May 13th, 2019 5:53 AM by Jackie A. Graves, President
Buying a home
is a major milestone, but it’s not the end of the journey. You might decide to
refinance your mortgage in a few years or even later. Here’s how to do that and
what to expect.
is mortgage refinancing?
mortgage means you get a new loan to replace the old home loan. You might want
to refinance your mortgage if interest rates have dropped substantially since
you signed your mortgage. You could potentially save a lot of money by
refinancing to a new loan with a lower interest rate. You can check the latest
rates for mortgage refinancing on Bankrate’s rate tool.
As a rule of
thumb, it’s worth considering a refinance if you can lower your interest rate
by about 1 percentage point or more. A mortgage
refinance calculator can help you decide whether you’ll save
enough money to make it worthwhile.
you’ve been making regular payments on your mortgage for several years, you’ve
likely build up some amount of home equity. Refinancing can be a way for you to
take out some cash against that home equity, to fund home improvements or for
any other purpose.
When should you refinance your mortgage?
refinance their home loan for a variety of reasons:
Benefits of refinancing your mortgage
your mortgage can improve your finances in various ways:
Risks and costs of refinancing a mortgage
can be a mistake if you aren’t able to lower your interest rate much, or you
incur a lot of fees.
if the refi results in a lower monthly payment, you won’t actually save money
until the monthly savings offsets the cost of refinancing. You’ll need to do
some math to figure out how many months it will take to reach this break-even
point, which will help you decide whether it’s worthwhile.
No cash-out refinance vs. cash-out refinance: What’s the
you refinance in order to reset your interest rate or term, or to switch, say,
from an ARM to a fixed-rate mortgage, that’s called a ‘no cash-out
refinancing,’ or a ‘rate-and-term refinancing.’ For example, if you have an ARM
that is set to adjust upward soon, and you refinance into a fixed-rate
refinancing pays off one loan with the proceeds from the new loan, using the
same property as collateral. This type of loan allows you to take advantage of
lower interest rates or shorten the term of your mortgage to build equity
Devyn gets a
$100,000 mortgage with an interest rate of 5.5 percent. Three years later:
situation, Devyn can save more than $100 a month by refinancing and starting
over with a 30-year loan. Or Devyn can save less every month, while paying off
the loan in 27 years — in other words, keeping the original loan’s payoff date.
Monthly principal and interest
cash-out refinancing leaves you with cash above the amount needed to pay off
your existing mortgage, closing costs, points and any mortgage liens. You may
use the cash for any purpose.
eligible for cash-out
refinancing, you must have sufficient equity.
Market value – All
mortgage debt = Equity
Kris and Avery bought a house four years ago. Today, it’s worth $200,000 and
they owe $120,000 on the mortgage. Their equity is:
$200,000 market value
– $120,000 mortgage debt
= $80,000 equity
of a cash-out refi
Avery owe $120,000 on their mortgage and have $80,000 in equity. With a
cash-out refinance, they could refinance for more than the $120,000 they owe.
For example, they could refinance for $150,000. With that, they would pay off
the $120,000 on the current loan and have $30,000 cash to pay for home
improvements or other expenses. That would leave $50,000 in equity.
set a clear goal, you’re ready to shop lenders, compare refinance rates and get
the ball rolling. You’ll also have plenty of paperwork to fill out and an
appraisal to navigate.
your home loan, step by step
guide to help you get started.
Use a mortgage
refinance calculator to learn how a mortgage refinance can work
about today’s mortgage
does a mortgage refinance work?
refinance is when you replace your current home loan with a new mortgage,
usually to meet a specific financial goal. Refinances tend to close more
quickly than new purchase loans, and you’re not limited to working with the
same lender again. Once your refinance closes, the old loan is repaid in full
and you’ll begin making payments on the new loan according to the terms you’ve
should I refinance my mortgage?
common reasons to refinance your mortgage are to lower your monthly payments by
reducing your rate or term, particularly if you bought your home when rates
were higher. Homeowners also refinance to pay off their homes faster, eliminate
private mortgage insurance or to take out cash from their built-up equity.
refinance isn’t exactly a cake walk. You have to get approved for a new loan,
have your finances and credit vetted (again), get an appraisal and pay loan
fees. It’s important to have a goal in mind when refinancing your mortgage.
Let’s look at each reason you might refinance your home loan in greater detail.
your monthly mortgage payments
refinance their mortgage to lower their monthly payments. A rate and term
refinance helps you do this by replacing your mortgage with a
new loan sporting a lower interest rate, and for roughly the same term, or
another 30 years with a new loan when you are already years into an existing
mortgage means you’ll pay more interest over time and it’ll take you longer to
own your home free and clear. Depending on how much interest you’ve already
paid, you may consider shortening the term or making extra mortgage payments to
save on interest and repay the balance faster.
off your home faster
loans tend to have lower interest rates because the lender risks its capital
for a shorter time period. And the savings in interest payments could be
substantial when comparing a 15-year fixed mortgage and a 30-year fixed
mortgage. But there are drawbacks to a
15-year mortgage. More of your cash will be tied up in paying down
your mortgage. That means you’ll have less money for expenses and to save for
retirement, college or an emergency fund.
private mortgage insurance (PMI)
first got your mortgage, you made a down payment of less than 20 percent, and
you’ve been saddled with private mortgage insurance premiums, or PMI, as a
result. But in the years since you got the mortgage, you paid down some of the
loan balance and the value of your house rose. If the outstanding loan amount
is less than 80 percent of the home’s appraised value, you might be able to
refinance into a new loan and remove private
This could be
a solid move if you have a loan insured by the Federal Housing Administration,
or FHA. FHA loans have annual mortgage insurance premiums that cannot be
canceled if you put down less than 10 percent — even when your loan-to-value
ratio falls below 80 percent. The only ways to get rid of FHA mortgage
insurance is to refinance the loan or sell the home.
your home’s equity
with sufficient equity in their homes sometimes turn to cash-out
refinancing to meet a specific financial need. In a cash-out
refi, you refinance your home loan into a new mortgage for a larger amount, and
receive the difference in cash to use as you see fit.
responsible ways to use a cash-out refi. You can use the money to add value
back into your home through a major remodeling project. You also can use it to
pay off high-interest debt or for educational expenses. To do a cash-out refi, though,
you typically need at least 20 percent equity in your home.
to get the best mortgage refinance rate
with multiple lenders to get the best deals on interest rates and terms.
Additionally, lenders generally offer the best deals to borrowers who have
higher credit scores, a positive credit history, and a lower debt-to-income
As you shop,
ideally you want to get a lower rate than what you currently have, but pay
attention to the annual percentage rate, or APR. The APR gives you an overall
picture of your total borrowing costs, including the loan’s interest rate,
lender origination fees, points and other loan charges.
details, along with your new monthly payments, will be spelled out in the loan
estimate each lender gives you. This is a three-page document lenders must
provide to you within three business days of receiving your refinance
application. You can use the estimate and a refinance calculator to compare
loan offers and identify the best deal.
steps to refinance your mortgage
Make sure to
shop around for the best home refinance rates and terms. Refinancing makes
sense if it puts your finances on a stronger footing, so weigh your decision
You can refer
refinancing resources as you do your homework on the
If you don’t
qualify for a refinance or owe more than your home is worth, a government-backed
mortgage program could provide some relief. Your lender might
agree to modify your loan or find other solutions to make your monthly payments
easier to manage if you face a financial hardship.
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