When you make the decision to buy a home, you do so knowing it will be among the largest and most important purchases of your lifetime. Most tangible objects you purchase will likely not cost as much. Furthermore, the cost, care, and time it takes to make that house your home can help you appreciate your space and make the most of it.
But one of the more overwhelming prospects – and arguably the largest hurdle – for first-time homebuyers is understanding how the mortgage process works and sorting through the many types of loan programs available.
Finding a lender, locking in your mortgage rate, sorting through out-of-pocket costs, and going through a step-by-step guide to closing can be eye-opening for the less experienced. Now picture this: you’ve built some equity in your home a few years after closing, and you decide to refinance your current mortgage. What you need to understand now are the possible benefits and drawbacks to that brand-new mortgage, and how different scenarios impact different borrowers.
Quite simply, refinancing is a strategy designed to replace your existing mortgage for one with, ideally, more favorable terms. Through refinance, your old mortgage is completely paid off and replaced with a new one, and when the ink on the paperwork is dry you should (in theory) be more comfortable with your mortgage situation.
Some reasons to consider refinance include reducing the monthly mortgage payment or accelerating the mortgage payoff. Other considerations may be a cash-out refinance or an opportunity for getting rid of private mortgage insurance (PMI).
No matter your reason, it’s best to weigh the pros and cons of mortgage refinancing before deciding if now is the best time to do it.
If you’re unsure about whether to refinance, know this — you’re not alone. Many homeowners see a change in market conditions, such a drop-in interest rates or a rise in home values, and they pick up the phone to talk refi.
The truth is, even when rates drop there are other variables in play when it comes to refinancing. Two important questions you should consider are: does it make sense to refi now, and what do you hope to accomplish?
No matter what, you need to consider how many years remain on your existing mortgage and weigh that against how much longer you plan to stay in your home. Once you’ve figured that out, weigh it against the cost of obtaining a new loan compared to the interest it might save you in the long run. Approaching a refinance from this perspective will help you focus on the big picture and evaluate the true pros and cons of refinancing for your unique situation.
As an example, let’s say that your existing mortgage has a remaining balance of $150,000. Total closing costs may run between 3-5%, which means you’d pay between $4,500 to $7,500 to refinance. If you pay that cash at closing, how many months of ‘savings’ will it take to recoup that money and make the refi worth it?
In the above scenario, a homeowner likely to move in two or three years may not benefit from refinancing. The folks that may benefit, however, include those with an adjustable-rate mortgage or homeowners with PMI. If you’re in that group, you might refinance to move into a fixed rate, and/or remove your mortgage insurance. Along with obtaining a lower rate, you may also be able to shorten your mortgage term and consolidate debt.
There are closing costs associated with refinancing that can include appraisal, title, and lender fees. If you choose to roll these fees into your mortgage, that “no-cost” option could end up costing you more over time than just paying the costs at closing. How? When refinance occurs, the new mortgage establishes a new term meaning you could end up paying more interest in the long run, and you’ll pay interest on the closing costs added to your loan.
Another thing to keep in mind are the other costs rolled into your monthly mortgage payment including escrow. Escrow includes the monies to pay for property taxes and homeowners insurance.
It’s important to remember that when you go through mortgage refinancing, you’ll need to establish a new escrow account. The caveat? Once your old mortgage is paid off, the lender may not distribute a refund on the balance in your old escrow account for up to 30 days.
Home refinancing can be a beneficial move under the right circumstances, but it may not be the best scenario for everyone. If you have a positive history of repaying your mortgage on time and have equity built up in your home, refinancing can be a great option for you.
A lot of thought and research should go into the choice to refinancing a home. Above all, you should consider your main financial goals and decide if refinancing will help you reach them. Once you have those goals in mind, it’s best to consult a reputable lender for more information.
Do you have questions about mortgage refinancing? Contact one of our knowledgeable, local mortgage professionals to discuss your options. With a little foresight, planning, and our guidance along the way, home refinancing can be a great money-saving option.
Orton, Kathy. “Perspective | What to Know before Refinancing Your Home Loan.” The Washington Post, WP Company, 18 Sept. 2019, www.washingtonpost.com/business/2019/09/18/what-know-before-refinancing-your-home-loan/.
Pritchard, Justin. “Learn About Refinancing: Pros and Cons of Replacing a Loan.” The Balance, The Balance, 27 June 2019, www.thebalance.com/what-is-refinancing-315633.
“Beginners Guide to Refinancing Your Mortgage.” Should I Refinance My Mortgage? Beginner’s Guide to Refinancing Your Home Loan, Mortgage Calculator, www.mortgagecalculator.org/helpful-advice/what-is-a-refinancing.php.