21 May, 2019
The moment you’re handed the keys to your new home, everything changes. It’s an exciting time full of vision, inspiration, and making the space uniquely yours. But at the same time, added finances like taxes, homeowners insurance, potential homeowners association fees and upkeep costs — on top of your new mortgage payment — can leave you scrambling for the latest budgeting app.
The mortgage you signed may have been perfect back then, but times change. Families grow, people change jobs, life happens. But that doesn’t mean you’re stuck with your original loan terms. By refinancing the mortgage, you can set up a new loan that works just as well (if not better) for your present.
Unsure about what refinancing might mean for you? Watch Henry Levison, Executive Vice President & Owner of Delmar Mortgage, explain the benefits and pitfalls for a refinance.
What is a mortgage refinance?
Refinancing a mortgage means replacing your current loan with a new one that better fits your current situation. Homeowners in the market for a refinance are typically looking to lower their mortgage payments or tap in to some of their home equity for home improvements to increase the value of their real estate investments. A refinance also lets you take advantage of potentially lower interest rates, shorten your repayment timeline and even change from variable to fixed interest rates.
Mortgage lenders roll out new refinance programs regularly. Finding a lender who will work with you to customize your refinance to your specific needs is key.
Is now a good time to refinance?
In a word, yes! At the end of April 2019, mortgage rates were around 4.3% for 30-year loans — some of the lowest numbers in years — and the apparent tidal wave of refinance applications indicate that the time is now.
In addition to lowering mortgage payments, Dan McLaughlin, Delmar Mortgage St. Louis Branch Manager, said customers are also taking advantage of the low interest rates to do the following:
- Consolidate debt,
- Make home improvements,
- Combine first and second loans,
- Shorten loan terms,
- Cash out for college tuition,
- Purchase investment property and
- Remove private mortgage insurance (PMI).
The benefits of mortgage refinancing
The reason many people refinance is to save money. And not just a few dollars here and there. Locking in a lower interest rate that’s at least 0.5% lower could save up to tens of thousands of dollars in the long run. For example, interest paid on a 30-year, $200,000 loan is $21,698 less at 4.5% APR versus 5% APR. That is a significant savings over time.
Typically, borrowers take advantage of that lower interest rate to either lower their monthly payments or shorten the life of the loan (in which case the payments could remain the same, or even go up, but you’ll be able to stop making them years earlier).
Finally, a refinance can help get homeowners out of the variable APR cycle that might have them sitting pretty for a few months, but scrambling if the rate goes up. Because just as that half-point percentage drop can make the monthly payment drop, a half-point bump does the opposite.
How much does it cost to refinance?
This answer depends on your financial goals. Ask your lender these questions to help paint a clear picture of how a refinance will help you save:
- Find out how much interest you’ve paid on your old loan, and how much you can expect to pay with the new one. How much will you save over the life of the loan?
- Be wary of lowering your monthly payment by extending the terms of your loan. How much extra will you pay in the long run if you extend your loan to another 30-year term?
- What are the closing costs? Ensure you are planning on staying in the house long enough to recoup them.
- What is each itemized fee? Make sure there are no additional or hidden fees. Some lenders use deceptive language such as “no closing costs” when, in fact, the closing costs are rolled into the loan or the APR.
Is refinancing right for you?
Refinancing, particularly when interest rates are low and especially if you bought your home within the past two years, is often a way to keep a lot more of your money in your pocket. But it doesn’t always make good financial sense, and it’s not a one-size-fits-all solution. Or as Craig Miller, Delmar Mortgage’s Regional Director in Overland Park, KS, said:
With mortgage rates recently hitting thirteen-month lows, refinancing your mortgage could yield thousands of dollars in savings, but it’s crucial that homeowners carefully review the loan terms and understand the potential costs associated with a refinance loan. Mortgage rates may rise in the near future, but they may also dip again. Working with an experienced professional who has your best interests at heart will help ensure you have a plan in place so that you don’t miss out on any current or future opportunities to save money.
We want to help you make the right financial decisions. If a mortgage refinance isn’t in your best interest, we’ll tell you.