How to Refinance Your Mortgage

You shouldn’t have to pay more on your mortgage than you need to. By refinancing your mortgage, you can secure a better interest rate, shorten your loan’s term, and do more to tap into money-savings.

There are plenty of mortgage lenders, including banks and credit unions, that offer mortgage refinance programs with adjustable-rate mortgages and great refinance rates to help you save. Here’s how to refinance your mortgage and get the home loan that benefits you the most.

What is Mortgage Refinancing and Why Consider It?

In short, mortgage refinancing is when a homeowner replaces their existing home loan with a new mortgage. There are many reasons why homeowners refinance, but chief among them is to get a lower interest rate that can potentially save them thousands in mortgage interest in the long-term. This reason is especially common when interest rates fall, or a homeowner has improved their credit score.

Here are some other reasons to consider refinancing your home.

Switch to a Fixed-rate Mortgage

One of the most common reasons homeowners refinance is to switch from adjustable-rate mortgages, or ARMs, to fixed-rate mortgages. This is typically done when interest rates are low and can offer more stability and peace of mind. Instead of having fluctuating monthly payments, homeowners can lock in monthly principal and interest payments that will remain static throughout the loan’s life.

Cut Monthly Payments

If your goal is to pay less than your current mortgage every month, refinancing can help you lock in a lower interest rate. You can also extend the loan term to a 30-year mortgage to cut your monthly mortgage payments.

Pay Less on Closing Costs

In many cases, you can pay below the industry average on closing costs when you refinance. This means you may not have to pay the full price on closing costs as you did when you first bought your home. These expenses typically include loan origination, appraisal, title search fees, title insurance, survey costs, and taxes.

If you don’t have money saved for closing costs when you refinance, you can ask your lender for a no-closing cost refinance option in which you won’t have to pay these costs upfront. However, this usually entails a higher interest rate over the life of the loan and can be more expensive than paying closing costs beforehand.

Pay Off Home Sooner

If you want to pay off your home loan faster, you can refinance and opt for a loan with a shorter term. If you have a conventional 30-year loan, you can refinance with a 15-year mortgage to pay it off in half the time, plus pay less interest over the life of the loan. If you go this route, one disadvantage is that you’ll likely have higher monthly payments.

Cash Out On the Equity in Your Home

Another refinancing option is a cash-out refinance, in which you borrow more than what you owe on your current mortgage and the lender gives you a check for the difference. When you tap into your equity this way, you can lock in a lower interest rate in addition to receiving a one-time cash payment.

Eliminate FHA Mortgage Insurance

While you can get rid of private mortgage insurance on most conventional home loans, canceling Federal Housing Administration (FHA) mortgage insurance is not so easy. However, one way to eliminate it is to refinance your mortgage once you’ve accumulated enough equity. You can calculate your home equity by estimating your home value and subtracting the mortgage balance.

Whatever the reason you want to refinance your mortgage, doing so can help save you money and meet other critical financial goals.

However, it’s essential to keep in mind that certain factors may not make refinancing the best option for you. For instance, if you’re struggling to pay off your credit cards and your credit score has fallen since you got your first mortgage, refinancing may lead to higher rates and ultimately not benefit your situation.

How to Refinance Your Mortgage

The refinancing process is similar for most mortgage lenders. Typically, you’ll apply for a new home loan, similar to when you first bought your house.

However, the difference from your initial mortgage is that you’ll be using the loan money to pay off your existing mortgage rather than to purchase the home. Instead of making payments on your old home loan, you’ll make payments on the new mortgage that allow you to continue to pay off the house.

Before You Begin

Before you apply to refinance your mortgage, you must consider why you want to refinance and keep your refinancing goal in mind as you move forward. Whether you want a lower interest rate or to pay off your home sooner, your financial plan will ultimately guide the refinancing process.

Shop Around

Once you’ve identified why you want to refinance, shop for the best refinance options. Just as you would shop around for big purchases like cars or TVs, you should do the same with your home loan. Every mortgage lender offers different mortgage rates and terms and has varying costs for borrowing money, so it’s best to do your research before settling on a lender.

Each lender should provide you with a loan estimate that details all the costs you’ll have to pay upon application. Compare these loan details and determine which home loan is best for you. By applying with more than one lender, you can ensure you get the best deal.

Refinance Your Mortgage

Do the Math

Next, you should do the math to calculate when you’ll hit your break-even point. You can determine how many months it will take to break even and recoup your refinancing costs by dividing the total loan costs by the monthly savings. Of course, you can go a step beyond breaking even by refinancing to shorter terms, paying your home off faster, and saving even more.

Lock in Your Rate and Close on the Loan

Once you’ve identified your refinancing goals and adequately compared mortgage lenders, you’re ready to refinance. Simply choose your lender, lock in your new, low-interest rate, and close on the loan.

At T&I Credit Union, we’ll walk you through this process step-by-step to help you on your way to more significant savings and meeting your financial goals. Call us at (248) 397-9345 to apply for a mortgage refinance loan today.

About Tammy Newcomb