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Should You Refinance Your Mortgage?

Key Takeaways

  • Refinancing could lower your interest rate, change your loan type, adjust your loan repayment term, or cash out available equity.
  • You may need 5% to 20% equity in your home to qualify for a refinance loan, depending on the type.
  • Determining your break-even point (when your future savings will surpass the upfront costs) is an important step in deciding whether a refinance makes financial sense.

As a homeowner with a mortgage, the topic of refinancing is bound to cross your mind.

But first, you’ll want to understand the common reasons for refinancing, as well as what’s involved in the process. That can help you decide if/when refinancing may be right for you.

Here’s a rundown of what you need to know.

Why would you refinance your mortgage?

Refinancing your mortgage could serve any of these four purposes:

  1. Lowering your interest rate: Current interest rates may be lower than when you first took out your mortgage. Or your credit may have improved, so you may qualify for a better rate. A lower interest rate means a lower monthly mortgage payment and less interest paid over the life of your mortgage. Generally speaking, if you can lower your mortgage interest rate by 1% to 2%, refinancing could make financial sense.

  2. Changing loan type: If you have an adjustable-rate mortgage (ARM) and worry that interest rates will rise, refinancing into a fixed-rate mortgage with a stable interest rate could give you greater peace of mind. Alternatively, if you have a fixed-rate mortgage and expect to sell your home within a few years, refinancing into an ARM could help you take advantage of a lower initial interest rate.

  3. Altering your loan repayment term: Besides a standard 30-year mortgage, lenders typically offer 15- and 20-year options. Moving to a shorter term will likely increase your monthly mortgage payment, but could save you thousands of dollars in interest over the life of the loan. In addition, a shorter term can help you pay off your mortgage by a specific deadline, such as before you retire. On the flip side, extending your loan’s term — for instance, refinancing to a 30-year loan when you have 20 years left on your current mortgage — could decrease your mortgage payment. However, you would pay more interest over the long term.

  4. Cashing out equity: Ever thought about tapping into your home’s equity to access funds for home improvements, education costs, medical expenses, debt consolidation, or other reasons? You can access your home equity with a home equity loan or line of credit, but you can also do it through a cash-out mortgage refinance. In this situation, you refinance for more than your outstanding loan balance in order to get cash back at closing. Because you pay closing costs for a cash-out refinance, it works best when you have a specific, significant amount you need to borrow. You may also pay a higher interest rate than you would for a refinance with no cash back, but mortgage rates still tend to be lower than other financing options like credit cards and personal loans. Be aware that if refinancing lowers your equity below 20%, you may need to pay mortgage insurance.

Taking the next step

Before refinancing, check the terms of your existing mortgage to ensure there’s no penalty for prepayment. Then you can move on to the application.

Getting a mortgage refinance is similar to the process you went through to apply and qualify for a mortgage to buy your home. You’ll complete an application, receive disclosures, and provide many of the same documents as before, plus details on your current mortgage. This checklist can help you track down the information you’ll need.

Depending on the type of refinance you choose, you’ll likely need anywhere from 5% to 20% equity in your home to qualify. Keep in mind that if you have less than 20% equity, you may still be required to pay mortgage insurance.

You’ll also have to pay closing costs, usually equaling about 3% to 6% of your outstanding principal. However, you may be able to roll those costs into your new mortgage if you have enough equity.

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

What to remember

The decision to refinance your mortgage can be made for a number of reasons. But no matter the reason, they all boil down to helping you achieve your financial goals. That could mean cutting down the length of your mortgage so you’re closer to living a mortgage-free life, or locking in a better interest rate to lower your monthly payments to free up funds in your monthly budget.

However, don’t forget to weigh the costs to figure out when you’ll break even before making your final decision. If the savings fit in your timeline, then you have your answer!

More information

We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can give you the information you need to find the right product to help you reach your goals. To learn more about mortgage solutions, please call 1-888-514-2300, visit us online, or find a Citizens Bank Loan Officer.

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