You’ve taken the leap of homeownership, but now you’re wondering if you should refinance. How to know when the timing is right and if refinancing will save you money in both the long and short term.
What is Refinancing?
Refinancing your mortgage is the process of replacing your current home loan for a new one. Your new loan will pay off your current loan and you will start paying the new loan. When refinancing, you can change lenders or stay with your current lender.
There can be several reasons to refinance including: Shortening the life of your loan, lowering your rate and/or monthly payment, or cashing out your home equity for other uses.
First, it’s important to evaluate all your refinancing loan options and use a refinance calculator to see if the savings are worth it on both a monthly basis and over the life of the loan.
Don’t Forget to Account for All Costs
Before you start the refinance process, check your current loan for a prepayment penalty. If you refinance and pay your current loan off early, a prepayment penalty could add a costly fee that reduces – or even eliminates – your overall savings. Accounting for this fee from the start can help prevent a budget-busting surprise.
Refinancing also means you’ll need to pay closing costs again. These upfront costs include appraisals, credit fees, lender fees, escrow and title fees, and insurance and taxes. Closing costs usually average about 3 to 6% of your loan amount. If you don’t have the cash on hand, closing costs will be added to your loan amount or may result in “buying up” to a higher interest rate. On average, it takes about two years to pay off closing costs. If you’re planning to move or sell your home within a couple years, it’s likely not worth refinancing.
Taxes & Insurance Costs
As you evaluate your refinancing costs, be sure to add your real estate taxes and home insurance costs too. If you leave these numbers out, you might not be comparing apples to apples or have the full picture of your monthly costs and savings.
Refinancing to a Lower Rate
As mortgage rates change it can be especially tempting to refinance, but it’s important to remember your mortgage costs aren’t limited to your interest rate and simply getting a lower rate won’t necessarily save you money over the life of your loan.
To recoup the costs of refinancing, financial experts typically recommend getting an interest rate that is 1 to 2% lower and having at least 20% equity in your home. If your interest rate would only change slightly, it may not be worth refinancing right now. Try our refinance break-even calculator to see what loan terms help you payback new loan costs the fastest.
Refinance Break-Even Calculator
In addition to lowering your monthly payment, refinancing to a lower interest rate also helps you build equity in your home more quickly because you’re paying the balance down faster. But remember, refinancing may extend your mortgage and could end up costing you more in interest. If your current loan only has 20 years left, refinancing to a new 30-year loan may save you each month but adding another 10 years to your mortgage could mean higher costs in the end. You also pay more interest at the start of a new loan – especially in the first 10 to 15 years. If possible, keep the length of your loan the same so you still pay your mortgage off in the same amount of time.
To save even more over the life of your loan, you can choose to put the extra savings from your refinance into an extra principal payment each month. If you can afford it, this can help pay your home off that much faster and you likely won’t feel any changes in your monthly finances.
Prepayment Savings Calculator
Refinancing to a Shorter Term
If you have room in your budget, you might consider refinancing to a shorter term loan of 10 to 15 years that carries a lower rate. Moving to a shorter loan will likely mean higher monthly costs, but your home will be paid off more quickly and it will cost you less interest overall.
As you evaluate this and other options, make sure your mortgage payment, taxes and insurance are less than 30% of your monthly income before taxes. And remember your overall debt payments such as credit cards, car payments and other loans should be less than 40% of your pretax income (also known as gross income).
Early Payoff Calculator
If you have equity in your home, you can get a cash-out refinance and use the cash to pay for home improvement projects or consolidate debt from credit cards, multiple mortgages or lines of credit.
Keep in mind, the equity you have in your home will drop if you choose a cash-out loan. For example, if your home is worth $250,000 today and your remaining principal is $150,000, then you have $100,000 in equity. If you take out $50,000 in cash with your cash-out refinance, you now have $50,000 in home equity.
If you use the money for home improvement, you may recoup some of the lost equity. On the other hand, if you choose to use the money to consolidate your debt from high-interest rate credit cards, it’s important to make sure you don’t charge too much on your credit cards again and lose your refinance savings.
Before moving forward with a cash-out refinance, use a debt consolidation calculator to add up the loans you want to combine and make sure 80% of your home equity (this is the maximum you can borrow) is enough to cover them all in a single loan.
Debt Consolidation Calculator
Refinance with Greater Nevada Mortgage
Greater Nevada Mortgage offers no-cost, no-obligation consultations to find the best fit for you and even offers refinancing options if you are upside down in equity.
Learn more about refinancing with Greater Nevada Mortgage or call us at (800) 526-6999.
*All loans subject to credit approval by Greater Nevada Mortgage. Terms and conditions of programs, products and services are subject to change without notice. Certain restrictions may apply. This is not a commitment to lend. Licensed by the Nevada Division of Mortgage Lending and California Department of Business Oversight under California RMLA. Equal Housing Opportunity