Refinancing your mortgage is a major decision that requires thoughtful consideration and planning. Before obtaining a new home loan, it’s important to take an honest look at your current financial situation, the amount of equity in your home, your current monthly payments, the length of your mortgage, and available interest rates.
What does refinancing mean?
Refinancing your mortgage involves taking out a new loan to pay off the original mortgage on your home. Refinancing can help homeowners cash out some of their home’s equity, obtain lower interest rates, or reduce their monthly payments. However, the process does come with added costs.
Is refinancing your mortgage the right choice for you? Here are a few questions that will help you decide:
1. Can I afford to refinance my mortgage?
Refinancing may save homeowners money over a long period, but it will likely have a detrimental impact on their budget in the short term. Refinancing a mortgage isn’t free, and numerous expenses will be added to the new loan. Fees can reach up to $4,300, including the mortgage application fee, inspection fee, survey fee, attorney and closing fees, loan origination fee, title search and title insurance, property appraisal fee, and more. These charges will be listed in the loan’s closing disclosure and should be looked over carefully.
Although no-closing-cost refinancing may sound like a great idea, it will still cost you in the long run. This type of refinancing doesn’t add on closing charges up front. Instead, borrowers are required to pay higher interest rates over the length of the loan, or closing costs are added to the total balance of the loan, making monthly payments higher.
2. Will I benefit from refinancing my mortgage?
Depending on the current state of the housing market, refinancing your mortgage could dramatically lower your monthly payments and interest rate, especially if you’ve already paid off a large portion of your current loan. Refinancing could also help homeowners pay their mortgages off in a shorter period — a 30-year mortgage could be refinanced to a 15-year or even 10-year loan. Although this may increase your current monthly payments, you’ll save significant cash by paying less in interest.
Refinancing also makes sense if borrowers wish to switch to a different type of mortgage. If they currently have an adjustable-rate mortgage, they may save money over time by switching to a fixed-rate mortgage, which maintains the same interest rate over the length of the loan. Borrowers can even switch from a fixed-rate loan to another fixed-rate loan if they can obtain a better rate.
Additionally, if you currently have a Federal Housing Administration (FHA) loan that requires monthly insurance payments, refinancing may be helpful. If you have significant equity in your home and your loan-to-value ratio is less than 80%, refinancing could eliminate private mortgage insurance payments (PMI) and reduce your monthly payments.
3. How much of my mortgage is already paid off?
If you’ve already paid off a significant amount of your current mortgage, or you’re coming to the close of a 30-year fixed-rate loan, most of your monthly payments are going toward the loan’s principal amount. Refinancing at this point probably wouldn’t benefit you and may cost you more money in interest payments over time.
You also plan to remain in your current home for a certain period. This ensures that the money you save by refinancing will exceed the short-term costs. If you plan to relocate before this happens, refinancing may not be the best option.
Finally, take a look at how much equity you have in your home. If you owe less than the total value of your home, you have equity. This equity can be traded for cash that can go toward major renovations, upgrades, large purchases, or debt repayment. However, this could leave you with a higher loan balance. A home equity line of credit or home equity loan may be a better option.
Learn more about refinancing.
Texas Tech Credit Union can help you explore refinancing options. Whether you’re interested in switching from an adjustable-rate mortgage to a fixed-rate loan or hoping to pay off your mortgage in a shorter period, we can help! Download a copy of our Home-Buying Guide. Still have questions? Talk to one of our mortgage experts today.