The Decision to Refinance Your Mortgage (includes calculator)
Mortgage refinancing is the replacing of an existing mortgage loan
with a new mortgage loan that offers different terms. When refinancing a mortgage, the lender typically charges an up-front payment based on a
stated percentage of the total amount borrowed. This fee is most
commonly expressed as “points”, with each point equaling 1% of the
total loan amount. The lender may offer the borrower a variety of options between points and interest rates as paying more points can lead to a
lower interest rate on the loan. Below are several things to consider when deciding whether to refinance a mortgage.
Reasons to Refinance a Mortgage
Lower your interest rate: The interest rate on a mortgage is the fee the lender charges for borrowing the money. The interest rate is a major factor in calculating the monthly payment, so it is in the borrower’s best interest to get the lowest interest rate possible. Many financial experts will tell you that when interest rates are at least 1% lower that what you are currently paying, you should consider refinancing.
Change the type of mortgage: Many borrowers will consider refinancing to get out of an adjustable rate mortgage (ARM) an into a fixed-rate mortgage. An ARM loan typically offers a lower beginning interest rate and then (often after three years or so) adjusts to the current prevailing interest rate. If interest rates decrease during the initial period of the ARM, it may be in the borrower’s best interest to refinance and lock into the new low rate.
Get cash from your home: The equity you have in your home can be used to pay for significant expenses, like college tuition, home improvement, or paying off high-interest credit cards.
Mortgage Refinance Breakeven
Many homeowners make the decision of whether or not to refinance based on the length of time it will take to recover the refinancing fees. The shorter the timeframe to breakeven, the better. Use the calculator below to arrive at your own breakeven timeframe.
The Downside to Refinancing a Mortgage
For borrowers who have been paying down their mortgage for a long time, refinancing might not make sense because it extends the timeframe of the loan, potentially increasing total costs over the long-term. Additionally, borrowers who have had any payment issues on their current mortgage may not qualify for a rate that is low enough for refinancing to make sense.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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