Refinancing A Home Mortgage: What You Need to Know

It's no secret that mortgage interest rates last year were the lowest since 2016 and baby boomers and millennials flocked to refinance their loans. The refinancing boom enabled many homeowners to lower payments, pay off mortgages, realign debt or change the type of mortgages they had on their homes. Good news: 2020 is shaping up to be another great year for refinancing home mortgages! 

Surprisingly, there are still plenty of homeowners that haven't taken advantage of the many benefits of refinancing. According to Black Knight, a mortgage data analytics company, there are roughly 6.8 million borrowers out there who could benefit from refinancing.

It is a big decision. Resolving whether it is the right move for you and your family requires some homework. 

What is Refinancing?

Let's begin by defining what refinancing means. In essence, when you–the homeowner– refinance a mortgage, you're paying off the original loan and replacing it with a new one. It's true, you could save thousands of dollars in interest by trimming the percentage rate or changing the number of years to pay off your loan, but the decision is more complicated than this short definition and best-case scenario outcome.  

Let's consider some of the top reasons homeowners refinance and see if they resonate with you.

Reasons to Refinance

Lower interest rates

Reducing the interest rate of a mortgage can help in meaningful ways. The benefit of saving money and the added perk of increasing how quickly you build equity in your home are among the top contenders. However, keep in mind that a lower rate might not be the best reason to refinance unless the new rate is significantly lower than the one you have. It will take some math to determine if refinancing makes a real difference to your bottom line, but most lenders have online calculators that can help you determine if lowering your interest rate is the right reason for you.                                               

BOB Expert Tip

 

Lenders vary on the actual percentage decrease that makes refinancing worth the effort, but most agree that a 1-2 percent drop in the rate is worth investigating.

Lower Payments

Lowering your monthly house payments is a bonus that goes hand-in-hand with lower interest rates, and it’s a strong motivator for refinancing. As an example of how lower payments work with interest rates, consider a homeowner with a loan for a home purchased at $168,243, with a 20% down payment ($33,648). The current loan is for a 30-year fixed-rate mortgage with an interest rate of 6.4%. The homeowner pays $1073.00 monthly on the loan. If that same loan is reduced to a 3.79% interest rate, the payment becomes $858.00. The savings are obvious.

Take Advantage of Better Credit

Paying the monthly mortgage payment on-time consistently over months or years may enable you to qualify for a lower interest rate. If you are among millennials that have only been homeowners for the last couple of years, you may find your credit score has improved, making refinancing a smart financial move.

 

Change the Type of Loan

Changing the type of loan assumed under your home mortgage is also a strong motivator for refinancing. Many homeowners start with adjustable-rate mortgage (ARM) loans at a very low rate, that are guaranteed for a certain period of time. Once the guaranteed time period is up, ARM rates may increase. A higher interest rate on an existing ARM will increase your monthly house payment. A fixed, 30-year interest rate may work out better if you're settled into a specific location and planning to stay long-term. You can refinance and lock-in the fixed-rate mortgage for the remaining life of the loan–meaning your percentage rate won't change, and you'll have the same monthly payment for the lifecycle of the loan.

 

Decrease the Loan Term

If you have substantial equity in your home, refinancing to pay off your mortgage in a shorter timeframe is smart. The difference in house payments on a 30-year loan versus a 15-year loan may only be a few dollars apart, but you'll save thousands of dollars in interest by shortening the number of payments. As an example, using the same $168,243 mortgage mentioned earlier, you’ll recall the payment for the 30-year, 6.4% interest rate mortgage was $1073.00. Refinancing and reducing the interest rate on the same loan to 3.79% for 20 years leaves the monthly payment amount at $1032.00–a difference of $41.00 to a monthly budget–and tremendous savings for your bottom line.

Home Improvements & Debt Consolidation

Renovations are an expensive undertaking but can add a lot of value to a home. If you're thinking of refinancing to offset the burden of costly home improvements or repairs, you'd be in good company. Lots of boomers and Generation Xers with equity in their homes have benefited from folding the costs of home improvements into lower-interest-rate home mortgages.

The same is true for high-interest-rate credit cards. Bundling outstanding debt into one payment at a low-interest rate can help you manage payments better and decrease debt quicker than continuing to pay multiple payments every month, but you'll need to consider the amount of equity in your home before deciding.

This is definitely a discussion point with your lender.

Questions to Answer Before Refinancing

You may be a prime candidate for refinancing if one or several of the above reasons make sense for your long-term goals. However, don't start the process before answering the following questions:

1. How long do you plan to stay in your residence?

The fees associated with refinancing may not be worth it if you are planning to move within the next couple of years.

2. How many years remain on your original home mortgage loan?

Deciding to refinance is a big decision, and choosing between a 15-20-year or a 30-year mortgage will take a bit of calculating. For instance, if you have consistently paid your mortgage for the past 20 years, it might be a better idea to refinance at the lower-rate for 15 rather than 20 years. Do the math with your lender to see which option is best for you.

3. How much will the closing costs be?

Find out how much money the refinance will cost and balance it with the savings you’ll achieve with a lower- interest rate and lower or fewer payments. Refinancing won't be worth it to you unless you save money in the end.

BOB Expert Tip

 

The process of refinancing is similar to applying for your original mortgage, including the costs associated with items such as appraisals, title searches and application fees. 

4. Is your current loan more than 2 years old?

If you assumed your home mortgage in the last couple of years, you might be a good candidate for refinancing. Even if you purchased your home in 2018, the current low rates might make refinancing beneficial. Look at the numbers.

Local Makes A Difference

Is it time for you to think about refinancing? If the answer is yes, we'd suggest meeting with your mortgage lender to talk about all the pros and cons. Our Bartlett Mortgage officer is happy to take a look at your current circumstances and make recommendations outlining the most beneficial path for you and your family. 

As a local lender, knowing our customer base enables us to not only help them make sound decisions but also make the experience of refinancing as painless as possible. 

Our local status gives us a degree of freedom in underwriting new mortgages and shaving dollars off the cost of refinancing. We have flexibility in our rates and finance charges that make us competitive with any national lender.

Let us help you identify if refinancing in 2020 is a smart option for you.

Apply Now

Bank of Bartlett NMLS # 418439. Bartlett Mortgage NMLS # 418443.

Return to Main Blog Page