You’ve probably heard whispers about the benefits of refinancing your mortgage. We’re here to tell you that all of the benefits you’ve heard about are absolutely true. Refinancing your home can translate into huge savings for homeowners.
However, like any financial decision, there are things you should consider before acting. Before you jump into refinancing your home, it’s essential to understand the pros and cons of doing so. Depending on your long-term goals, refinancing may or may not be best for you.
Benefits of Refinancing Your Mortgage
Even if you only cut one percentage point from your existing mortgage loan, refinancing can be significantly beneficial for you. Here are a few benefits of refinancing your mortgage.
- Lower interest rates. This means lower monthly payments and less interest paid on your home. Over time, that could save you tens of thousands of dollars in interest payments while providing you with lower monthly payments. Take advantage of these monthly savings by boosting your retirement accounts, paying off additional debt, or building your emergency fund.
- Better terms. Most people not only change their interest rates when refinancing but also negotiate much better terms as well. These include the type of mortgage and loan terms (length of mortgage).
- Shorter loan. When refinancing your mortgage, you have the option to reduce the length of your loan. By obtaining a lower interest rate, you may be able to shorten your loan while keeping your new payments the same as your current payments. This will help you pay off your loan faster, build equity quicker, and save thousands of dollars in interest.
The financial benefits of refinancing your home are significant. However, before you decide you’re ready to make your move today, it is wise to explore a few potential drawbacks of refinancing as well.
Considerations Before Refinancing Your Mortgage
There is no denying the fact that current low interest rates are attractive for people with mortgages. Some homeowners with older loans can enjoy substantial savings by refinancing. But there are some situations in which refinancing your mortgage is not the best choice.
Closing Costs
When refinancing your mortgage, you will be required to pay closing costs and other fees. While these expenses will be lower than when you initially bought your home, they are still significant. Many lenders will provide you with the option of rolling your closing costs into the new loan, depending on your available equity levels.
The reason closing costs are lower when you refinance your home is due to your escrow account. If you’re like most borrowers, your existing mortgage provider places a portion of your monthly payment into an escrow account to cover your property taxes and homeowner’s insurance. Since this money is already paid into your escrow account, you will not need to pre-pay it, as you did when you first bought your home. The funds will be refunded to you from your existing mortgage provider and can be applied directly to your new mortgage escrow account, if necessary.
Time
Ultimately, you will have to decide if refinancing is worth your while. Depending on your anticipated closing costs and the amount of time you expect to be in your home, any savings you may net from refinancing your mortgage may be a wash.
Let’s review a quick example of how you could analyze your savings by refinancing your home.
Imagine you refinance your home and save $250 per month on your mortgage payment. Your closing costs, due upfront, are $5,000. It would take you 20 months to break even on refinancing ($5,000 / $250).
If you plan to sell your home within two years, it may not be in your best interest to refinance. On the other hand, if you plan to stay in your home long-term, refinancing is an excellent financial strategy.
It’s important to examine all sides of the issue when making significant financial decisions, such as refinancing your mortgage. If you are considering refinancing your mortgage, use the handy “Time to Refinance?” calculator on our Mortgage page.
We’re Here to Help!
Refinancing your mortgage with today’s rates may be one of the best financial moves you ever make. However, it’s crucial to understand your options and the financial benefits thoroughly.
Our Mortgage Team is ready to answer all your questions, review your refinance options, and help you make the best decision for you and your family. Please stop by one of our convenient branch locations or give us a call at 800.336.6309 to get started today.
Each individual’s financial situation is unique, and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed.
