When homeowners see mortgage rates falling, they often wonder about mortgage refinancing. Many are questioning if refinancing their mortgage is a good idea. If a mortgage refinance can save you a substantial sum of money, it might be worth considering. Simply lowering your interest rate by a percentage point or two can significantly lower your monthly payment. You might be contemplating mortgage refinance for many reasons. It might be taking advantage of the interest savings of lower rates, lowering your monthly payment, or taking a cash-out refinance to access some cash for home improvement or debt consolidation.
When to refinance your mortgage loan
- You are currently paying a much higher interest rate than the current mortgage rates, and you have an opportunity to save on the overall interest paid.
- To reduce your monthly mortgage payment to a more affordable payment.
- You want to convert from an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage. Low-interest rates make it a good time to lock into a fixed-rate mortgage loan
- To get a shorter loan term. Changing from a 30-year term to a 15-year term for an even lower rate will enable you to save more by paying off your mortgage faster with a lower term.
- Cashing out equity to renovate and increase the value of your home.
- Your credit has improved, and you feel you’ll be eligible for a lower rate.
- To eliminate Private Mortgage Insurance (PMI), if you are paying it.
Mortgage Refi Cost Vs. Savings
The first question you must ask yourself is if the cost of the mortgage refinance is worth the savings. There are costs associated with refinancing and they can be steep. A good way to figure out if the interest rate savings would high enough to outweigh the cost is to do the math. Calculate your break-even point. For instance, your closing costs are $2,800 and your new mortgage is saving you $150 per month. $2,800/$150 equals approximately 18.6 months to break even. If you don’t plan on selling your house in a year or so, the cost may not be worth the savings. Examples of mortgage refi costs can include a refinance application, appraisal, title search, home inspection fee, origination fee, points, credit report fee, a recording fee, and more. Your credit union mortgage loan officer can help you figure the potential costs and savings involved with refinancing your mortgage.
Considerations when refinancing a mortgage loan
- Do you qualify? It’s important to remember that you still need to qualify for the loan. You will need to have enough equity in your home and your income and credit will need to justify the loan. Your credit union or another mortgage lender will need to run all of the checks to be sure you are creditworthy and that the home value is worth more than the loan. It’s not always a slam dunk. Speak to your lender to learn more.
- Is there a prepayment penalty? If your existing mortgage has a prepayment penalty, that will need to be figured into your cost vs. savings calculation. If you are refinancing with the same lender, they may be willing to waive that fee. Be sure to ask.
- Do you plan on moving? Refinancing and the costs associated with it may not be worth it if you plan on moving in the near future.
Three Steps to Mortgage Refinance
- Shop for a new mortgage loan. Be sure to include your local credit union in your comparison. Credit Unions, such as Benchmark FCU, have extremely competitive rates and lower costs than larger financial institutions. Get loan estimates from at least three lenders.
- Do the math. Compare rates and costs as we mentioned above. Also compare rates and terms. You might not be saving if you get a lower rate, but add years onto your existing term.
- Lock in the rate and apply with the lender that gives you the best deal.
With all of the hype about mortgage refinancing, it’s worth taking the time to see if it’s actually a good idea for your current situation. For some homeowners, refinancing to get a lower monthly payment might be their primary objective. If you can benefit from a reduction in rate or a more affordable monthly payment, it’s time to start shopping for a mortgage refinance loan. Click to Learn More about Benchmark Federal Credit Union’s mortgage refinance benefits, including competitive interest rates.
Want more help deciding which mortgage loan is best for your needs? Read our blog post titled, “Which Mortgage Loan is Best?”