Could a refi lower your mortgage payment?

By Lisa Rinkus | Citizens Staff

As a homeowner, the topic of refinancing is bound to cross your mind. This is particularly true when everyone’s talking about low rates. Refinancing has become a popular way to consolidate debt, quickly access cash and pay for home improvements. But things have been going well, you don’t foresee any major expenses, you’re comfortable with the mortgage payments and your lender is fine. Why bother?

Because you could be leaving thousands of dollars on the table.

Can a refi increase cash flow? Let us count the ways.

1. Current interest rates may be lower than when you first took out your mortgage. Not only that, your credit and income may have improved, so you might qualify for better terms. A lower interest rate means a reduced monthly mortgage bill and less interest paid over the life of your mortgage. (Of course paying less interest depends on how much you’re extending the term of your new mortgage.)

According to Black Knight, a mortgage technology provider, 43% of 30-year mortgage holders are eligible for a refinance. (This means they have at least 20% equity in their homes and credit scores of at least 720.) Through refinancing, these homeowners can reduce their rate by 0.75%, or nearly $300 a month, on average. Over the course of a 30-year mortgage, that’s a savings of more than $100,000.

2. In addition to getting a better rate, the terms of your loan can be changed to your benefit through a refi. For homeowners who plan to move in a few years, switching to an ARM (adjustable rate mortgage) will enable them to take advantage of a lower initial interest rate that can reduce their monthly payments. (Up front, ARMs have a lower rate than a conventional mortgage, but the rate is adjusted periodically.) Although if you’re planning to stay put for the next 20 years and plan to do a refi in five years to pay for college, an ARM might also be a smart choice. The important thing to remember is that it’s not necessarily about how long you keep your home. It’s about how long you keep your mortgage. That’s the key to making a solid financial decision about refinancing.

3. A refi could also cancel out any premiums being paid by the homeowner. For example, buyers who can’t put down 20% on their homes are paying PMI, or private mortgage insurance. Annual PMI premiums can range from about 0.2% to more than 1% of the total loan amount. This cost can be wiped out if the homeowner has built up at least 20% equity at the time of their refinance. (Equity is the difference between what your home is worth, minus the balance of your mortgage.)

4. Switching a loan’s repayment structure to a shorter term will likely increase your monthly mortgage payment, but over the longer term, it can save you thousands of dollars in interest. A reduced term can also help you pay off your mortgage by a specific deadline, such as when your first child goes to college, or before you retire. So, if you’ve got 20 or 25 years left on your mortgage and you want to lower the interest you’ll be paying over the long term (and pay off the loan before tuition bills kick in), consider refinancing with the 15-year option offered by most lenders.

Related Topics:

• How to calculate your home’s equity
• What Is an Adjustable-Rate Mortgage?

Taking the next step

If you’re thinking of moving your mortgage to another lender, it’s a good idea to check in with your existing lender first. Some will match competitive interest rates because they want to keep your business. Also, be sure to check the terms of your existing mortgage to ensure there’s no penalty for prepayment. When you refinance with Citizens, you get a loan suited to your needs, a dedicated loan expert providing advice each step of the way, and one of the lowest rates around.

Once you complete an application and receive documents with your loan details, you’ll be asked to provide many of the same documents you did when you first took out a mortgage. If you refinance with your current lender, you may save on some costs, such as a title search, because that was completed during your last transaction. If you refinance with Citizens, you may be eligible for a 0.125% rate discount, on top of getting a low interest rate.

Related:

The Mortgage Refi Process

Keep in mind you’ll also have to pay closing costs, usually equaling about 3% to 6% of your loan amount. However, you may be able to roll those costs into your new mortgage if you have enough equity. If you can afford to, it’s best to pay these closing costs up front, so you’re not paying interest on them over the life of the loan.

Related:

What are Closing Costs?

Once you’ve finalized your loan and signed all the paperwork, you can expect your previous mortgage to be paid off and your new mortgage to go into effect in about four days.