Should I Refinance My Mortgage?

First things first, let's explain what a mortgage refinance is. 

What is a mortgage refinance?

If you're asking, 'Should I refinance my mortgage?' keep reading. We'll give you the info you need to help you determine if and when to refinance your mortgage.

When to refinance a mortgage

• Has your credit score improved?
• Have rates dropped below your current interest rate?
• Did you reach 20% equity?
• Do you have cash to apply?
• Do you have an adjustable rate mortgage that is near the end of a fixed-rate period?

Reasons to refinance your mortgage

Here are a few reasons why you may want to consider a mortgage refinance :

• To change your loan terms
• Take out cash and pay off debts
• To lower your interest rate 
• To help pay for improvements or renovations

You want to change your loan terms

Changing the duration of your mortgage or interest rate to adjust your monthly payment are common reasons for a refi. Revised loan terms can also allow you to cash out some of the equity in your home and use it for other purposes. Here are a few possible scenarios.

Lengthen or shorten your loan term

If you refinance to a longer-term loan (like moving from a 15-year to a 30-year mortgage), you can lower your monthly payment and free up money for other uses like paying college tuition or saving for retirement.

Change from an adjustable-rate mortgage to a fixed rate

Avoid PMI or get out of other loans that require insurance

Getting rid of monthly PMI or MIP payments lowers your monthly payment. Let's say you buy a $375,000 house on a 30-year mortgage at 4.5% interest. You only put 12% down. Your monthly PMI payment will be $138, which goes on top of your $1,670 house payment. That's an extra $1,650 a year out of pocket.

You want to take out cash to pay off debts

With a cash-out refinance, you get a new home loan for the amount you currently owe on your house, plus the amount of cash you want to take out from the equity you have in your home. The difference between the new mortgage amount and the old one goes to you when the loan closes, in cash.

Here's an example of how a cash-out refi works: Let's say you own a $400,000 house and still owe $150,000 on the mortgage. You have $250,000 in equity, which is a way of saying how much of an ownership stake you have in your home. Now let's say you need $75,000 to pay for your kid's college education. You could do a cash-out refinance to get the money. To do so, you'd get a new mortgage worth $225,000. That's the $150,000 you owe on the house plus the $75,000 you're going to take out in cash to pay that tuition for junior (not accounting for closing costs and fees).

You want to make home improvements or do a remodel

A cash-out refinance allows you to use the money for whatever you need it for, including home improvements. Ready to remodel your outdated 1990s kitchen, upgrade your home's siding or add a big bedroom suite? A home refinance can let you tap into your home's equity for the cash to get the work done.

You can get a lower interest rate and save money

Lowering your interest rate is one of the best and most popular reasons to refinance a mortgage. Trading in your higher-interest home loan for a lower-interest one may save you hundreds of dollars in interest on your monthly payment and tens of thousands of dollars in interest over the life of your loan. It's money in your pocket.

If you've raised your credit score and lowered your debt-to-income (DTI) ratio while owning your home, you may qualify for a lower rate even as the prime rate is rising.

Here's an example: You have a $350,000 mortgage with a 30-year fixed rate of 5%. Your monthly payment is around $1,880. If you refinance to a new mortgage with a 4% interest rate, your monthly mortgage payment would fall to around $1,275. That saves you $600 a month and almost $7,200 a year.

How much will refinancing save me?

You will need to know how long you plan to stay in the home, your current loan term and interest rate, loan balance, estimated home value and refinance mortgage size. More details follow:

Years before selling: If you might sell in the next couple of years, it's unlikely that a lower rate will offset the closing costs associated with refinancing before you move. In that case, you will not save money on the refi. 

Current loan term: You'll need to know the year you acquired your loan and the original term. Simply multiply the number of years by 12 to get to the term in months. A 30-year loan is 360 months.

Current interest rate: To calculate interest savings, you need to know the difference between the quoted rate and your current interest rate. Your rate will be in your financing paperwork.

Remaining loan amount: Check your account for the current principal balance. This will inform the size of your refinance loan.

Current home value: You'll likely need to pay for an appraisal to understand the current value of your home. If the value has appreciated since purchase, that increase counts toward equity and can reduce the length of time you must pay mortgage insurance. If your home has depreciated, you could be underwater, owing more on your loan than the value of the house.

Refinance mortgage size: The size of refinance loan you apply for will play into the total risk the lender will take and will affect the interest rate offered.

Is it worth refinancing?

If you make it to the breakeven point and experience monthly savings before selling the house, then there is financial value in refinancing your mortgage.