Refinancing

The goal of refinancing your mortgage is typically to lower your monthly mortgage payment, pay off your loan faster, or take cash out of the equity of your home.

There are several reasons you may choose to refinance your mortgage. One of the most common reasons is to take advantage of a lower interest rate. When interest rates fall, refinancing can allow you to secure a lower rate on your loan and reduce your monthly mortgage payment. Another common reason to refinance is to shorten the loan term, which will result in paying off the loan faster and save on interest over the life of the loan.

Borrowers can also refinance to change the type of loan they have, for example, from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or from a government-insured loan to a conventional loan. Additionally, borrowers can refinance to cash out some of the equity in their home for home improvement projects, debt consolidation, or to pay off other expenses.

When considering a refinance, it is important to look at the cost of doing the refinance versus the benefits.  It is wise to calculate a simple break-even analysis when considering a refinance.   If it will cost $5,000 for the refinance (lender fees, title and escrow, appraisal, recording, etc.) and with the new rate, your monthly savings is $400, then your break-even point is 12.5 months (5,000/400).  If the break-even point is less than 24 months, then it generally makes sense to move forward with the refinance.  It is also important to consider the term of the new mortgage and not extend it too much further than your initial mortgage.  

Each homeowner’s situation is unique, so it’s vital to evaluate your financial goals as well as the cost of refinancing before proceeding. Just because you can refinance doesn’t mean that you should.