Mortgage Refinancing

Refinancing your mortgage (getting a new loan to pay off and replace a current one) is generally done to change the terms of your mortgage in a favorable way. You might refinance your mortgage in order to get a lower interest rate, a different term, to avoid paying PMI (private mortgage insurance), or to take cash out of your home's equity (borrow money based on the value of your home). Here are a few things you should consider before refinancing:

Costs of Refinancing

Like getting your original mortgage, refinancing has associated costs beyond what you're looking to borrow. There can be new appraisal fees, lending fees, fees associated with the title, escrow fees, insurance fees, taxes, etc. These fees must be taken into account when balancing the pros and cons of refinancing. Because monthly payments on the front end of a loan go more toward interest than principle, if you're not going to stay in your house for the long term, the additional costs of refinancing may not be offset by the lower monthly payments you might achieve. When using our Mortgage Refinancing Calculator, be sure to enter accurate closing or refinancing costs. Our calculator will tell you how long you'll have to stay in your house for the interest savings to overtake the closing costs.

Benefits of Refinancing

There are a number of reasons you might choose to refinance:

  • To reduce your monthly payment by reducing your interest rate
  • To reduce your monthly payment by increasing your term
  • To increase your equity by decreasing your term
  • To change the type of loan from an ARM to fixed, or vice versa
  • To borrow agains the equity in your home

The important question to ask yourself with all of the above, is will this actually be a benefit when all else is considered? If you can reduce your interest rate (and you've taken refinancing costs into account) that's always going to be a plus. But if you're reducing your payment by increasing your term, is that really a wise financial decision? What will you do with the extra money you'll have each month? If your plan is to invest it and you're able to make a higher return than your loan is costing you, then it would likely be a wise move. If you're considering increasing the equity in your home by shortening the term (and paying less interest), you'll be increasing your monthly payments. Could you have used those increased payments for something that will give you a greater return? Don't make the mistake of looking at your mortgage costs in isolation. Consider how refinancing will affect your other financial plans before you make a decision.