Refinancing a Mortgage: Does it Make Sense for You?

Most homebuyers participate in obtaining a mortgage in order to purchase their homes, whether it’s a first home, an upgrade or part of their down-sizing process. Part of that process is rate-shopping to ensure the mortgage the buyer secures is most beneficial to their personal finances. But what about homeowners who are several years into paying off a mortgage? Should they re-evaluate the loan used to originally purchase the home? Are rates lower now than at the time of their purchase? Or did the buyer select a variable rate loan rather than a conventional loan and now prefers more stability in the payments?

Refinancing the mortgage could be an option for homeowners who desire to change their current payment, interest or mortgage type. When a mortgage is refinanced the original mortgage is paid off (not thrown out) and a new mortgage is created. Due diligence is still required to ensure the new mortgage truly is more desirable than the original mortgage. One of the main advantages of refinancing, regardless of equity, is reducing the interest rate; a lower interest rate can have a significant effect on monthly payments.

An alternative reason to refinance is to obtain money for large purchases, such as a new car or to pay off credit card debt. To do so the homeowner must have equity in their home (i.e. have paid off a portion of the mortgage) in order to receive a home equity line of credit (HELOC). The HELOC is based on the appraised value of the home and what percentage of that value the lender is willing to loan. The money owed on the original loan is subtracted from that amount, and the remaining balance is loaned to the homeowner. When a HELOC is used to make improvements to a home homeowners are able to take out larger loans as the appraised value increases (after renovated value) and the balance of the mortgage decreases.

There are some risks to refinancing, including penalties incurred as provided in the agreement with the lender of the original mortgage. Additional possible fees include paying an attorney to review paperwork, title insurance and title search, points and fees incurred in loan origination and additional bank fees. Due diligence on the part of the homeowner is critical to ensure the cost of refinancing does not exceed the anticipated benefit to do so.

Refinancing a mortgage is a personal decision, but can have long-term benefits for homeowners who desire to lower their monthly expenses. Talking to multiple lenders helps ensure consumers make the best decision for their financial future.

 

Header image sourced from US Bank.