Should I Refinance My Home?

Refinancing into a similar mortgage with a lower interest rate is the most common reason people refinance their home mortgage.  Lowering the interest rate on your mortgage lowers your monthly payment, and decreases the amount of interest you will pay over the life of your mortgage.  Since 1985, the average 30 year mortgage interest rate has dropped from 12.5% to historic lows in 2016 in the 3% range!   Many homeowners have refinanced several times over this period, taking advantage of the lower payments & substantial long term savings.  There isn’t much lower mortgage rates can go leading many to refinance one final time before the markets shift upwards again.  

A Refinance in which the mortgage term is changed is also a common reason people decide to refinance.  Common mortgage terms are 30, 25, 20, 15 and 10 years.  Shorter mortgage terms typically offer lower interest rates.  There is typically a large difference in interest rate between a 30 and 15 year term.  Shortening your term pays your mortgage off more quickly & greatly reduces the amount of interest you will pay over the life of the loan.  Paying off your mortgage more quickly increases your monthly payments; making it more difficult to qualify.  You will need to evaluate whether you can afford the increased payments.

Adjustable Rate Mortgages are loan products that typically offer a lower interest rate at the outset of the mortgage but after this initial fixed period expires, the rate will adjust either semi-annually or annually.  They are considered riskier mortgages because if interest rates go up your monthly payment will go up and you could be at risk having payments that spiral out of control.  

Fixed Rate Mortgages have the same set payment over the life of the loan, so you never have to worry about a fluctuating payment.   It is common for people to refinance out of an ARM and into a fixed mortgage payment even if their payment increases in exchange for the security of maintaining a fixed payment for the life of the mortgage.

Mortgages where the loan amount is greater than 80% of the appraised value of the property require Mortgage Insurance.  The federal government requires lenders to take out Mortgage Insurance on these loans in order to protect themselves from losses in the event the mortgage goes into default.  It is common for first time home buyers or other borrowers with limited funds for a down-payment to get a loan with Mortgage Insurance when they buy a home.  Once the value of the property has increased, or you have the ability to pay down the mortgage to 80% or less of the new appraised value, it is common to refinance to remove the mortgage insurance and significantly reduce the monthly payment.  The Refinance out of an existing FHA mortgage and into a traditional conventional mortgage is a very common type of refinance for this reason as FHA Mortgages carry mortgage insurance for the life of the mortgage.

Cash-out Refinances are a popular type of refinance if you are looking to take equity out of your home, but don’t want to have to sell the property.  In some instances you are able to take equity out of your home & lower your interest rate at the same time. There are many reasons people decide to take cash out, including:

• Pay off other debt and consolidate it into your mortgage

• Pay for home improvements

• Pay for tuition, medical or other bills

• Purchase another home

• What is your purpose in refinancing?

• Will the property appraise high enough to qualify for the loan you want?

• What are your short and long term plans are for the property?

• Do you plan on selling or holding on to the home?  

• If selling, approximately how many more years do you think it will be before you sell?

• Do you plan on paying the loan balance down or off in the next few years?  If so, when?

The analysis of cost vs. benefit is at the core of your decision to refinance.  This is where working with an experienced, licensed Mortgage Banker really comes into play. After listing to your goals & going through your plans for the property, have your Mortgage Banker put your scenario options together on paper so you can analysis the benefit vs. cost. For Refinances where you are looking to reduce your rate/monthly payment or for debt consolidation refinances you should work with your mortgage banker or financial advisor to determine:

• Your monthly savings

• The closing costs to refinance

• The amount of months it will take to “break even”. For example:

  • Monthly Interest Savings = $150

  • Closing Costs = $4,000

  • It would take 26 months of lower interest payments to make for the cost of the refinance.

  • You would save approx. $50,000 in interest over the life of a 30 year loan.  This is referred to as the “life of loan savings”.

Once you have the #s on paper, it is usually pretty clear whether refinancing makes sense for you.  You mortgage banker can help you with this analysis & with a more  sophisticated  evaluation comparing different loan programs and which offer the best savings vs risk.

• Determine what your new monthly payment will be & whether you can afford the payment?

• Estimate the closing costs for the refinance

• Determine whether you are receiving enough cash to justify the closing of refinancing.

Refinances often require an up-front fee be collected to order an appraisal.  Appraisals can run from $300+. It’s good to work through a list of potential deal-breakers with your mortgage banker prior to starting the process and incurring fees.

Some Common Examples of Refinance Deal-Breakers are:

• Prepayment penalty exists on the loan being refinanced.

• There is renovation or construction being done on the property.

• There are open permits.

• Adverse/delinquent credit history.

• Insufficient Income or Reserves.

• Click here for a detailed list of potential refinance deal-breakers.