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After you closed on your home, you probably breathed a huge sigh of relief. You completed the marathon that is a home purchase, and hopefully moved into your new abode and made it your own.
You’re done, right? Well, not exactly.
There’s a lot to be said for staying on top of rates and keeping refinance in mind, even after you’ve signed on the dotted line and started making payments on your new home.
I. What to know when refinancing your home
Why would you consider refinancing? You may be able to save thousands — if you strike while the iron’s hot. Here’s what you need to know.
What is refinancing a home?
Refinancing your home is taking out a new mortgage to pay off the old one. Usually, homeowners use refinance to save money, get more advantageous loan terms, or to tap into their equity.
For example, let’s say you bought your home back in January 2014, when rates were hovering at around 4.43%. In January 2021, rates came all the way down to 2.74%. If you were to refinance during that ultra low rate period, you’d save 1.69% on your rate — a whopping 38% savings. Imagine how that money could add up over time!
How refinancing works
Typically, when you refinance, you take out a new home loan to replace — and pay off — the existing one. You might go with a new lender or the same lender, depending on the terms you’re offered.
When you refinance, you need to qualify for a home loan all over again. Remember how you did all that mortgage prep to get a mortgage in the first place? You might need to brush up your credit, pay down your debts, and get your financial ducks in a row once more.
Another thing to know about refinancing? You’ll have to pay closing costs again, so make sure the savings are worth it. You can use a refinance calculator, or run the numbers yourself to figure out your break-even point. More on that soon!
Reasons why you might refinance your home
If you’ve forgotten how overwhelming it is to get a mortgage, you’ll be quickly reminded when you start the refinancing process. But despite the mortgage stress, there are still good reasons to take the plunge and consider refinancing.
Here are a few:
- Rates have fallen since you took out your mortgage and you could save significant money with a refinance.
- You want to switch your loan type. For example, if you got a FHA loan because it’s all you could qualify for, but now you qualify for a conventional loan with lower fees and more competitive rates, you might consider refinancing.
- You want to change your interest from fixed to adjustable, or vice versa.
- You want to adjust your loan term to one that’s shorter or longer (this would also affect your monthly payment amount).
- Your credit score has gone up since you got your loan, so you now qualify for a more competitive rate.
- You need an infusion of cash. You can do what’s called a cash-out refinance, which means you take out more on the home than you currently owe, and pocket the difference.
The major costs of refinancing a home loan
The biggest costs associated with refinancing a mortgage are the closing costs. These can add up to 2% to 5% of your loan amount, depending on the lender, the specifics of your purchase, and where you live.
Refinance closing costs might include things like:
- Loan application fee
- Loan origination fee
- Credit report fee
- Early repayment fees to the original lender
- Appraisal fee
- Title search/insurance
- Settlement fee
You can save significantly on these fees by shopping around with different lenders.
There are also no-closing-cost refinance options available, which are rare. Fortunately we’ve partnered with one of the nation’s largest lenders, Guaranteed Rate, to get our users a no-lender fee refinance opportunity!
The pros and cons of refinancing a home
By now, you might be thinking, “refinancing sounds great — sign me up!” But there are some important pros and cons to consider before you decide if refinancing is right for you. Let’s walk through them.
Pros of refinancing:
- Lowering your monthly payment. This is the biggest motivation to refinance for most homeowners. If rates have dropped since you took out your mortgage, or you qualify for significantly better rates now, it might be worth refinancing.
- You may be able to drop mortgage insurance. For example, if your home has appreciated in value since you took out your mortgage, you may be able to drop private mortgage insurance (PMI). Or let’s say you currently have a FHA loan that requires mortgage insurance throughout the life of the loan, and you switch to a conventional. You may be able to drop the mortgage insurance if you have at least 20% equity in the home.
- You can change the length of the loan to fit your needs. Want to pay off your loan earlier? Or maybe your financial situation has changed and you want to lengthen your loan term, thus lowering your monthly payments. A refinance could help you meet your goal.
- Using your home’s equity for upgrades or other financial needs. Home repairs and upgrades are expensive. Maybe you need a new roof, but don’t have $10,000 to $20,000 lying around. Tapping into your home’s equity on a cash-out refinance might be the answer.
Drawbacks of refinancing:
- You’ll restart amortization. You know how when you take out a mortgage, you pay more toward interest for the first few years of repayment? Well, you’ll have to do that again when you refinance. So if you just started paying down your loan principal, a refinance might not be a great deal right now (depending on how much you could save over time).
- Closing costs aren’t cheap. They can add up to 2% to 5% of the loan amount. It’s crucially important to factor this in when deciding if you should refinance.
- You need to qualify for a home loan again. If your credit’s taken a hit since you applied for your home loan, or you’ve taken on new debts since that would put you out of DTI range for lender requirements, you may have difficulty qualifying for great refinance terms.
- The process of getting a home loan is stressful and frustrating. It can’t be overstated how stressful getting a mortgage can be. That’s probably why 40% of Americans rank buying a home as the most stressful event in modern life. Depending on where you’re at in life, it may not be worth adding that stress onto your plate right now.
- Refinance may not work in your favor if you sell soon. Once you factor in loan costs, it can take years to start financially benefiting from your refinance. Not sure if you want to stay in your home much longer? Refinancing might be a wash, or worse — it could cost you more than it saves you.
Can you refinance without paying closing costs?
As we mentioned, you technically can refinance without paying closing costs, through what’s called a no-closing-cost refinance. However, these opportunities are rare and you should make sure the lender isn’t charging hidden costs through higher loan principal. Our partnership with Guaranteed Rate is as clean as it gets – no upfront or hidden fees and the lowest refinance rates on the market.
II. Is refinancing worth it? Use our calculator to find out
All of that is to say, deciding whether to refinance is a complex process that involves an element of timing. And the outcome can have long-reaching financial implications. So how do you know if you’re doing the whole refinancing thing right? We’ll walk you through step-by-step.
How to compare refinance offers in 3 simple steps
All mortgage lenders are not created equal, and costs can vary drastically from company to company. For example, some lenders don’t charge any lender fees at all, while others charge the maximum amount that’s allowable by law. That’s why you’ll want to get multiple quotes and compare them to make sure you’re getting the best possible deal.
Comparing refinance offers isn’t terribly different from comparing lender offers on your initial home loan. Here’s how to do it in three easy steps:
- Receive multiple quotes from lenders. Make sure you have your credit score and current mortgage loan information handy when you call each lender so they can run an accurate quote (more on the info you’ll need below!).
- Use a refinance calculator to compare quotes.
- Choose the best option for your bottom line.
For a simple, fast, and money-saving quote, we’ve partnered with Guaranteed Rate. LoanCompass readers get preferred rates and waived lender fees — saving you at least $1,290! Click here to get your free, no obligation quote now.
What information do you need to calculate refinance savings?
As you’re gathering and comparing lender quotes, you’ll want some important information closeby. This is so you can look at the most accurate information possible, and compare apples to apples on each quote. Here’s what you’ll need:
- Original loan amount
- Your current mortgage interest rate
- Your current mortgage loan term
- Origination month and year
- Cash-out amount (if you’re using cash-out)
- The new loan’s interest rate
- The new loan’s term
- Closing costs on the new loan
Once you’ve got your quotes, all you have to do is plug this information into a refinance calculator — ours is super simple! — and you can easily compare the potential savings and learn your break-even point on the refinance.
Look at the savings and determine if refinance is worth it
Now it’s time to answer the big question: Is refinancing worth it?
Let’s go back to our example from above:
- Original loan:
- Loan amount: $280,000
- Origination month and year: January 2014
- Rate: 4.43%
- Term: 30-year fixed
- Second loan:
- Origination month: January 2021
- Rate: 2.74%
- Term: 25-year fixed (you might not want to start your 30 years over. Many homeowners who refinance opt for a shorter loan term. Remember, in this scenario you would already have made seven years of payments on your original balance.)
- Closing costs: $10,000
With this example, you’d save $293 on your mortgage payment each month, adding up to $49,914 saved over the life of the loan.
Consider your break-even point for refinancing
Your break-even point is the point where your savings equal the costs you used to get those savings.
In our example above, you’re paying $10,000 in closing costs to get a new loan. Sure, you’re saving $293 per month, but you need to think about how many months it will take you to reach that $10,000 mark, after which you’ll actually start saving money each month. That’s your break-even point.
$10,000 / $293 = 34.13 months
So it would take you around 35 months of mortgage payments — or just shy of three years — to break-even on your refinance.
If you were planning to be in the home for more than three years, it might be worth it to jump on that low rate while you can.
Determine if you’re willing to take on the stress of refinancing
Of course, saving money isn’t everything, and refinancing is a stressful life event. It’s worth thinking about whether you’re willing to undergo that stress to save money. For most homeowners, whether it’s worth refinancing probably depends on exactly how much money they could save.
For example, if breaking even is going to take seven years, and you’d only save a nominal amount on your mortgage payment each month thereafter, it’s probably not worth the hassle.
But if you could break-even in just a few years and save hundreds each month like with our example above, that refinance is probably going to look pretty attractive to you — even with the added stress.
III. Track mortgage rates
How do you know when it’s the right time to finance? You’ll need to keep an eye on rates.
Why you should stay on top of mortgage rates
Staying on top of mortgage rates gives you options. If you take the time to play around with a refinance calculator, you should have a pretty good idea of at what point a rate is “worth it” for refinancing.
Once mortgage rates fall to that point, you’re in business.
In any case, it makes sense to track current rates as you pay down your mortgage, if for no other reason than to know where your current rate falls in comparison to market rates.
The easiest ways to track mortgage rates
The easiest way to track mortgage rates is to find a rate-tracker you like, and check in with it a few times a week. The Consumer Financial Protection Bureau has a good rate tracker that even lets you look at rates by state, credit score, and loan details. Or, you could use a consumer finance site like Bankrate or NerdWallet.
Finally, you could sign up for a daily mortgage rate update email, like the one offered through Mortgage News Daily.
However you decide to track rates, you’ll be way ahead of the game when it comes to refinancing your home and making the most of your biggest investment.