Home Refinancing Basics
What is Refinancing?Refinancing replaces your current mortgage with a new mortgage. Most homeowners refinance to lower the interest rate or shorten the term of their mortgage, allowing them to lower their monthly payment or pay off their mortgage faster.
If you’ve owned your home for a while and your home’s value is higher than your current mortgage balance, you may also be able to obtain a cash out refinance. Using the equity in your home, you can get funds to renovate or improve your home or pay down high-interest debt.
What is the Average Cost to Refinance?Similar to when you obtained your current mortgage, there are lender and third-party fees and other costs associated with a refinance, such as an origination fee, appraisal fee and closing costs, although refinance costs are generally less than costs associated with purchase-money mortgages.
While there is not a standard method to calculate the cost of refinancing your mortgage, the amount you will pay depends on your lender and the location of your home as closing costs vary from state to state. Some lenders allow you to “buy” a lower interest rate by paying “points”, or an up-front fee. Some offer a “no cost” or “zero points” mortgage which reduces the expense of refinancing, but keep in mind, the interest rate will likely be higher and therefore your monthly payment will be higher.
Is it Cheaper to Refinance with My Current Lender?Your current mortgage lender may be able to offer you cost effective refinance options and may be able to expedite the application process, however it is always best to contact other lenders and compare the rates, terms and costs available.
Should You Refinance Your Mortgage?More than half of all new mortgage loans in recent years were refinances. Depending on your current mortgage’s interest rate, you may be able to refinance at a lower rate. You will want to determine if the savings from a lower interest rate will cover the cost of refinancing itself. For instance, if you don’t plan to live in your home long enough to break even, refinancing may not be the right choice for you.
Don’t make the mistake of choosing a mortgage based only on the interest rate. With interest rates at historical lows, refinancing to a shorter-term mortgage may make sense, such as a 20 or 15-year term rather than the traditional 30-year. While a shorter-term can significantly reduce interest costs over the term of the loan, the principal portion of the monthly payment will be greater because there is less time to pay off the loan. You’ll need to take into consideration whether you have the cash flow to cover a higher monthly payment.