How Does Mortgage Refinancing Work?

Refinancing your mortgage is just like starting all over with a new mortgage, but things may be different this time around. First of all, you might be financing a smaller amount because you have already paid off a lot of the original mortgage. Or, you might be financing more because your house is now worth more and you want to take out some of that equity. Then your interest rate may be different. You might be switching from an adjustable rate mortgage to a fixed rate or visa versa. And you might be financing for a longer or shorter time period. All these variables can be changed depending on what you want and what the lender will agree to.

For example, let’s assume you have 21 years left on your adjustable rate mortgage and your rate just went up. You notice that the fixed rates are lower, and you would like to lock in the new lower rates. Your lender might agree to a refinanced mortgage at the new lower fixed rate for 15 or 30 years. You have to pay closing costs, but you should recoup these costs if you stay in the house a few years. Over the term of the mortgage you should save a lot in interest. The longer you own the home, the more you save in interest costs.

Another example: let’s assume you have 18 years left on you fixed rate mortgage and have considerable equity in your home. You also have about $20,000 in credit card debt which you have foolishly piled up over the years. The credit card interest is really expensive and you want to get out from under that burden. (And you promise yourself never to go into that kind of debt again.) You can get the cash by refinancing your home. Maybe your lender will agree to refinance your mortgage over 30 years and return about $20,000 in home equity to you. You use the money to pay off the credit card debt and save a bundle in interest expense. Since you have extended the length of your mortgage your payment may even be lower. You will have to pay closing costs, and the lender can foreclose on your house if you can’t make your payment.

Mortgage refinancing can be a useful financial tool when used carefully.

Should I Refinance My Mortgage?

Interest rates are very low now and it might be a good time to refinance a mortgage or even a car loan. For example, if you have a $200,000, 30 year mortgage at 8 percent, your monthly payment will be $1468. If you can now get a 5 percent interest rate, the payment will be $1074. Of course there are fees associated with a refinance. Go to the
refinance page to determine if refinancing your mortgage is best for you.

Another perspective:

Refinance your mortgage if: it will save you money, you need to lower your monthly payment, need cash, or need to change the terms of your mortgage. This all depends on the interest rates, closing costs, the length of the mortgage, and the length of time you will be staying in the house. It doesn’t make sense to refinance if you are planning on selling in a year or two. Do you have to pay the closing costs up front, or are they just added to the principal so you pay them off (with interest) over time?

Start by talking to your current lender and getting a proposal. This proposal should include your closing costs, new monthly payment, new interest rate, new length, and the total interest and closing costs you will have to pay over the length of the new mortgage. Compare the total cost of the refinanced mortgage with the total cost remaining on the old mortgage. Are you saving anything? And if so, how much per year. If you are saving $100 per year, it probably doesn’t make sense to go to the bother of refinancing. However, if you are saving several thousand per year, maybe you should do it. All that assumes you are staying in the house and will pay it all off eventually. The fewer years you will own the house, the less you save. After working with your current lender, it may make sense to shop around for proposals from other lenders.

Here’s another way to look at it. Find your total closing costs. If your new monthly payment is lower, then how many months will it take you to get back these closing costs. Once you have recouped the closing costs, you are coming out ahead. For example, if the closing costs are $2,000 but your new monthly payment is $100 less, then you will pay off the closing costs in about 20 months. Then you will be coming out ahead by $100 per month unless the new mortgage is for a longer term.

You may also need to refinance in order to take out some of your home equity. If you currently have 15 years remaining on your mortgage but can refinance for 30 years at a lower interest rate, you may be able to come away with a substantial cash payment. Of course, you will eventually have to pay it all back or lose you house.

If you currently have an adjustable rate mortgage (ARM), your interest rate gets adjusted up or down periodically. If you wish to change to a fixed rate that will not change, you may need to refinace to do that.

Some people will be most interested in the total cost savings over the length of the mortgage. Others will be more concerned with getting a lower monthly payment. Still others many be most concened with getting some of their home equity in the form of cash. Which ever you are most interested in, make sure to study the numbers and proceed cautiously.

How to Refinance a Mortgage?

Why would you want to refinance your mortgage? Here are some reasons: maybe you want to change from an adjustable rate mortgage to a fixed rate. Maybe you want to lower your monthly payment. Maybe you need to get cash out of your home equity. Or maybe you want to consolidate several high interest loans into one. Refinancing your mortgage would be a way to accomplish any of these goals, but it is a fairly big important step to take, not something you would want to do too often. Maybe once every five years or even less frequently. Maybe only once for the whole time you own your home.

There are numerous factors to consider in refinancing, so there is no simple yardstick to measure whether it will be of benefit to you. Generally, you must get a lower interest rate, plan on staying in the house at least a few years, and save enough to pay for the closing costs. The closing costs could amount to several thousand dollars, so you must save enough on your new loan to pay these off in a reasonable time frame.

You will have to pay closing costs, but some lenders will just include them in the new mortgage, thus increasing your principal and interest. Some lenders will allow you to stretch out the term of the loan so that you monthly payment may be less, but you pay it for a longer time. A friend of mine was able to refinance her home at a lower interest rate for a longer term. This allowed her to lower her monthly payment and get a nice piece of cash to pay off her medical bills. The downside is that she will have to keep paying on the mortgage for a longer time. If you refinance too often, these closing costs may prevent you from ever coming out ahead. Or if you sell before recouping the closing costs, you lose.

Try starting with your current lender to see how they can help. Then shop around. Try some of the many online mortgage calculators to see how much if any you will save. This page can help.

Add up all the costs for principal, interest, and closing costs for the whole term of the mortgage (the lender should do this for you) and find your total cost. Then compare the total remaining cost of your current mortgage. Of course if you sell the house before paying it off (as most people do) you reduce the amount you save.

You must stay in the house to save enough to pay off those closing costs. How long? Here’s how to find out: Add up all the closing costs. Find out how much lower you monthly payment will be. Divide the closing costs by the monthly savings. This will tell you how many months until you have paid off the closing costs. After that you are coming out ahead. Many of the online calculators will do all this for you.

How to Refinance a Car Loan?

If you feel that you are paying too much interest on your car loan, maybe it would be smart to refinance. You might be able to take advantage of lower loan rates to reduce your monthly payment and reduce the total you will pay for the car. It takes a little work. If you owe at least $7,500 and have longer than two years remaining, it might be a good thing to refinance. If rates have dropped as little as 1 percent, you might profit from refinancing.

If you can get refinancing, then the new lender will pay off your old loan, and you will start with a new payment schedule.

The best place to start would be your current lender, but there are lots of companies who make their business refinancing car loans for people like you. If the current lender will refinance, that might be the quickest and easiest way. If you want to get a new lender, compare rates for several companies to get an idea of the cost.

Remember, there may be some upfront costs associated with this loan, but don’t pay fees for an appraisal, loan application or credit check. When you have a good looking proposal from a lender, add up the total costs over the length of the loan to see how much you are really paying. Then compare it to the total cost of your current loan. Are you coming out ahead?

When to Refinance a Mortgage?

Consider refinancing your home when interest rates go down. The easiest way is to request quotes with various lenders while factoring in closing costs and expenses, and any change in the loan length.

One rule of thumb is that you should refinance if the interest rates drop by 2%. Another rule was the 2-2-2 rule. Refinance if you have been in your house for 2 years, the interest rates have dropped by 2%, and you plan on being in your house another 2 years. More recently, some say that you should refinance if rates drop only 1%.

There are several reasons to refinance your home: 1. You wish to save money by paying less interest; 2. You need cash that is currently tied up in your home, 3. You wish to lower your monthly payment; or 4. You wish to change the terms of your loan, from an adjustable rate to a fixed rate, for example.

The decision to refinance depends on several factors: the interest rates, the closing costs, the length of the mortgage, and the length of time you will be staying in the house. It doesn’t make sense to refinance if you are planning on selling in a year or two.

Find your total closing costs. Your lender can give you a good faith estimate. If your new monthly payment is lower, then how many months will it take you to get back these closing costs? Once you have recouped the closing costs, you are coming out ahead. For example, if the closing costs are $2,000 but your new monthly payment is $100 less, then you will pay off the closing costs in about 20 months. At that point you will be coming out $100 ahead each month.

In summary, consider the closing costs, don’t lengthen your loan, don’t refinance often unless you get very low closing costs (or none at all), be sure to stay in the house at least until you recoup your closing costs, and always consider total interest over the course of the loan. Refinancing smart can save you a lot of money.

How Soon Can I Refinance a Mortgage?

You can refinance your mortgage as soon as you can find a lender willing to do it. Most banks require at least 12 months before you can refinance a mortgage, but this is not written in stone. The guidelines are changeable, and there are undoubtedly lenders out there who will refinance after a much shorter time.

Your current mortgage might have a clause requiring a “seasoning period.” This means that you are not permitted to refinance your mortgage until you have lived in your home for one or two years. Some lenders also add on early payoff penalties, meaning that you will have to pay a penalty if you pay off the mortgage before a certain time period. Such an early payoff penalty makes refinancing less attractive because of the added cost to you.