If you own a home, you might want to refinance your mortgage to take advantage of better rates. You could potentially refinance your home loan out of an adjustable-rate mortgage or to lock in lower interest rates. Learn how to refinance your mortgage and how to find out if refinancing your home is worth it.
What Is Refinancing?
When refinancing a mortgage, you take out a new loan and pay off the existing loan or loans with money you receive from the new loan. Refinancing can allow you to pay off a second mortgage, which will leave you with only one mortgage payment a month. It can also allow you to cash out home equity that you might have built up so that you can pay for home repairs or other expenses.
How Do I Refinance a Mortgage?
Refinancing typically involves applying for a new mortgage. Shopping around for the best mortgage rates can help you get the best deal when you refinance. Follow these four steps to refinance your home:
- Find the best mortgage rates. You can find out rates from a mortgage broker or shop online. A mortgage broker will work with several different companies to help you find the best rates for your refinance.
- Apply for the refinance. Be prepared to pay an application fee. Application fees can range from $75 to $300, depending on the mortgage company.
- Find out the amount that you qualify to borrow. You can find how much you could potentially borrow by having your home appraised. You might be required to pay for the appraisal, which can cost about $300 to $700.
- Be prepared to pay the loan origination fees. Loan origination fees are usually a percentage of the loan between 0 percent and 1.5 percent. You can also purchase additional “points,” which can help to lower the interest rate on the loan. The process is similar to paying the interest on the loan up front.
Should I Refinance My Mortgage?
A mortgage refinance might not always be the best option available. You need to determine if the pros of the refinance outweigh the cons.
Pros of Refinancing
You might benefit from a number of advantages that come with refinancing your home loan. Know the pros of refinancing and how a refinance could help your financial strategy:
- You can lower your monthly payment by refinancing to a lower interest rate. You might also lower it by refinancing to a longer loan term. If you do this, you’ll be paying on your mortgage longer and could pay more in interest over the life of the loan.
- Refinancing out of an ARM loan into a fixed-rate mortgage can lock in lower interest rates. With an ARM, you have scheduled rate increases built into your loan. Refinancing allows you to secure a lower interest rate for the life of the loan.
- Take advantage of the equity in your home to finance other purchases. A cash-out refinance allows you to use the money you have in your home to pay for things like home repairs, a wedding or school expenses.
Cons of Refinancing
Before you apply to refinance your mortgage, make sure you understand the disadvantages that can come with this financial move:
- You need to calculate your break-even point on your mortgage. Look at the amount that you will save each month. For example, you might currently be paying $1,500 a month on your mortgage. Your refinance could bring your payment down to $1,350 a month. Your monthly savings would be $150 a month ($1,500 – $1,350 = $150). The origination fee and other costs are around $3,000. Divide the refinancing costs by your monthly savings: $3,000/$150 = 20. It will take you 20 months to break even with the refinance. If you plan on selling or you’re close to paying off your mortgage within that time period, refinancing might not be worth it.
- Be careful not to extend the life of your loan so that you’ll still have your loan for an additional 30 years. Paying off your mortgage is especially important as you reach retirement; you don’t want to continue making mortgage payments once you retire and will likely be on a fixed income.
As you weigh the pros and cons, you should be able to determine whether refinancing your mortgage is a good option. Determine if you can at least break even before you need to sell your home. Avoid refinancing to an ARM if you think that will require you to refinance again in a few years.