When to Refinance a Mortgage

Refinancing a mortgage simply means replacing your old mortgage loan with a new mortgage loan, often so you can get better terms and potentially save money. It works by the lender (the company you refinance with) paying off your old mortgage and signing you up for a new mortgage with new terms.

For example, let’s say your current mortgage payment is $1,000 per month. By refinancing to a lower interest rate, you might be able to reduce your payment to $800 per month. That’s an extra $200 in your pocket each month! Remember, refinancing does involve some upfront fees, so make sure the long-term savings outweigh those initial expenses.

There isn’t a one-size-fits-all answer to this question. In reality, it all depends on your goals, the market, and your personal situation. What’s important to remember with mortgages is that interest rates change, and your personal situation may change which creates opportunities.

Depending on your goals and the market, it could be a good idea to refinance your mortgage for:

• Lower interest rates: Refinancing can save you money and lower your monthly payment if you have a higher interest rate than today’s interest rates. Refinancing is a good idea especially if you plan to stay in the home.
• Shorter loan term: Opting for a shorter loan term can help you pay off your mortgage faster, though it will result in higher monthly payments.
• Access extra cash: If you have substantial home equity, a cash-out refinance can provide you with additional funds for other expenses or investments.

Refinancing might not be ideal if:

• Minimal rate change: If the difference between your current rate and the new rate is small, the fees associated with refinancing might outweigh any potential savings.
• Planning to sell soon: If you plan to sell your home within a few years, you may not recover the costs of refinancing through the savings you gain.
• High closing costs: The fees involved in refinancing can be substantial and might reduce the overall benefit of the lower interest rate.
• Already low rate: If your current mortgage rate is already very competitive, refinancing may not offer significant financial advantages.

Summary: There’s no right or wrong answer to whether you should refinance. You need to evaluate your situation and work with a loan officer to see if it makes sense.

Refinancing your mortgage can offer several benefits, from saving money to paying off your home faster. Here are six key reasons to consider refinancing, along with simple examples to show how each option can work for you:

1. Secure a Lower Interest Rate

If the current interest rates are lower than when you signed your mortgage, refinancing to a lower rate can save you a lot of money over time.

Example: Jane got her mortgage at a 5% interest rate five years ago. Now, interest rates have dropped to 3.5%. By refinancing, she can lower her monthly payments and save thousands over the life of the loan.

2. Shorten Your Loan Term

Switching to a shorter loan term, like from a 30-year loan to a 15-year loan, helps you pay off your mortgage faster and save on interest. This is a good option if you can afford higher monthly payments.

Example: Tom currently has a 30-year mortgage but decides to refinance to a 15-year term. Although his monthly payments are higher, he will pay off his home much sooner and save on overall interest costs.

3. Consolidate Debt

If you have high-interest credit card debt or other debts, a cash-out refinance can help you pay off those debts with one lower-interest payment.

Example: Sarah has accumulated $20,000 in credit card debt at 18% interest. By refinancing her mortgage and taking cash out, she can pay off her credit cards and lower her monthly interest payments.

4. Access Your Home Equity

A cash-out refinance lets you take out some of the equity you have in your home. You can use this money for things like home improvements or education costs.

Example: Mike wants to renovate his kitchen but doesn’t have extra money. By refinancing his mortgage and cashing out some of his home equity, he can finance the renovation without taking out a separate loan.

5. Remove Private Mortgage Insurance (PMI)

If your home’s value has gone up, you might be able to refinance to get rid of PMI. This can lower your monthly payments.

Example: Emily bought her house with a small down payment and had to pay PMI. Now, her home’s value has increased significantly. By refinancing, she can eliminate PMI and reduce her monthly mortgage costs by having one less bill.

6. Switch From Adjustable-Rate Mortgage (ARM) to Fixed-Rate Mortgage

If you have an ARM, your interest rate can go up and down with the market. Switching to a fixed-rate mortgage gives you a steady, predictable payment.

Example: Mark has an adjustable-rate mortgage, and his interest rate has recently increased. To avoid future hikes, he refinances to a fixed-rate mortgage, ensuring stable monthly payments.

Refinancing your mortgage can come with great benefits but also has costs associated. Below is a list of the most common costs:

• Loan origination fee: A fee for processing your loan, usually 0.5% to 1.5% of the loan amount.
• Appraisal fee: A fee to check your home’s current value, usually $300 to $500.
• Title search and insurance: Fees to check and insure your home’s ownership history, usually $200 to $500 for the search and around $1,000 for insurance.
• Recording fees: Fees to record the new loan with the county, usually a few hundred dollars.
• Credit report fee: A small fee to pull your credit report, usually $25 to $50.
• Attorney fees: Some states require an attorney for closing, which varies by state.

Total Closing Costs: The total cost of refinancing is usually 2% to 6% of the loan amount. For a $200,000 mortgage, you could pay $4,000 to $12,000. These costs include various fees and charges that can add up quickly, so it’s important to budget for them when considering refinancing.

Summary: The cost of refinancing is usually between 2% to 6% of the loan amount.

Equity requirements for refinancing

To refinance, you’ll need enough equity in your home. Lenders usually want you to have at least 20% equity to qualify for a conventional loan without paying PMI. If you have less equity, you might still be able to refinance, but you’ll need to meet other requirements and possibly pay for PMI.

The all-important question: how do you refinance a mortgage? If you decide to refinance, here’s what you need to do:

1. Shop around and compare rates: Get quotes from different lenders. It’s important to compare not only the interest rates but also the terms and fees associated with each loan offer.
2. Gather your documents: You’ll need income, employment, asset, and debt information. Common documents include pay stubs, tax returns, bank statements, and information about your current mortgage.
3. Submit a loan application: Choose a lender and apply for the loan. This process typically involves filling out an application form and providing the necessary documentation.
4. Underwriting: The lender reviews your financial information and home value. This step involves verifying your income, assets, and credit score to determine if you qualify for the loan.

5. Closing: If approved, sign the loan papers and pay closing costs. Once all the paperwork is signed and the closing costs are paid, your new loan will be finalized, and your old mortgage will be paid off.

Refinancing can also be a strategy to protect your home equity. If you have an ARM and want to stay in your home to avoid future rate increases that could eat away at your equity, switching to a fixed-rate loan can provide stability and protect your investment in your home. Speak to a licensed loan officer to see if this makes sense for your situation.

Think refinancing might be the right choice for you? CrossCountry Mortgage is here to help. Speak to one of our dedicated loan officers who will consult with you to determine if refinancing is the right choice for you.