Refinancing: Why, When, and How

There has been considerable buzz about refinancing and low interest rates in 2020. Consequently, many Americans are taking advantage of these historically and near-historically low interest rates to save money, help build equity in their homes, or shorten the term of their mortgage with a refi. 

These are all worthy reasons to refinance. Is it a solid fiscal option for you? Consider the why, when, and how of refinancing to answer this question.

There are numerous reasons WHY you should refinance your existing mortgage. 

Refinancing is the paying off an existing loan and replacing it with a completely new loan. Why do homeowners go through the refinancing process? Simply put, to save money in the long run. Here are a few specific ways a refi does just that:

• Securing a lower interest rate:  Lower interest increases the rate you build equity in your home since you are paying less toward interest and more toward your home’s principal.

• Shortening term of mortgage: Converting from a 30-year to a 15-year term, for instance, will mean you are paying considerably less interest over the course of your loan. But here is a caveat to this general principle to consider: if your current 30-year mortgage carries a very low interest rate, you are better off committing to paying an extra mortgage payment every few months to shorten the term rather than refinance.

• Converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage: An adjustable-rate mortgage may seem like a great deal when interest rates are low. But potential rate hikes can cause uncertainty, and actual rate increases will raise your monthly mortgage payment. 

• Tap into equity to access a large sum of money: Financial emergencies happen. Refinancing provides a cushion for when unexpected and substantial expenses occur. It may also make sense to refinance to boost retirement savings, pay off higher-interest student loans, or finance a child’s education. Generally speaking, however, trading your home’s equity to purchase a car or pay of high-interest credit debt is not a good idea if you think you are in jeopardy of accruing more debt. 

Here is HOW you go about a refinancing.

Refinancing can cost between 2-6% of a loan’s principal. Since it can take several years – up to five years – to recoup your initial outlay, it is best to refinance only if you are going to be in your home for at least five years.

What does this 2-6% cost include? The refinancing application, a new home appraisal, a new title search, a home inspection fee, the lender’s attorney review fees, an origination fee (cost of establishing an account with the lending institution), and a possible points fee (payment made to the lender for a lower interest rate).

You will also need to qualify for the loan. Remember, you are applying for a completely new mortgage that involves a new underwriting process. The amount of equity you have in your home, your income, and your credit score will be considered. Your home’s value must exceed the loan’s value, your income must cover the monthly payment, and your credit must be solid.  

WHEN should you refinance? 

Now, when rates are so welcoming!

The general rule of thumb is when interest rates are 1-2% points lower than your existing rates. But some advisors even say that 0.5-0.75 a percentage point is worth a refi. 

And if you plan on remaining in your home for an extended period of time. And if you believe you’ll be approved. 

Check out our refinance calculator or let Aksarben Mortgage professionals crunch the numbers to ascertain if refinancing is in your best interest. We can help you determine your new monthly payment and the total cost of refinancing, as well as show you what your savings will be. Contact us today to save big in the future.