What is Refinancing and Should I
Refinance My Mortgage?
As interest rates drop to historical lows and
the outlook on the economy uncertain, many homeowners are taking advantage by
refinancing their mortgage. If you’re unsure, refinancing your mortgage means
paying off your existing mortgage with a new loan, generally from a different
There are many reasons why tens of thousands
of Americans choose to refinance their existing mortgage each year.
Obtaining a lower interest rate,
Shortening the term of your
Converting from a fixed-rate
mortgage to an adjustable rate or variable rate mortgage (or vice versa)
Financing a large purchase
Paying for an unexpected emergency
Tapping into the equity in your
home, also known as cash-out refinance.
In this article, we'll explore the pros and
cons of refinancing your mortgage.
Getting a mortgage with a lower
interest rate is a great reason to refinance.
With interest rates at historical
lows, consider refinancing to shorten the term of your mortgage and pay
significantly less interest over the life time of your mortgage.
Leveraging equity in your home to
cash-out is a common reason many Americans refinance their mortgage each year.
Depending on how long you expect
to remain in your home, switching from an adjustable rate mortgage, or a fix
rate mortgage might make sense for you.
What are the benefits of
The most attractive benefit of refinancing
your mortgage is the ability to lower your monthly payment. Depending on when
you purchased your home, refinancing could help you secure a lower interest
That said, a lower interest rate would mean a
lower monthly payment and less money spent on interest over the life of the
loan. This principal would help you save money not only each month but for each
year that you pay your mortgage.
Beyond saving money, many Americans have seen
a rapid increase in the value of their home’s equity. States like Massachusetts and Illinois, have seen real
estate appreciate by 33% and 9.05% in 2019. This presents homeowners with a
unique opportunity to refinance. By keeping their payment the same they can
take out some equity - cash - on their property. This allows them to make a
large purchase, renovate their home, pay for a child's education or consolidate
higher interest debt. This is commonly known as a cash-out refinance.
In a recent interview with Business Insider, Joe Tyrrell, CEO of Ellie
Mae, attributed the recent surge in refinancing to consumer savings.
"If you look at 2018 alone, the average
[interest] rate that millennials were purchasing at was 4.78%. On a 30-year,
fixed-rate mortgage at an average loan amount of about $241,000, that's a
$1,263 payment that they're making. If you fast forward to today, where rates
are at 3.8%, that's a savings of roughly $150-$250 per month."
What are the costs of
With these benefits there it’s important to
remember that refinancing does come at a cost. On top of needing to qualify for
and close on a new mortgage, which can typically cost between 1%-2% of your
home’s value, the process can take several months. Additionally, depending on
your new loan, you could end up extending the life of your loan. Furthermore,
depending on your reason to refinance you could end up with more debt if you
choose to cash out.
Should I refinance?
Ultimately, the decision to refinance your
mortgage is a personal one that should be made with care. To help you
understand if your current situation makes sense to refinance, we’ve outlined
some scenarios below.
Lower your interest rate
If you can lower your interest rate you, your
monthly payment will drop and you will save money over time. You might be
asking yourself “Is it worth refinancing to save $100 a month?”. A good way to
decide is to look at the interest rate you’re paying now and the current
interest rate if you refinance. If you’re going to get at a least half a
percentage point reduction in rate, it is worth refinancing as you will benefit
Switching from an
adjustable-interest rate to a fixed-rate term
If you’re coming to the end of your
introductory-rate and you’re concerned about the changes in your interest rate,
it may make sense to refinance with a fixed-rate mortgage. This will give you
stable monthly payments that will not change regardless of changes in the
Furthermore, if you’re looking to decrease the
length of your loan, it could be a good idea to change from a 30-year loan to a
Access the increased value in
If you’re like many Americans, you’ve likely
seen your property appreciate in value over the last 5-10 years. If you’re
looking to access the equity in your home, a cash-out refinance could be right
for you. By leveraging the equity in your home, you can borrow more money and
use the cash for large expenses.
As opposed to a personal loan, the money
borrowed in a cash-out refinance is amortized over a longer term, 30-year in
most cases. This makes your home renovation or your kids
education much more attainable.
Predictions for record-low mortgage rates are
expected for 2020 and beyond. This is good news for American consumers in the
market to refinance their home.
If you’re feeling financially stable and
you’re in a position to refinance now is likely a good time to do so.
Visit our preferred partners today to figure out how
much you could save by refinancing now.