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Home Buyers Guide
Refinancing Your Existing Mortgage
Why and when should you refinance
your home
Refinancing is paying off your existing mortgage with a brand new mortgage.
When would refinancing make sense:
- To lower your payment – Refinancing at a longer term or a lower interest rate can reduce your
monthly payment. The first may increase the total cost of interest over the
life of the loan. A lower interest rate on the same term may reduce it.
- To pay off faster – Refinancing a 30-year loan at 15 years (Click here for additional rates and terms.) can reduce your overall interest
costs, though payments are often higher. Refinancing to a weekly or biweekly
mortgage can have the same effect.
- To reduce interest – If you have sufficient equity, consolidating higher interest loans into
your mortgage can lower your overall cost of debt and may allow you to
deduct interest on your taxes.
- To change rate types – Depending on your situation, you may want to switch from an
adjustable-rate mortgage to a fixed-rate, or vice versa.
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When refinancing may not make
sense:
- If you'll be moving
soon – If you'll be paying points and closing costs to get a
better rate, the interest rate savings over your remaining time in the home
should be equal or greater than the closing costs or you haven't saved
anything. If you look at the money you might have earned placing the points
and closing cost money in a savings account over that time, the threshold is
even higher for it to be worthwhile.
- If you're already
several years into your mortgage – Once you are halfway through
your mortgage, you've really started to pay down the loan principal. When
you refinance, your payments will be mostly interest again. As a result,
your payments may be lower, but you could pay more interest over the life of
the loan.
However, refinancing could be beneficial if you do not extend the loan by
doing so. For example, if you have 10 years left on a 30-year loan and you
refinance for 10 years or less, refinancing may save you money depending on
the interest rate, fees, and closing costs.
- If refinancing extends
your mortgage past retirement age – If you haven't planned for
house payments after retirement, you may want to either skip refinancing or
make sure your new term does not extend past your original pay off date.
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