When Does It Make Sense to Refinance?

With interest rates historically low right now and looking as if they may not get lower, this means that mortgage interest rates are holding steady, too. So it may make sense to refinance – get a new home loan and pay off the old one. 

There are several things to look into and factors to consider before you decide, but it boils down to this: Will refinancing save you money?

Factors that set the stage for refinancing  

Basically, there are three factors that set the stage for you to save money by refinancing:

1. Mortgage interest rates are lower now than when you got your existing home loan
2. Your credit score has improved since you got the existing mortgage
3. Your home is worth more now than when you got your existing mortgage – either because prices in your area have increased or you’ve had the home long enough to pay down the loan and build value (equity)

Both 1 and 2, above, allow you to get a better interest rate.  Number 3, an increase in your home’s value, may allow you to finance a smaller loan than you currently have and/or take some cash out.

Benefits

One of the benefits of refinancing is to get a more favorable loan than you have currently. With a lower interest rate on the same loan principle amount as your existing mortgage, your monthly payments may be lower. If you’ve paid down some of the loan and you can refinance a smaller loan amount with the same or lower interest rate than you have now, you also can lower your monthly payments.

Another benefit of refinancing is to utilize the equity you have in your home to obtain cash for other uses.   If your home has increased in value since you obtained your current mortgage, you may be able to refinance for the same or higher loan amount than you had before. If you qualify, a cash-out refi allows you to get a new home loan and cash at closing from the equity in your house. This could let you pay off debt with a higher interest rate than a mortgage (like credit card debt), make home improvements, or pay for a child’s tuition. 

You also can change loan duration with a refinance, shortening or lengthening the new term of the loan. For instance, if you’re now in what’s considered peak earning years (age 40s to early 50s) and can handle higher monthly payments, you may want to refinance to a 15-year loan to pay off the loan quicker.*

Refinancing an FHA loan

If you have an FHA loan you can refinance that, too, to lower your monthly payments. An FHA Streamline refinance is a way to fast-track a new loan and retains the same FHA-qualifying low-interest benefit. The guidelines may appear  strict and there are costs involved as with any new loan.

Things to consider

As a rule, you may have to wait six months after you’ve gotten a home loan to refinance.  And, interest rates aren’t the only factor in refinancing – there are costs, too. You’ll go through the many of the same processes for refinancing that you went through the first time you got a mortgage, including fees and closing costs. 

If you’re going to spend money to save money, you’ll want to find your break-even point – the point in time or payments when costs = savings. Once you pass that point, you actually start saving. For example, if you refinance to save $150 on monthly payments, and you pay $3000 in fees/closing costs to get the new loan, it will take you 20 months to break even (3000 divided by 150). So, as long as you plan to stay in your home two years or more, you’ll likely save money. If not, then refinancing wouldn’t be right for you.

As always, every individual homebuyer’s situation is different and it’s best to talk it over with an expert. If you think you want to refinance your home loan, contact Capital Finance Bank to speak to a knowledgeable, experienced loan originator. 

* Capital Finance Bank, N.A. is not a debt management, tax planning, financial planning or credit counseling service provider. The information provided is strictly for informational purposes and not meant as legal or financial advice. Please seek professional advice from an accountant, financial advisor or credit counselor.