These are the best (and worst) reasons to refinance your mortgage

Here Are Best And Worst Reasons To Refinance Your Mortgage

These are the best (and worst) reasons to refinance your mortgage

Mortgage rates continue to fall, trending lower over the last three months. With rates remaining near record lows, you may be considering refinancing your current mortgage to save on monthly payments or even pull out cash for a renovation project.

Whether you’ve owned your home for a short time or you’ve had your mortgage for longer, a mortgage refinance should be carefully considered. After all, you’ll pay fees and have to go through the mortgage approval process again. You need clear goals to improve your overall financial picture when you refinance.

As you review the situation, here are the best (and worst) reasons homeowners decided to refinance.

Known as a “rate-and-term” refinance, this is the most popular reason homeowners refinance a home loan. Homeowners with a higher interest rate on their current loan may benefit from a refinance if the math pans out — especially if they’re shortening their loan term.

Right now, the economy is in a low-rate environment And, while the connection between the Federal Reserve’s target rate and mortgage rates is complicated, the fact that low rates make money less expensive to borrow could provide you with a way to come out ahead.

Shorter-term mortgages typically have lower interest rates than longer-term mortgages because you’re paying back the loan in less time, but your monthly payment will ly go up. A rate-and-term refinance can result in big savings for a homeowner if there’s room in their budget for it, says Kurt Johnson, senior vice president with Mr. Cooper, a Dallas-based mortgage lender.

“If you can afford to shorten the term of the loan and you are substantially lowering your rate, it could be a win-win as you’re paying off your mortgage faster and saving a ton of money on interest,” Johnson says.

Consolidate high-interest debt

If you have a hefty amount of high-interest debt on credit cards or personal loans, a cash-out refinance can help improve your cash flow and save you money in the long term, possibly even if you take a slightly higher mortgage rate.

The drawback to this move is that you’ll be unable to deduct the mortgage interest you pay on the cash-out amount that exceeds the current loan balance if the funds aren’t used to “buy, build or substantially improve” your home, according to the IRS.

Another consideration is that you’re securing unsecured credit card debt with your home. Be careful as you move forward, and make sure you can afford your new terms to reduce the risk of losing your home.

“There’s this myth that in order for a refi to make sense that you have to lower the rate by 1 percent or more, but I disagree,” says Elizabeth Rose, a certified mortgage planning specialist with AmCap Home Loans in Flower Mound, Texas. “Even with losing some mortgage interest deductibility, in the long run, it’s improving your cash-flow situation, saving you money and getting you out from underneath your debt quicker.”

Eliminate mortgage insurance

If you have a home loan with private mortgage insurance (PMI), a refinance could help lower your monthly costs, says Dan Snyder, co-founder of mortgage lender Homeside Financial based in Columbia, Maryland. Snyder is also CEO of Lower, a Columbus, Ohio-based direct online lender.

This is especially true if you have a loan insured by the Federal Housing Administration, or FHA.

While FHA loans can be a viable path to homeownership for borrowers with little savings or not-so-stellar credit, they come with a big downside: mandatory mortgage insurance. After paying an upfront premium of 1.

75 percent of the loan amount, most FHA borrowers continue to pay an annual mortgage insurance premium of 0.85 percent of the loan amount for the remainder of the 30-year term that cannot be canceled. That adds up over time.

To eliminate PMI, homeowners can refinance an FHA loan into a conventional mortgage once they gain 20 percent equity in their home.

Save money for a new home

Refinancing isn’t free; you’ll pay roughly 2 percent or more in closing costs, and it can take a few years to break even. Moving up to another home before you’ve recouped those costs means you’ll probably lose money even if you manage to lower your monthly payments in the interim.

“If a homeowner is planning to move within the next five years, they may not get as much benefit from a refinance,” Snyder says. “Often, the costs (of a refinance) could outweigh the benefits.”

A refinance break-even calculator can help you decide how long you should stay in your home after a refinance to recoup the costs.

Splurge on luxury purchases with a cash-out refinance

Tapping your home equity an ATM to misuse it without a clear financial goal in mind is dangerous, Rose cautions. Using a cash-out refinance to pay for a new car or RV, invest in iffy ventures or to splurge on other luxuries can lead to even more financial turmoil, she says.

While it may be tempting to get the money at a low rate, remember that you’re securing these purchases with your home. If you run into trouble later, you’ll have less equity to tap and depreciating assets that can drag you down.

“There has to be some sort of net tangible benefit to the homeowner to refinance,” Rose says. “I don’t recommend cash-out refinancing for anything that won’t add security to or improve your financial picture.”

Move into a longer-term loan

Snagging a lower rate and lowering your payments may seem a great move, but refinancing when you’re already halfway or more through a 30-year mortgage is rarely a good idea, says Steven Jon Kaplan, CEO of True Contrarian Investments in New York City.

“Before you refinance, the most important consideration is how much interest is being paid throughout the remainder of the loan, and how long the loan will continue,” Kaplan says.

“Because all mortgage loans are amortized the same way, almost all of the monthly payments in the early years consist of interest, while almost all of the payments in the final years of a mortgage consist of paying down the principal.

“When you’re in the final half of a mortgage, such as the final 15 years of a 30-year mortgage, it’s a very bad idea to refinance because you are finally at a point where you are paying back more principal than interest. When you refinance, the amortization begins from scratch so you will waste the first decade or so paying off almost all interest.”

Pay off your home faster if you haven’t met other financial goals

Refinancing into a shorter-term loan solely to pay off your loan faster can short-change you on other financial goals. More of your money will be tied up in your house that could be put toward increasing your retirement account contributions, college fund savings, paying down debt or making investments with higher returns.

After you’ve checked off those boxes and if the spread between your current interest rate and a shorter-term refinance rate isn’t that large, consider knocking down your mortgage debt another way, recommends Johnson, the Mr. Cooper lending executive.

“You can always pay more principal on your existing mortgage to pay it off in 15 years while giving yourself the option of making smaller payments if you are faced with financial hardship (in the meantime),” Johnson says.

You recently bought your home

Even if rates dip slightly within the first year of your home purchase, refinancing into another mortgage too soon isn’t advisable, Johnson says.

For example, the 30-year mortgage rate might be at a record low, but it’s still not a full percentage point lower than it was at the same time last year. By the time you include refinancing costs, you might not come out ahead.

“This is lender churning, which is usually beneficial for the lender but, when refinance costs are considered, rarely benefits the customer,” Johnson says.

Featured image by Westend61 of Getty Images.

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These are the best (and worst) reasons to refinance your mortgage

These are the best (and worst) reasons to refinance your mortgage

The coronavirus pandemic has taken a heavy toll on the U.S. economy, and while the housing market has began its recovery from the economic downturn, many homeowners may be turning to mortgage refinancing instead of selling their home.

The good news is that now may be a better time than ever to refinance your home mortgage. National mortgage interest rates have hit a record low, making it easier to score a lower interest rate on quite possibly your largest debt. You can explore your mortgage refinance options by visiting Credible.

But just because rates are favorable, it doesn’t mean refinancing is the right step for you. Here are some good reasons to consider it, along with some reasons that should make you think twice.

The best reasons to refinance your mortgage

A mortgage refinance can serve many purposes, but here are the three that may make the most sense:

  • Reduce your interest rate and monthly payments: When you replace your existing mortgage loan with a new one that has a lower interest rate, it could reduce your monthly payment and save you thousands of dollars in interest. Plus, if you replace a loan with, for example, 25 years left on it with a new 30-year loan, that will also help reduce your payment.  
  • Expedite the pay-off process: If you can afford a higher monthly payment and want to eliminate your mortgage debt faster, you can refinance your loan with a shorter repayment term. Combine that with a lower interest rate and you’ll stand to save a lot of time and money. Use Credible's free online tools to see what rates you qualify for today.
  • Debt consolidation: With a cash-out mortgage refinance, you can tap some of your home’s equity and get cash, which you can use to pay off high-interest debt. If you do this, though, it’s critical to ensure that you can afford your new monthly mortgage payment, which may be higher than your current one. Also, take steps to avoid replacing your consolidated debt with new debt.


Worst reasons to refinance your mortgage

Depending on your current financial situation and your plans with the home, you may be interested in using a mortgage refinance loan to resolve short-term concerns. However, it may not be the best to use a long-term financial solution to do it. Here are some reasons that may not work in your favor in the long run:

  • You need quick cash now: It’ll take roughly a month to refinance your mortgage loan, which won’t help you with an emergency situation. Also, refinancing can be expensive, with closing costs ranging from 2 to 6 percent of the loan amount. If you need cash fast, consider applying for a personal loan instead. You can get prequalified and compare multiple loan options by visiting Credible.
  • You don’t plan to stay in the home very long: Getting a lower monthly payment can save you money, but only if you stay in the home long enough to break even on the loan’s closing costs. For example, if refinancing reduces your monthly payment by $100 and you paid $5,000 in closing costs, it’ll take 50 months for you to start seeing actual savings from the new loan. If you don’t plan to stay in your home that long, you’ll actually lose money.  
  • Tap your equity for non-urgent issues: A cash-out refinance can be a great way to consolidate debt, but if you want to use your equity to live beyond your means or pay for something that’s nonessential, you may ultimately regret it when you’re stuck with a higher monthly payment for the remainder of your loan. 


How to decide if refinancing your mortgage is right for you

Refinancing a mortgage loan is a significant financial decision, and it’s important to understand your motivations before you start shopping around. Take some time to think about how the decision can affect you both now and in the future.

Also, run the numbers to make sure you’ll actually save money with a mortgage refinance — whether that’s through interest savings on consolidated debt or because of a reduced monthly payment.

If you’re not certain, consider consulting with a financial advisor, who can provide you with objective, expert advice on the matter. If you decide to refinance, visit Credible to compare rates and other terms from multiple banks and lenders in one place.



18 Reasons to Refinance Your Mortgage

These are the best (and worst) reasons to refinance your mortgage

There are many reasons to refinance your mortgage, some obvious and some a bit more obscure and/or different.

I figured I’d compile a list of the many reasons I can think of to refinance.

Some of the situations are complete opposites of one another and will depend on your unique financial goals and/or risk appetite.

But most will be appealing at times when interest rates are low, as they are now.

1. To get a lower interest rate

This one is the no-brainer that everyone will agree on. If you want a lower interest rate then refinancing your mortgage is the way to go, assuming mortgage rates are lower now than when you took out your original mortgage.

The classic rate and term refinance allows homeowners to reduce their interest rate so they can enjoy a lower monthly payment.

The potential downside to this is resetting the clock on your mortgage, though you can also go with a shorter term at the same time to avoid that.

2. Because your borrower profile has improved

Another reason to refinance has to do with your unique borrower profile.

Say you improved your FICO scores over the past year and cleaned up some other negative stuff. Or perhaps your home value increased enough to push your LTV into a lower tier.

It’s also possible that your new loan amount could fall below the conforming loan limit, thereby opening up new loan programs and potentially providing even greater savings.

In short, if your borrowing profile has improved significantly since you first took out your home loan, you might be entitled to a much lower interest rate than what you previously qualified for.

This could be a good time to inquire about a refinance to save some money each month.

[How soon can I refinance my mortgage?]

3. To change loan products (FHA to conventional)

It could also be that you started out with a loan product you weren’t too fond of because it was the only way to qualify for a mortgage.

But now that you’re a better borrower with more home equity (thanks to all that home price appreciation) you’ve got more loan options to choose from.

Instead of paying mortgage insurance for life on an FHA loan, you can refinance your mortgage into a conventional loan instead.

This will allow you to remove that pesky and expensive lifetime MI while potentially snagging a lower interest rate at the same time. Talk about a win-win!

4. To reduce the loan term

Then we’ve got the folks who want to aggressively pay down their mortgages, or at least not pay them down at a snail’s pace over the next three decades.

If this is you, there is a huge benefit to refinancing from a 30-year fixed into a shorter term loan such as the 15-year fixed. You pay a lot less interest and own your home much sooner.

These shorter-term mortgages also come with lower interest rates so you can pay your mortgage off a lot faster without potentially breaking the bank, depending on the rate you had and where rates are today.

5. To increase the loan term

The exact opposite group might refinance to extend their loan term, which will cost them a lot more in interest but save them in monthly payment.

Not everyone wants to pay down their mortgage in three years and for some it’s very difficult to make large monthly payments.

Perhaps a change in circumstance means a 30-year term is more sustainable moving forward.

Others may simply want to slow mortgage repayment and put their money into alternative investments, whether that’s the stock market or a new investment property.

6. To switch to a fixed-rate mortgage

We’ll put this in the common reasons to refinance pile. Just about everyone will suggest that you refinance an ARM and into a fixed mortgage if you think interest rates will rise.

The same is true if your hybrid ARM that was fixed for X amount of years is about to hit its first rate adjustment.

For example, if you originally took out a 5/1 ARM and it’s nearing the 60-month mark.

To avoid the costly rate reset you can move to a FRM before that happens. And with rates so low today, you might even get a lower fixed rate than what you had on your ARM.

7. To go adjustable instead

Of course, things also move the other way. It’s entirely possible to switch from a boring old 30-year fixed mortgage to an ARM if you want some payment relief, or simply feel you’re overpaying.

It’s also possible to refinance one ARM and into another ARM to not only obtain a new (hopefully lower) rate but also restart your fixed-rate period on the new ARM.

Plenty of wealthy individuals move from ARM to ARM to take advantage of cheap short-term rates while they put their money to work elsewhere.

8. To go fully-amortized

Another common scenario might be a borrower with an interest-only mortgage who is facing a recast. The IO period typically only lasts 10 years before the mortgage must be paid back in full.

To avoid a steep monthly payment increase, a homeowner might opt to refinance the IO product and into something fully-amortizing. Or perhaps even another IO product to extend that benefit.

9. To go interest-only

Conversely, a borrower sitting on a lot of home equity might decide it’s time to make interest-only payments to improve monthly cash flow.

This can also free up cash for other expenditures or investments the homeowner may be looking at.

After all, you don’t always want all your eggs in one basket if you’ve already got a ton of them in your house.

10. To get cash your home

Speaking of cash flow, you might refinance simply to get cash your home.

The age-old cash out refinance is a great way to free up your home equity and put it to work elsewhere.

Perhaps you want to make some home improvements, or buy a second home or an investment property. Maybe you need some money to pay for college tuition.

Or you simply want to diversify and move your cash your home and into the stock market instead.

11. To buy someone out

In certain situations, you may need/want to add or remove someone from title and/or the mortgage. If this is the case, a refinance can be an appropriate vehicle to do so.

Maybe there was a divorce and you’re buying someone out. Or maybe you’re ready to fly solo and remove mom and dad as co-signers.

Again, this could be a good time to snag a lower interest rate and/or make a loan product change too assuming it’s favorable.

12. To protect your investment

You might also refinance to tap some of the equity you’ve gained over the years.

Home values are known to seesaw over time and it could be a good opportunity now to get some of that cash for the future.

It doesn’t hurt to put aside some dry powder, especially when interest rates are low.

And if you can do so while home values are high and your property is owner-occupied, that cash can be put to work elsewhere. Perhaps to buy another home if property values drop. Diversify.

13. To drop PMI

I spoke about switching loan products to drop mortgage insurance, but you can also dump private mortgage insurance by refinancing if you’ve got a low enough LTV.

If your home increased in value and/or you paid it down enough to ditch the PMI, a refinance might save you a lot of money from the absence of said PMI.

It’s actually a one-two punch because the lower LTV can help you qualify for a lower interest rate as well!

14. To apply a lump sum to lower your LTV

Similarly, you might have come across some money recently and as such have the ability to take a big chunk your mortgage balance.

If you’re one of those people who s to pay down the mortgage as quickly as possible, applying a lump sum to lower the balance (and the LTV) will lead to a lower monthly payment, assuming you refinance (or recast).

But paying extra won’t lower future payments unless you do one of those two aforementioned things.

So those looking for actual payment relief could do a cash in refinance.

A lower interest rate and/or shorter loan term could apply here as well to really speed up the loan payoff if that’s your goal.

15. To consolidate multiple mortgages

Here’s a classic reason to refinance. You’ve got multiple mortgages (hopefully just two) and want to consolidate them into a single loan.

A refinance is often a great way to accomplish this, especially if you wind up with a lower interest rate to boot.

Many second mortgages have sky-high interest rates or are adjustable (hello HELOC), so this can be both a conservative strategy and a money-saving move.

16. To consolidate other debt

Another typical reason to refinance is to consolidate other non-mortgage debt, such as credit cards and other higher-APR debt.

Mortgages tend to have the lowest interest rates around, especially right now, and they allow you to pay the debt back very slowly, which makes it easier to manage.

Just be careful not to go on a spending spree because you still haven’t paid off the old debt, you’ve merely transferred it.

It’s not an excuse to spend more and accrue more debt, it should be a strategy to get debt more economically.

17. To access a loan program before it’s gone

You may also want to refinance to take advantage of a home loan program before it’s gone.

This could be a specialty program such as HARP, which allowed underwater borrowers to refinance, or a guideline change the FHA’s move to lower the max LTV on cash out refis from 85% to 80%.

There may also be a program a specific lender is offering for only a limited time. If you what you see, it might be wise to bite now to avoid missing out.

18. Simply because you can

One final reason I can think of to refinance is simply because you can, assuming things change for the worst financially.

There’s never a guarantee you’ll qualify for a mortgage in the future. Heck, it’s possible you might need today’s low interest rates just to stay below the DTI limit.

You could also run into some sort of financial hardship a job loss, or rent out your home that you later wish to refinance.

Just take COVID-19 as an example of a completely unforeseen situation that has affected millions of homeowners.

Lots of these folks may not be able to refinance their mortgages due to missed payments or forbearance requests.

Perhaps it makes sense to refinance now while you know you qualify and the home is owner-occupied. The terms you receive should be better.

Read more: Use a refinance calculator to determine if it makes sense for you or check out my list of refinance questions and answers.


8 reasons to refinance your mortgage

These are the best (and worst) reasons to refinance your mortgage

With home loan interest rates seeming to hit lows often, it can be maddening for homeowners who want to refinance their mortgage at the lowest interest rate they can find. What’s low today could be lower tomorrow.

When, exactly, is the best time to refinance your mortgage? It all depends on your situation and reason for refinancing. Getting a lower rate is probably the main reason people refinance their home loans. But there are others. Here are eight of them, starting with the most obvious one.

Lower interest rate and lower payment

Refinancing to a lower interest rate will save you money — on your monthly mortgage and interest paid over the life of the loan.

“Once people decide to refinance to satisfy a need, they still need to get a loan done successfully,” says Todd Huettner, president of Huettner Capital in Denver.

“Most people focus on the rates and fees without realizing they can often save far more and have a better experience by structuring their loan properly and creating a lock plan to determine when to lock, at what rate, and for how long to lock.”

Huettner recommends finding your “target rate.” First, determine your “regret rate,” or “the rate at which you would be mad you could not get tomorrow,” he says.

“The reason for this is that many people say they just want the ‘best rate,’” Huettner says. “However, this is impossible to clearly define. Therefore, it is an unachievable goal leaving people dissatisfied with the outcome most of the time. You only know if it is the ‘best rate’ in hindsight and even that changes with time.

If you’re not happy with a rate a lender offers you, or it won’t lower it when you’re finding lower rates elsewhere, you can still shop around for a lender after being preapproved for a loan.

Do it before rates rise

It can pay to look ahead. If your current rate is higher than 5 percent, you may be able to find a lower rate to justify refinancing through 2019.

A survey by the American Bankers Association predicted that sub 5-percent rates will persist throughout 2019. The economists predicted that the 30-year fixed-rate mortgage will rise to 4.7 percent by the second quarter of the year, then to 4.86 percent in Q3, and ending the year at 4.91 percent. Rates will be at around 5.05 percent in the first quarter of 2020, they say.

“One key to note in a rising interest rate environment is for people to not move their thinking to what they need today,” Huettner says. “With rising rates expected to continue in the long run, think ahead a year or more to see what types of benefits you could gain from refinancing and do it today to get a lower rate.”

Reduce or shorten PMI

It has been six years since the Federal Housing Administration, or FHA, changed its rules requiring mortgage insurance for the life of the loan if you put less than 20 percent down on the loan.

If you refinance to a lower rate and shorten the loan by a few years to a 15- or 20-year refi, you can get rid of private mortgage insurance, or PMI, and still possibly take cash your home.

Rising home equity

If you put down less than 20 percent on your home and have an FHA loan, higher home equity could put you close to refinancing an FHA loan so you can get rid of monthly insurance premiums. You don’t have to refinance your home loan to get this benefit, though you can refi for this and other reasons.

If you live in areas where home values have been appreciating the most — such as California and New York — you could be at 20 percent equity already.

A 2018 report by ATTOM Data Solutions found that 24 percent of all U.S. properties were equity-rich during the second quarter of 2018. California had the highest share, followed by Hawaii, Washington state, New York and Oregon.

Cash out

If you can reduce the interest rate on your mortgage and still take cash your home to pay off bills or make home improvements, then a cash-out refi could make sense. One thing to be aware of is that this usually involves refinancing your mortgage for a larger sum than what you owe now, and your house is still collateral for the bank.

You may be able to qualify for up to 80 percent of the home’s loan to value, or LTV. Having a good credit score will help you get the best deal.

Smart ways to use the money from cash-out refinancing include paying off high-interest debt such as credit cards, and making home improvements.

Moving from ARM to fixed rate

Having floating rates on an adjustable rate mortgage and be nerve-wrecking and expensive if an ARM is adjusting upward. Dropping to a fixed-rate loan can be cheaper if you plan to stay in your home for awhile.

Reduce loan term

A loan with a shorter term typically has a more attractive interest rate, so shortening the term of the loan can significantly decrease the amount paid over the life of the loan.

Jeff Neal and his wife Jennifer in saved about $75,000 in interest by switching from a 30-year mortgage at 4.5 percent to a 15-year one at 3.8 percent interest on their home in York, PA. Their monthly payments increased from $1,450 to $1,715. They found some extra savings of about $150 a month by paying off a chunk of the principal and getting rid of PMI.

It cost the Neals about $3,800 to refinance, requiring a little more than two years to recoup that investment.

Buy out ex-spouse

If your home is co-owned by a spouse or someone else, you may want to refinance the loan to get them off it.

“Most of the time in divorce, one spouse must refinance the other off the existing loan if they keep the home,” Huettner says. “People may also need to refinance if they own a property with a friend, relative, significant other, or a business partner.”


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