Documentation for investments, retirement accounts, or other assets.

• Proof of homeowners insurance: Your current policy's declarations page.

• Mortgage statement: Your most recent mortgage statement, showing your outstanding balance and payment history.

Having these documents organized and readily available can help streamline the application process.

Step 5: Appraise Your Home

During the refinance processing, your lender will ask for a home appraisal report to determine the current market value of your property. They may use this information to determine your loan-to-value (down payment vs loan amount) ratio.

Depending on the outcome, you may get favorable, fair, or worse loan terms. So, ensure that your home is in good condition before getting an appraisal to qualify for the best terms.

Step 6: Close The Mortgage

Once your loan is approved, review the closing disclosure provided by your lender. This document outlines the final terms of your loan, including the interest rate, monthly payment, and closing costs.

Compare the closing disclosure with the initial loan estimate to ensure the terms are consistent. Attend the closing meeting, sign the necessary paperwork, and pay any required closing costs to complete the refinancing process.

Part 6: Benefits and Drawbacks Of Mortgage Refinancing

Part 7: 4 Ways To Save On Your Mortgage Without Refinancing

If refinancing your mortgage doesn't seem like the right option for you, there are still other ways to save money and optimize your finances. Consider the following alternatives:

Make Extra Payments and Ensure They Are allocated To The Principal

Making an extra payment on your mortgage can help you reduce your loan term and the overall interest payable. This works when the extra cash is applied toward your principal balance, thereby reducing the amount.

So, by the time you make your next payment, the interest will be charged on a lower principal amount. With this strategy, you can save some money on your mortgage without refinancing.

Take Out A Personal Loan

If you need to consolidate high-interest debt or finance a home improvement project, you may consider taking out a personal loan. Personal loans can have lower interest rates than credit cards, and you can use them to pay off debt faster or invest in your property without refinancing your mortgage.

Take Out A Home Equity Loan Or A HELOC

You can take out a HEL or HELOC, which allows you to borrow some cash against the equity of your home. With this option, you can access loans with a lower interest rate compared to credit card advances or personal loans.

You can use such cash to cover other financial obligations, like home improvement, debt consolidation, emergencies, investments, and more.

Get A 0% Interest Credit Card

If you have a good credit score, you may qualify for a 0% interest credit card. This type of card offers an introductory period with no interest, allowing you to pay off debt or finance a purchase without incurring additional interest.

Be cautious, though, as the interest rate will increase after the introductory period, so it's essential to pay off the balance before that happens.

FAQs

When Should I Not Refinance My Mortgage?

There are a few cases where refinancing may be a bad idea for you. Some of them are:

• When you plan on moving out of your home soon.
• When your lender charges a prepayment fee, which may be greater than anticipated refinancing returns.
• When you have taken out a home equity loan prior to refinancing.
• When you are almost done repaying your mortgage.

What's The Potential Amount I Can Save By Refinancing?

The amount you can save by refinancing your mortgage depends on factors such as the interest rate on your current mortgage, the new interest rate, the remaining loan term, and any fees associated with refinancing. To determine your potential savings, use a mortgage refinance calculator and consult with a mortgage professional.

Let's say your current mortgage is $300,000 with a 4.5% interest rate and a 3-year loan term. This means that your monthly payment would be $1,520.

Now, you are in your 5th year repaying the loan but decided to extend your loan term by refinancing with a 30-year loan at a 3.5% interest. Your new loan becomes $208,800 ultimately and your new monthly payment will reduce to $1,347, which is $173 lower than your previous plan.

In the course of processing the refinancing, there's a potential 6% closing cost on the new mortgage, which is $12,526. By the time you pay $1,347 each month for 30 years, your total mortgage cost would be:

$484,920 + $91,200 (payment on previous mortgage) + $12,526 (refinance cost)= $588,646.

If you didn't refinance, your total mortgage payment on the initial loan would be $547,200

From the calculations above, you can tell that your refinancing cost is higher than your potential savings.

How Long Does Refinancing A Mortgage Take?

The time it takes to refinance a mortgage can vary, but it generally takes 30 to 45 days from the application submission to closing. This timeframe can be affected by factors such as the complexity of the loan, the lender's workload, and the borrower's responsiveness to document requests.

What Do I Do If I Can't Afford My Current Mortgage Payments?

If you're struggling to make your mortgage payments, contact your lender immediately. They may be able to offer options such as a loan modification, forbearance, or repayment plan to help you get back on track.

How Much Does Mortgage Refinancing Cost?

A typical mortgage refinancing would cost you between 2% to 6% of the mortgage amount.

The total cost may consist of fees, such as home appraisal, loan processing, underwriting, insurance, and more, depending on your lender. Some lenders take care of all the costs involved in the refinancing process but usually charge a ridiculous interest rate to make up for the expenses.

How Soon Can I Apply For Mortgage Refinance?

There's no set time frame for when you can refinance a mortgage, but it's essential to consider factors such as the break-even point, the remaining loan term, and potential savings. Generally, you should wait until market conditions improve or your credit score increases, making it more likely for you to qualify for a better interest rate.