Why and when should you refinance your mortgage
Refinancing a mortgage can sound like you’re taking on a lot. But really, there are plenty of solid financial reasons to refinance—perhaps you’re hoping for a lower rate*, or a longer term to help lower your monthly payments. However, you really need to be clear about your financial goals before diving in.
You can start by talking with a loan officer who can map out your financial plan and give you insights into things you might not have considered. Or you can start right away by applying online. Now, let’s talk about why you might want to refinance.
Reasons for refinancing:
The decision to refinance is a serious one and not all borrowers are ideal candidates for a refi. However, for those individuals who could lock in attractive rates and restructure the terms of the loan, here are some of the advantages.
Lower your monthly payments
The most common reason for refinancing your loan is to change your mortgage rate to a lower interest rate. This should allow you to pay less each month. Keep in mind that there are usually fees associated with refinancing, so you need to figure out if the costs of getting a refinance are going to make sense to you financially.
There is a cost-benefit analysis of a mortgage refinance that can best be described as calculating the break-even point.
The break-even point is the point in time when you recoup the costs you had to pay to refinance. It’s typically a couple years down the road. If the break-even point is too many years into the future, then you may decide to sell your home or pay off your loan before you make your money back. This would mean it wouldn’t make as much sense to refinance.
Calculating a break-even point
Refinances tend to make more sense if you’re planning to stay in your home for a while. The shorter the time you live in your home after refinancing, the less opportunity you have to pay off the associated costs rolled into your monthly payments and produce the intended savings.
Let’s take a look at an example where you figure out that you could save $114 a month on your mortgage payment by refinancing to a lower rate. Let’s also say that the cost to refinance in fees and closing costs is $3,000. You simply divide the costs required to refinance ($3,000) by the monthly savings ($114). A written formula appears like the following:
- Closing costs / Decrease in monthly payments = Number of months to break even
- Total closing and associated costs: $3,000
- Monthly savings: $114
- Your break-even point = 26 months
In this example, it would take a little over 26 months to break even. After that, you get to keep the entire $114 as your refinance savings.
Take control of your debt
Feeling financially squeezed with monthly bills? A cash-out refinance may get you the money you need to consolidate bills and high-interest charges.** A cash-out refinance can be used to consolidate medical bills, credit cards debts and other necessary expenses. Opportunities include:
- Fixed payments: Eliminate differing due dates and various companies you owe to, putting all your loans and debt into one recurring payment.
- Steady interest rates: With the right timing, you could capitalize on market conditions and lower your monthly payment. In general, cash-out refinancing offers lower interest rates than personal loans.
Tap into home equity
If the assessed value of your house is higher than the principal amount left to pay on your mortgage, you have home equity. Did you know you might be able to refinance into lower rate, take cash out or borrow against the difference with a home equity line of credit***? Opportunities include:
- Rate and term refinance: Lower your rate, change your loan program or both.
- Cash-out refinance: Refinance your current mortgage for more than the amount owed and take the difference in cash. The primary purpose of a cash-out refi is to convert home equity into liquid assets.
- Home equity loan: Receive one-lump sum to be repaid over a fixed term at a fixed interest rate.
Renovation refinance
If you need cash for renovating your home but don’t have enough equity, you may want to consider a Renovation loan.
Renovation loans asses the home’s value “as-if” the repairs have already been completed, so you can tap into the future equity to improve the efficiency, comfort and value of your home. Our dedicated Renovation Specialists provide a transparent and simple process, while a consultant oversees the project to protect you as a homeowner. Opportunities include:
- FHA 203k: Property can be a single-family home or 2–4 units and must be a primary residence. Ability to make required repairs plus optional improvements. Down payment options as low as 3.5%.****
- HomeStyle® Renovation Mortgage: Down payment options as low as 3%. All permanently affixed improvements allowed, including “luxury” improvements. Property can be a primary residence, single-family dwelling, townhome, 1–4 unit multi-family dwelling, second home or investment property.
Want to know if a refinance is right for you? Talk to a loan officer or get started by getting preapproved for a refi online.
* Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Proper Rate for current rates. Restrictions apply.
**Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Proper Rate for more information.
**The Proper Rate home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently only available in Illinois. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Proper Rate for more information and to discuss your individual circumstances. Restrictions Apply.
**** Credit score and down payment requirements higher for 2-4 unit, investment properties and renovation products.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.