Refinancing 101

Refinancing, simply put, is paying off and replacing your current loan with a brand new loan to get better terms. What exactly those “better terms” are can be heavily influenced by your unique financial situation. The general goal for most of those refinancing is to save money, whether it be reducing how much you pay in interest over the life of the loan, or taking advantage of a lower mortgage interest rate to save every month on your mortgage payment. Some even refinance to pull cash out of the equity of their home to fund tuition, larger purchases, etc.

There’s a lot to consider when refinancing. Keep reading to learn about the most common scenarios when refinancing your mortgage, and what important considerations to make.

Why do people refinance?

People are varied and unique – they enjoy different foods, music, and activities – and the reasons to refinance are just as varied and unique. Here are the most common reasons to refinance.

Get a lower mortgage interest rate – The mortgage interest rate a lender may offer you is based on a number of factors – current market rates, your credit score, the loan amount, loan program, discount points and more!

Currently, interest rates are at record lows, and many people are refinancing to take advantage of these lower rates. It doesn’t hurt just to give us a call and find out how much you might be able to save every month by refinancing into a loan with a lower mortgage interest rate. For example: if your credit score has significantly improved since you originally got your mortgage, you may be able to refinance for a lower rate.

Change loan term length – depending on your financial situation, lengthening or shortening the term of your mortgage may benefit you.

Refinancing from a 30 year to a 15 year fixed mortgage is a popular option. It’s likely that shortening the length of the life of your loan will increase both your mortgage interest rate and monthly payment, but it helps build equity in your home faster and can help save quite a bit in interest costs over the life of the loan.

The opposite of this – changing from a 15 year to a 30 year loan term – can be done to spread out the amount owed over a longer period of time to reduce your monthly payment. This option will increase the amount of interest paid over the life of the loan.

Change loan type – People commonly refinance to change the type of loan they hold, i.e. switching from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage (FRM). This is usually done after the initial period of low interest rates on an ARM to protect from fluctuating interest rates. Another example is when people refinance from an FHA loan to a conventional loan to get rid of FHA mortgage insurance.

Eliminate mortgage insurance – once you reach 20% equity in your home and if you’re paying mortgage insurance, you may want to find out if refinancing into a new loan can eliminate your monthly mortgage insurance. This may save you a couple hundred dollars every month!

Debt Consolidation – You may have a home equity loan or other second mortgage on your home in addition to your original mortgage. Refinancing to consolidate these debts may make them more manageable.

Cash-out – A cash-out refinance taps into your home equity. If you want to take out $5,000, and your current mortgage is $100,000, you may be able to refinance into a $105,000 loan, and use that $5,000 for a variety of purposes. Common reasons for cash-out refinances are:

  • paying for school tuition
  • paying for home improvements
  • paying off a credit card

Should I refinance my mortgage?

Refinancing is about your financial goals and timing. The key is to figure out your “break-even” point. This is the point where the amount it costs to refinance meets the savings you are getting from the refinance. In other words, your “break-even” point is when you actually start saving money.

There is a pretty simple formula you can use to figure this out on your own: Total Closing Costs / Monthly Savings = Break Even Point

Example: If your cost to refinance is $3000, and you will save $100 every month as a result of refinancing, divide $3000 by $100 per month to get 30 months to until you break even.

The cost to refinance typically costs between 3% – 6% of the loan amount and includes:

  • application fee
  • loan origination fee
  • discount points
  • appraisals
  • title search fee
  • title insurance fee

Play with some numbers on this refinance calculator to see if refinancing might be right for you.

How do I refinance?

Refinancing is pretty much the same as getting your first mortgage, except this time you aren’t buying a house. You will need to qualify based on your credit, income, and debt just like when you got your first mortgage, and just like when you’re buying a home, it’s a good idea to shop around for the best rate.

Start your search right here at OneTrust Home Loans! Give us a call at (877) 706-5856. Our loan origination professionals will walk through your options with you to find the best solution for your home financing needs!