Should I Refinance My Mortgage?

Part II: Exploring Your Refinance Loan Options and Getting Qualified

Last month, we gave you an introduction to refinancing by talking about what refinancing is and going over a few reasons you might pursue a refinance. Today, we’ll talk about the factors that will impact your decision and your ability to refinance as well as review the types of refinance loans that are available. It’s critical that you understand what might prevent you from refinancing (or cause you to reconsider). If you decide refinancing might be the right move for you, then knowing what sorts of refinance loan products are available will help you understand how to use a refinance as a tool to improve your financial health.

Note: Should I Refinance My Mortgage? is designed specifically for homeowners. If you’d like information on refinancing your commercial loan, check out this post.

Factors Affecting Your Refinanced Loan must include Ability, Options to Explore, Decision-Making, and More

Now that you know what refinancing is and its role in improving your financial health, it’s important to realize that the amount you could save from refinancing is highly variable and figuring out just how much you might save is a complicated task. Also, whether you can refinance at all depends on a number of factors. This post will help you understand the various refinance loan options and understand what’s involved in getting qualified. Along the way, you’ll also need to identify the most appropriate type of refinance loans for you. Let’s dive in!

How Much Can I Save By Refinancing?

As you might recall when you last took out a mortgage (which might have been just a couple of years ago or could have been more than 20), your loan’s interest rate plays a crucial role in determining how much your home will end up costing you when the entire loan is paid off—and that amount could vary wildly.

For example, if you bought a home today, taking out a loan for $500,000 at an interest rate of 5% on a 30-year fixed-rate loan, your monthly payment would be $2,684.11 (remember, this number excludes taxes and insurance). After a total of 360 payments, you’d have paid a total of $466,278.92 in interest, nearly twice the cost of your original loan. However, if you knocked that interest rate down to 3.75% on the same loan, you’d pay considerably less each month—only $2,315.58—and, after 30 years of payments, you’d have only paid $333,608.06 in interest—a huge difference!

Refinancing a Fixed-Rate Loan or an ARM

So, if you have a fixed-rate loan, ensuring your interest rate on your refinanced mortgage loan is comparable or, ideally, lower will be critical. If interest rates are currently lower than they were when you took out your current mortgage, you should consider refinancing. Or, if you’re comfortable taking chances, you could wait to see if they drop even lower before making your move.

But what about if you have an adjustable-rate mortgage (ARM) loan? These typically start out with very low interest rates for an introductory period (often five or seven years), before adjusting up or down once a year according to market conditions. If rates are good when you adjust, that’s great for you, but if not, you may consider refinancing into a better rate. While many people caution against refinancing back into an ARM (or getting one in the first place), they can be a very useful savings tool if you’re comfortable with the terms. Read more on ARMs here.

What’s Going on With You

Can you get the lowest interest rate available? Is your financial health in better or worse shape since you took out your mortgage? If it’s in better shape and rates are good or better, you should consider refinancing. However, if you lost your job, defaulted on a loan, or just bought an expensive car or sent your kid to college, your finances may be taking a hit. If you can manage it, this may actually be the ideal time to refinance so you can free up some cash (more on the cash-out refinance later), but whether you can pull it off depends on how much your credit was affected by the changes. A mortgage broker can assess your situation and determine whether you could refinance as well as review the types of refinance loans available to you.

Are you currently in the process of undertaking a major home renovation that would affect your home value? If so, you might want to wait until you’ve completed the renovations, as this will boost your home value and potentially enable you to avoid paying mortgage insurance on a refinanced loan. Of course, you might also need more cash to complete those renovations in the first place. Again, a mortgage broker can look at home values in your area, consider the type of renovation you’re taking on, and help you determine whether to try to refinance now or wait until the work is done.

These are just a few of the factors that affect whether to refinance. Your mortgage broker can discuss others with you that are specific to your situation.

Types of Refinance Loans

As you’re determining whether moving forward makes sense, you’ll also need to have a purpose in mind, which will ultimately help you choose the type of refinance loan for you:

Rate and Term Refinance: This is fairly straightforward and involves refinancing simply to get a better rate and/or to change the length of your mortgage loan, both of which will impact how much you pay monthly and over the lifetime of your loan. It also might involve going from an ARM to a fixed-rate loan.

Cash-Out Refinance: This loan might involve the same rate and term, but you’ll take out more than your home is worth in order to get “cash out.” you can use this cash to consolidate debt, pay for college, or make renovations to your home. It’s the most affordable type of loan out there (because the interest rates are much lower than with other loans), so this is an excellent way to borrow money if you can manage it.

Refinancing Out of an FHA Loan: To get out of paying the insurance premiums (MIP) on FHA-backed loans, you must refinance into a conventional loan once your loan-to-value ratio drops below 80%. Because insurance can cost hundreds of dollars per month, this move alone can be a real money saver.

Home Affordable Refinance (HARP)

If you’re underwater on your mortgage, and your home is owned by Freddie Mac or Fannie Mae a HARP loan can help you lower your rate, get a shorter loan, or change from an adjustable rate to a fixed-rate mortgage. The program is scheduled to expire in December 2018 though, so there’s very little time left for this program.