Tue Feb 18 2020
If you’ve paid attention to the news in the last year or so, you’ve probably heard a fair amount about mortgage refinancing.
In July, CNBC proclaimed that eight million homeowners were leaving cash on the table by not refinancing. In December, the publication noted that weekly refinance rates were up 314 percent from a year earlier.
Even if you previously had no plans to refinance your mortgage, you may have started wondering whether doing so would save you money. If you’re still wondering, you’re in the right place. You’ll learn:
Read on for details.
A refinance loan is a type of mortgage loan. It replaces the original mortgage you took on to pay for your house. You take out the refinance loan to pay off the original loan, then make mortgage payments to the lender who originated your refinance mortgage.
As the name of the loan implies, homeowners often take on refinance loans when they want to rework the financial terms of their mortgage – often so they can save money in some capacity.
It’s common for homeowners to refinance in order to:
And because refinance loans are themselves a type of mortgage loan, homeowners have to go through roughly the same process to get them as they do with an original mortgage. Notably, this means you have to qualify for the loan itself and that you have to pay certain associated costs (including a home appraisal and closing fees).
Because of those two factors, a mortgage refinance isn’t right for everyone. To get an idea of whether refinancing your mortgage can improve your financial situation, let’s take a look at when refinancing typically makes financial sense.
When you refinance your mortgage, you have to pay for a home appraisal and closing fees.
The goal of refinancing a mortgage loan is typically to save money in some way, either on your monthly payments or on the overall cost of your loan (as outlined above).
For individual homeowners, there are a few common triggers that indicate that it’s a good time to research whether taking on a refinancing loan makes financial sense, including these:
But these triggering incidents are only part of the equation. Because refinancing a mortgage isn’t free (experts note that it usually costs between three and six percent of your loan’s principal), it’s important to run the numbers before leaping headlong into a refinance loan.
There are a few numbers you might want to consider as you evaluate the potential benefits a refinance could bring you:
Notice we haven’t offered any definitive guidelines here on when a homeowner should refinance a mortgage. That’s because everyone’s situation is different and may be affected by a number of variables, including:
Because of this, it’s also possible that refinancing your mortgage could end up costing you more than the original loan. We really can’t emphasize enough how important it is to run the numbers for your particular case.
If you’ve run the numbers and determined that refinancing your mortgage makes financial sense, it’s time to start the actual process. First, decide which of the following is your goal for refinancing:
Once you’ve defined your goal, do some online research to figure out what interest rates currently are. Then do some ballpark calculations: plug your numbers into an online refinance calculator to see what kind of savings you can expect.
If the initial numbers look good, it’s time to get in touch with lenders. It’s best to compare offers from three to five lenders to ensure you’re getting the best deal. As you do this:
They’ll get back to you with loan estimates (including closing costs). Use these numbers to run your refinance calculations again.
If everything still looks good, it’s time to go with the lender who offered you the most attractive deal and ask to “lock” your interest rate. Locking guarantees the rate for a set number of days, during which time you and your lender can try to close the loan.
This part of the process should remind you of getting your original mortgage, because it’s roughly the same – except you won’t be moving into a new house when you’re finished. At this point, that’s probably a big relief!
If you’ve never refinanced a mortgage, the process can be intimidating. It’s a major financial decision and you may feel like you’re on your own to make it.
In reality, though, your lender should be motivated to help you. Lenders make money on mortgage refinances, so it’s in their best interest to help borrowers determine whether refinancing makes sense.
And don’t be surprised if your lender doesn’t reach out to you proactively about refinancing opportunities available to you. Even though most banks and lenders have a lot of data on their customers, few have effective systems for effectively tracking when those customers might benefit from various financial products.
The bottom line: refinancing a mortgage can lead to significant savings for some homeowners. If you’re curious about whether you should refinance, play around with some online calculators to get an initial idea of how the numbers add up for you.
Keep in mind, though: refinancing a mortgage does not make sense in every situation. It’s important to do your homework to make sure you end up in a loan that works with your long-term financial goals.
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