4 Questions to Answer Before You Refinance Your Mortgage

Blog posted On January 30, 2020

Is it time for a mortgage refinance?  With today’s low mortgage rates, you may be thinking about refinancing your mortgage to lower your interest rate, shorten your loan term, or get cash out.  Black Knight reports approximately 8.1 million homeowners could benefit from a mortgage refinance.  Keep in mind, a mortgage refinance is a new loan origination and with that comes a new mortgage and closing costs.  Whether or not a refinance is right for you, depends on your answer to these four questions.

Why do you want to refinance your mortgage loan?

A mortgage refinance can be an opportunity for you get a lower mortgage rate, change your loan terms, or switch from an adjustable-rate to a fixed-rate mortgage.  A lower mortgage rate will lower your monthly payment, but you will still have to pay closing costs on the loan.  Shortening your loan terms will give you a higher monthly payment but reduce the cost of interest long-term.  With today's low rates, switching from an adjustable-rate to a fixed-rate mortgage may be the right move for you to lock in a low rate.  Evaluate your short and long-term goals before a mortgage refinance to determine if the refinance will help you achieve those.

How much will the refinance cost?

When you refinance a mortgage, you originate a new loan and you will have to pay closing costs.  Closing costs typically range from 2% to 4% of the total loan value.  For example, if your closing costs will be $3,000 and the refinance will save you $200 each month on your mortgage payment, it will take you 15 months to break even.  If you plan on living in the home for at least 15 months or longer, a refinance can save you money.  However, if you may need to move before then, you won’t save any money with a refinance. 

Can you afford the closing costs?

When you refinance your mortgage, there are three ways to pay for the closing costs.  You can pay the closing costs upfront when the loan is closed.  You can finance the closing costs into the cost of your loan, but that will result in a larger loan amount.  A “no-cost” refinance does not charge closing costs upfront or finance the closing costs into the loan, instead you will get a slightly higher interest rate, and may not benefit as much from the refinance. 

Is there any reason for you to not refinance?

Many homeowners choose to refinance to get cash out.  With a cash-out refinance, you originate a new loan with a larger balance than your current loan and withdraw the difference.  Real estate professionals recommend waiting until you have at least a 20% home equity cushion before withdrawing cash.  If you’re taking cash out of your home to pay down debt, use it for higher interest debt.  For example, your mortgage loan will typically have a lower interest rate than credit card debt.

If you’re considering a mortgage refinance, you should talk to a lender first.  Share your goals and determine whether or not a mortgage refinance is the best way to achieve them. 

Sources: CNBC