Planning to refinance

During the term of your mortgage, you may want to refinance to meet a variety of personal and financial goals. Refinancing will completely replace your current mortgage with a new loan that provides you with a new term, rate and monthly payment. Refinancing will involve time and money, so be sure to talk with your lender about the costs and benefits of securing a new loan.

You can refinance through your existing lender or a new lender. What’s most important is that the lender you choose is trustworthy and offers competitive rates and terms. The best way to determine if you’re being offered competitive terms is to shop around and compare loan estimates from multiple lenders. Our research shows that you could save on average several thousand dollars over the life of the loan by getting additional rate quotes.

Reasons to refinance

Common reasons to refinance include:

1. Lowering your mortgage rate.

If mortgage rates are lower than when you closed on your current mortgage, refinancing could reduce your monthly payments and the total amount of interest you pay over the life of the loan.

Even the slightest difference in your mortgage rate can impact your monthly payment. The following example shows the dollar amount difference when refinancing a $300,000 outstanding loan balance into a 30-year fixed-rate mortgage at various rates.

If you refinance to a lower interest rate, your monthly payment will likely shrink. You can put those savings toward other expenses or apply it toward your principal balance, which will help you pay off your loan sooner.

2. Moving from one mortgage product to another.

If your current mortgage is an adjustable-rate mortgage (ARM) and it no longer makes sense for your financial situation, refinancing into the security and stability of a 30-year fixed-rate mortgage may be a good decision.

On the other hand, switching to an ARM could make sense, if you plan to move before the fixed-rate period on the loan ends.

3. Building equity faster.

If your financial situation has improved since your purchase, refinancing to a loan with a shorter term (e.g., from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage) will allow you to build equity faster, own your home sooner and pay less in total interest.

4. Getting cash out.

If you’ve built up significant equity in your home over the years and could use this money for home improvements or to improve your financial situation, it might be a good time to talk with your lender about a cash-out refinance.

Does refinancing make sense?

A quick check to see if refinancing makes financial sense for you is to calculate how long it will take to recoup the costs of the refinance. To do this, simply take the total cost associated with the refinance and divide it by your monthly savings. Note that this model will not work for cash-out refinances or if you are refinancing to reduce the term of your loan.

There are other variables to consider. For example:

Reach out to your lender to discuss your situation and evaluate whether refinancing is right for you.

• Do you plan to move? If there’s a chance you may move in two years, but it will take you three years to recoup the cost of refinancing, it probably does not make financial sense.
• Are you going to significantly extend your loan term? If you have 20 years left on your 30-year fixed-rate mortgage and you refinance into a 30-year fixed-rate mortgage, you’ve essentially extended the term of your loan and will pay more interest over the life of the loan as a result.

Reach out to your lender to discuss your situation and evaluate whether refinancing is right for you.