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Reasons to Refinance Your Mortgage
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Reasons to Refinance Your Mortgage

There are many reasons to refinance your mortgage. You can refinance to lower your mortgage rate, reduce your monthly payment, shorten the length of your loan, change your mortgage program or use your homeowner equity to take cash out or consolidate high cost debt. Refinancing usually comes at a cost plus it can take a lot of time so there are several factors to consider before moving forward. 

When evaluating if you should refinance, you should weigh the financial benefits against closing costs to determine what makes sense financially.  You want to make sure that you can recover any potential costs within a reasonable period of time otherwise it may not make sense for you to refinance.  For example, if you refinance to consolidate debt, you should save money every month by cutting your total debt payments, including your mortgage. If your debt expenses do not go down, then you probably should not refinance.

Lowering your monthly loan payments is only one consideration, however, and may not be your determining factor.  If you decide to refinance into a shorter term mortgage, such as going from a 30 year to a 15 year loan, your monthly payments may go up, but your mortgage rate should be lower plus you likely save a lot of money in total interest expense.  Slicing your loan term in half can save you tens of thousands of dollars, depending on your loan amount and interest rate.

Another scenario when you may not see an decrease in your monthly payment is if you change mortgage programs when you refinance.  For example, if refinance an interest only mortgage with a fixed rate loan, your monthly payment may actually increase in the short term because you start paying both principal and interest.  Over the long run, however, the payment on a fixed rate mortgage may prove to be lower because the payment and interest rate on an interest only loan can change and potentially increase.

Paying a higher monthly mortgage payment in the near term may end up saving you a lot of money in the long run.  So part of the decision making process depends on your time horizon and how your mortgage payment an interest rates may change in the future.  This is also the reason why refinancing can be particularly beneficial in a rising interest rate environment.  Changing your loan program and locking in the certainty of a fixed rate loan can provide peace of mind for borrowers.

People also choose to refinance for reasons that are completely beyond the numbers.  For example, you may want to take cash out of your home to pay for a major home renovation or for college tuition. In this scenario, refinancing is less about lowering your mortgage rate or changing your loan program and more about accessing the equity in your home.  You certainly want to pay the lowest rate and closing costs possible any time you finance, but with a cash-out refinance your priority is what you are going to do with the loan proceeds.  In many cases your home may offer the least expensive financing option available, especially when you compare mortgage rates to the interest rate on a credit card, personal loan or home equity loan.

We highlight the top reasons to refinance your mortgage below and outline what you should know about each.  The more you understand about why you should refinance, the more informed decision you can make to determine if it is the right option for you.
1

Lower Your Mortgage Rate

The most common reason to refinance your mortgage is to reduce your mortgage rate and monthly payment.  You may be able to refinance at a lower rate because interest rates have dropped or if your credit score improved or you have more equity in your property as compared to when you initially obtained your mortgage. For example, you may have paid down credit card bills which caused your credit score to increase or completed a home renovation project which resulted in an increase in your property value and equity. A higher credit score and increased property equity may enable you to qualify for a lower interest rate.

Use our Mortgage Refinance Calculator to determine how much money you can save by lowering your rate

You may also be able to obtain a lower interest rate by refinancing into a different mortgage program. For example, the initial interest rate on an adjustable rate mortgage (ARM) is typically lower than the rate on a fixed rate mortgage.

As a general rule, if you are refinancing to reduce your interest rate then your new rate should be at least .75% lower than your existing rate to justify the refinance closing costs. Additionally, your new, lower monthly payment should enable you to recover your closing costs, or breakeven, within 30 months. You can divide your closing costs by your monthly mortgage payment savings to determine the breakeven point for a refinance.

The table below compare refinance rates and closing costs for leading lenders near you.  Contact multiple lenders in the table to shop for your refinance.

Rate Details*
Loan Program:  
Monthly Payment:  
APR:  
Rate:  
Points  More Info:
Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
 
Total Lender Fees:  
Loan type:  
Property Value:  
Loan to Value:  
Credit Rating:  
Date Submitted:  
Monthly Housing Payments
P & I More Info
Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
Mortgage Insurance More Info
Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
(Estimated)
Property Tax More Info
Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
(Estimated)
Homeowner Insurance More Info
Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
(Estimated)
Homeowner Association Fee More Info
Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
(If Any)
Total Monthly Housing Payments
Lender Fees
Points More Info
Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
Origination Fee More Info
Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
Credit Report Fee More Info
Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
Tax Service Fee More Info
Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
Processing Fee More Info
Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
Underwriting Fee More Info
Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
Wire Transfer Fee More Info
Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
(If Any)
FHA Upfront Premium More Info
FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
(If any)
VA funding Fee (If any)
Flood Fee
Other Fees More Info

Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

Total Lender Fees
*Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
Current Mortgage Refinance Rates as of November 21, 2018
  • Lender
  • APR
  • Loan Type
  • Rate
  • Payment
  • Fees
  • Contact
Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.

2

Shorten Your Mortgage

Reducing your mortgage term when you refinance enables you to reduce your interest rate and total interest expense over the life of your mortgage. For example, the interest rate on a 15 year mortgage is typically .5% - 1.0% less than the rate on a 30 year mortgage.  A mortgage with a shorter term and lower interest rate results in significantly reduced total interest expense over the life of the mortgage. For example, a $250,000 15 year mortgage with a 2.750% interest rate saves a borrower approximately $100,000 in total interest expense over the life of the loan as compared to a 30 year mortgage with a 3.500% interest rate.

Review Refinance to Reduce Your Mortgage Term

The downside to a shorter mortgage term is that your monthly mortgage payment increases (even though your interest rate goes down).  Reducing your mortgage term when you refinance may cost you a little more each month but can save you thousands of dollars in the long run.

3

Change Your Mortgage Program

Refinancing your mortgage also provides the opportunity to change your mortgage program. As mentioned above, borrowers can change from a fixed rate mortgage to an adjustable rate mortgage (ARM) to lower their interest rate.  Additionally, borrowers with ARMs or interest only mortgages can refinance into a fixed rate mortgage to eliminate the risk that their interest rate and monthly payment will increase in the future.

Understand the benefits of Refinancing To Change Mortgage Programs

Although it can be difficult to predict interest rates, if you think rates will increase in the future refinancing an ARM or interest only mortgage into a fixed rate mortgage can save you thousands of dollars over the life of your loan. Plus a fixed rate mortgage offers the peace of mind that your interest rate and monthly payment will never change.

4

Take Cash Out of Your Home

In a cash-out refinance your new mortgage amount is greater than the principal balance of your existing loan and you keep the difference, less any closing costs, when the refinance closes.  For example, if your existing mortgage balance is $100,000, and you get a new $150,000 loan with $3,000 in closing costs then you take $47,000 in cash-out by refinancing.  $150,000 (new mortgage balance) - $100,000 (existing mortgage balance) - $3,000 (closing costs) = $47,000 (cash out to borrower).  You can use the proceeds from a cash-out refinance for a variety of purposes including to pay for a home renovation or college tuition.

Use our CASH OUT REFINANCE CALCULATOR to determine how much equity you can access by refinancing

Before pursuing a cash-out refinance borrowers should understand the approximate value of their property to determine if they have enough equity to pay off their existing mortgage and receive the proceeds they want by refinancing. For a cash-out refinance, lenders typically permit a maximum loan-to-value (LTV) ratio of 60% - 80%, depending on the amount of money the borrower is taking out. The lower LTV limits typically apply when borrowers are taking a significant amount of cash out (greater than ~$250,000).

Borrowers considering a cash-out refinance should also evaluate a home equity loan or line of credit (HELOC) to access the equity in the property.

5

Refinance to Consolidate High Cost Debt

With a debt consolidation refinance you use the proceeds from your new mortgage to pay off your existing loan as well as high cost debt, such as a credit card bill.  Consolidating debt with a high interest rate should enable you to reduce your total monthly debt payments.  For example, you may be able to use a new mortgage with a 5% interest rate to pay off credit card debt with a 18% interest rate.  In an ideal scenario, with a debt consolidation refinance your new mortgage payment is less than your old mortgage payment plus your old debt payments, enabling you to save money every month.

Use our Debt Consolidation Refinance Calculator to understand if you should pay-off debt when you refinance

Borrower should also consider total interest expense when evaluating a debt consolidation refinance. In many cases it may not make long-term financial sense to replace short-term debt, such as a credit card you are going to pay-off within three-to-five years, with long-term debt such as a mortgage, even if the short-term debt has a higher interest rate.

6

Refinance to Eliminate Mortgage Insurance

You may be able to eliminate mortgage insurance such as PMI by refinancing, although eliminating PMI should not be your sole reason to refinance. Lenders typically require you to pay private mortgage insurance (PMI) if the loan-to-value (LTV) ratio when you obtained your mortgage was greater than 80%. LTV ratio is the ratio of your mortgage amount to the fair market value of your property.  If you believe your LTV ratio declined to below 80% due an increase in property value or reduction in your mortgage balance then the PMI should be removed when you refinance.

Please note that with conventional loans, you do not need to refinance your mortgage to have PMI removed. You can submit a request directly to your lender to have the PMI removed without incurring the costs involved in a refinance.  So unless you realize an additional benefit such as lowering your mortgage rate or reducing your loan term, it probably does not make sense to refinance if your only reason is to eliminate PMI.

Review What is PMI and Do I Need to Pay It?

If you have a government-backed loan such as an FHA or USDA mortgage, you are required to pay mortgage insurance premium over the entirety of the loan and you cannot request to have it removed regardless of your LTV ratio. In this scenario, refinancing to remove mortgage insurance makes more sense as long as your new interest rate is lower than the rate on your current loan plus the mortgage insurance.

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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