Should You Refinance Your Mortgage — Yes or No?
As you pay your mortgage bill each month, do you find yourself wondering if you could be paying less? If so, this may be the push you need to refinance your mortgage and start feeling confident that your mortgage is the best choice for you.
The Advantages of Refinancing
When you refinance your home, there are many benefits that come your way:
- Lower monthly payment — The main goal of refinancing your mortgage is to reduce your monthly mortgage payments through a combination of a smaller loan amount and a lower interest rate.
- Save thousands in interest — Over the life of a mortgage, a homeowner pays thousands of dollars in interest payments. Refinancing your home to obtain a more desirable interest rate will put more money into your pocket.
- Build more equity — Equity is the difference between your home’s appraised value and the outstanding balance on your home. When you pay less money toward interest and more money toward the principal of your loan, you will build equity in your home at a faster pace.
- Remove your PMI — If you originally purchased your home with less than a 20% downpayment, you may have been paying private mortgage insurance (PMI) on your loan. Because you’ve built equity in your home over the years, PMI costs are often removed during a refinance.
How To Refinance Your Mortgage
When you apply to refinance your mortgage, you are essentially going through the entire mortgage process again on a house you already own. In most cases, homeowners refinance to improve the interest rate or loan terms on their existing mortgage.
During a refinance, you will need to complete the following steps:
- Mortgage application
- Credit check
- Home appraisal
- Closing procedures (including closing costs)
With the money you receive from a refinance, you can pay off the balance of your existing mortgage and begin making monthly payments on your new loan.
Questions to Ask Before Refinancing Your Mortgage
Homeowners often wonder if there is a right time to refinance and achieve the biggest savings. Ask yourself these questions to determine if now is the right time to refinance your home.
Are current interest rates lower than my rate?
YES: The main goal for many homeowners is to secure a lower interest rate with the refinance process.
NO: Refinancing at the same interest rate or a higher interest rate may not be in your best interest.
Is my current loan an unconventional loan (jumbo loan, balloon mortgage)?
YES: Jumbo or balloon mortgages offer a period of lower payments, but you should consider a refinance to avoid the rising payments that come after the introductory period.
NO: Refinancing your mortgage is still an option, even if you’re carrying a conventional fixed-rate or ARM loan.
Does my current loan have a prepayment penalty?
YES: When you pay off your existing loan early (with the money from your refinance loan), it may count against you if your current loan has prepayment penalties. Some loans allow a refinance prepayment (soft prepayment penalty), while others do not (hard prepayment penalty).
NO: Perfect! You can use your refinance to pay off the balance on your existing mortgage immediately.
Do I plan to stay in my home for more than two years?
YES: You’ll be able to enjoy the savings from a refinance for years to come.
NO: With the closing costs you pay to refinance, it may take almost two years to see the true savings on your refinance.
Have I built at least 20% equity in my home?
YES: The more equity you’ve built in your home, the easier it is to refinance. The extra equity available to you can be utilized for debt consolidation or home improvements.
NO: Lenders may be less likely to refinance a mortgage if you have not built much equity in your home.