Borrowers often consider refinancing when they have a chance to get a lower interest rate or a lower monthly payment. However, if you’re refinancing to save money or take pressure off your monthly budget, you’ll want to consider a variety of factors including how long you plan on staying in the home, closing costs and how long it will take for you to break even on your refinance.
You can reach out to a Newrez mortgage expert today if you want to learn more.
Click to navigate:
1. What Does It Mean to Refinance A Mortgage?
2. Common Reasons Homeowners Will Refinance
3. Questions to Ask Before Refinancing
4. Common Mortgage Refinance Scenarios
5. The Bottom Line: When Refinancing Makes Sense
What Does It Mean to Refinance a Mortgage?
Refinancing means replacing your current mortgage with a new mortgage. That new loan might be a better option for you because it allows you to change one or more of the following: your interest rate, repayment term, monthly payment, loan type or loan balance.
The key question is not simply, “Can you get a lower rate?” The better question is: Will refinancing help improve your overall financial position?
Common Reasons Homeowners Will Refinance
Borrowers often consider refinancing when the financial benefit clearly outweighs the cost of getting the new loan.
Common reasons to refinance include:
- Shortening the loan term
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage
- Lowering the interest rate
- Reducing the monthly mortgage payment, either by lowering the interest rate or extending the loan term
- Taking cash out of home equity
- Consolidating higher-interest debt (using cash from the refinance)
- Funding home improvements (using cash from the refinance)
- Removing mortgage insurance
- Improving long-term financial flexibility
Questions to Ask Before Refinancing
How long do you plan to stay in the home?
Refinancing can come with upfront costs. If you plan to move soon, the savings you get from refinancing your mortgage might not make up for the initial expense of refinancing. If you plan to stay for at least long enough to break even on your refinance, this can help you save in the long term.
What are the total closing costs?
The total closing costs impact the cost of refinancing. If the closing costs (and the refinance) are very expensive, the new loan may not be worth it. You should review costs carefully and compare them with monthly savings.
Will the new loan increase or decrease total interest?
A lower monthly payment can still result in more total interest if the loan term is extended. You'll want to compare both monthly payment and lifetime cost.
Will the new payment fit comfortably in your budget?
Refinancing should create or improve financial stability. Even if you’re saving money in the long run, if your new monthly payment is too high, the loan may not be practical.
Common Mortgage Refinance Scenarios
Scenario 1: Lower Rate and Long-Term Stay
You have a mortgage rate that is meaningfully higher than the rates you might be able to qualify for today, and plan to stay in the home for several more years. If the monthly savings recover closing costs within a reasonable period, refinancing may be a strong choice.
Scenario 2: Lower Payment Needed for Budget Relief
You need more cash each month because household expenses have increased. Refinancing so you have a lower mortgage payment may help, even if it extends the loan term. You might wind up paying more interest in the long run, but it can take pressure off your monthly budget.
Scenario 3: Pay Off the Home Faster
You can afford to make higher payments and want to reduce long-term interest. Refinancing into a shorter loan term may help you build equity faster, lower your overall interest rate and own the home sooner.
Scenario 4: ARM Adjustment Is Approaching
You have an adjustable-rate mortgage and want to avoid uncertainty. Refinancing into a fixed-rate mortgage means you’ll have predictable principal and interest payments each month and can make budgeting easier.
Scenario 5: Home Equity Needed for Renovations
You've built equity and need funds for major home improvements. A cash-out refinance can give you access to the money you need to reinvest in the property.
Scenario 6: High-Interest Debt Is Straining Cash Flow
You have significant credit card, personal loan or other high-interest debt. A cash-out refinance can give you the means to pay it off and may reduce your monthly obligations, but you’ll want a plan in place to avoid taking on new high-interest debt. Keep in mind, this replaces unsecured debt with debt secured by your home, which could increase your risk of foreclosure if you’re unable to keep up with payments.
The Bottom Line: When Refinancing Makes Sense
After evaluating all of your options, you may decide that it makes sense to refinance, especially if it will take pressure off your monthly budget or save you money in the long term. That’s why it’s important to review your finances carefully before making a decision. Reach out to a Newrez loan expert today, and they can help walk you through your options.
By refinancing an existing loan, the total finance charges may be higher over the life of the loan.
