Should You Refinance Your Mortgage? [infographic]
What does mortgage refinancing mean? Getting a new mortgage to replace your existing mortgage.
4 reasons to refinance your mortgage: 1. To get a lower interest rate, resulting in a lower monthly payment 2. To get a short loan term, so your mortgage will be paid off sooner 3. To switch your mortgage type, such as from an adjustable-rate mortgage to a fixed-rate loan, or vice versa 4. To extract cash from the home’s equity known as a cash out refinance
Types of refinancing: Rate and term refinancing: this type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity faster. Cash-out refinancing: this type of land leaves you with cash above the amount needed to pay off your existing mortgage, closing costs, points and any mortgage liens. You may use the cash for any purpose.
Questions to help you decide: what is your current interest rate? If higher than current rate: refinancing can help bring that rate down If lower than current rate: you are probably better staying where you are
Does your current loan have a pre-payment penalty? If no: use your refinance to pay the balance of your loan If yes: and it is a soft refinance, you are still able to repay early through a refinance
How much equity do you have in your home? If more than 15%: the more equity you have built0in, the easier the process can be If less than 15%, lenders typically prefer 15-20% equity as a baseline for the application
How long do you plan to stay in your home post-refinance? If longer than 2 years: you’ll be able to enjoy the benefits of the refinance for many years If shorter than 2 years: after all of the fees associated, it can often cost more if you move out of the home within 2 years
How healthy is your credit score? If above 580, your hard work at keeping your credit score in good standing can help to make refinancing a reality. If below 580: you may need to spend some time working on increasing your credit score
Breaking even on closing costs. Before you take the next steps, it’s good practice to calculate the break-even point at which you’ve recovered the money it costs to refinance in closing costs. If you plan to sell before the time it takes to break even, you probably should not refinance. For example: $200 lower your monthly payment times 20 months of time it will take to break even equals $4,000 cost to refinance.