Should You Refinance Your Mortgage?

The beauty of homeownership is that borrowers may build towards the option to refinance from their initial home into a loan with better rates and terms to put themselves in a better financial position. Home owners will want to establish a breakeven point to calculate the amount of time that is necessary to ensure choosing to refinance their loan will make sense to their financial goals. 

For homeowners looking to stay in their homes long term, refinancing into a loan with better rates and terms can save them hundreds of thousands of dollars that would otherwise be paid over the life of their loan. However, for homeowners who may be planning to sell their home soon, it may not make the most sense for them to refinance on their loan when taking into account closing costs and other fees. 

The Home Loan Experts are here to help break down which scenarios make the most sense for homeowners to refinance on their mortgage, putting themselves in a better position financially.

When Should I Start Thinking About Refinancing my Mortgage Loan?

First, we should look at how and why refinancing on a loan can be advantageous to borrowers looking to put themselves in a better position financially. 

1. Debt Consolidation. Homeowners may be able to secure outstanding consumer debts like credit card debt, non-mortgage loan debt, and other bills by using their built-up equity to refinance on their loans. Those debts get absorbed into the overall loan and issued at lower interest rates as part of your monthly payments. With a debt consolidation loan, you can get cash and get a new mortgage at the same time, while also combining your debts. Your credit score will impact approval from your lender along with your debt-to-income ratio, age (at least 18 years old), resident status, and status as a homeowner (cannot be in bankruptcy or foreclosure). 
2. Lower Interest Rate. Fixed-rate loans are set at competitively low prices currently, making this refinancing option a serious contender when it comes to putting homeowners in a better financial position. Initially, a larger portion of your monthly payments on your loan goes towards paying off the interest on your loan before getting to the core of the principal owed on the loan. A lower interest rate means paying lower interest over a shorter period, which can lead to significant savings.  
3. Better Terms on Your Mortgage. The 30-year fixed-rate mortgage loan is the path most taken by homeowners today. However, refinancing into a 15-year mortgage loan with more aggressive monthly payments can save you thousands of dollars in the long run that would otherwise be paid over the life of the loan. Furthermore, securing a lower interest rate by refinancing into a fixed-rate mortgage from an adjustable-rate mortgage makes it so homeowners are not subjugated to an interest rate that fluctuates according to market conditions once the initial period ends. 
4. Eliminate PMI. Homeowners who are not able to put down a down payment of at least 20% are usually required to purchase private mortgage insurance (PMI) to offset the risk to lenders when issuing a loan. PMI can range from .25% to 2% on your loan, like a barnacle on your monthly payments. Homeowners who have built-in enough equity in their house reaching the 20% threshold will want to strongly consider refinancing into a loan without PMI when they are eligible to lower their monthly payments.
5. Borrow Against Your Own Equity. Having built-in housing equity gives homeowners the ability to be their own bank. You can borrow against that equity to do a cash-out refinance and apply that cash towards a larger life purchase, like college tuition, paying off student loans, a wedding, giving yourself capital to make other investments, or a home renovation project. A cash-out refinance gives homeowners the agency to pursue a better financial future of freedom and independence.

What Variables Does A Refinance Calculator Use as Inputs?

A refinance calculator determines savings based on the bare bones of your loan, which is why it is a great tool for showing you an estimate. Speaking with a lending service provider can give you a more accurate figure. The following variables are input to show you how much you are eligible to save by comparing your current monthly payments to new monthly payments by refinancing on your mortgage.

1. Current Loan Amount. This amount is how much you currently still owe on your loan. It is composed of the principal, interest rate, and other monthly payment expenses.
2. Interest Rate. This is your current interest rate. A fixed-interest rate is typically calculated at 2-5% on the total loan amount, while an ARM will depend on if it is locked in at the initial rate period or fluctuates based on market conditions.
3. Current Term. Loans are usually issued at intervals of 15 or 30-year terms. 30-year fixed-terms are the traditional route to homeownership, offering more affordable monthly payments. However, 15-year terms can save homeowners thousands of dollars that would otherwise be paid over the life of a longer loan term.
4. Origination Year. This is the year your loan was issued. Time is an important variable when determining if refinancing is the best option for you financially. The longer you intend to stay in your home, the more refinancing will make sense according to your economic situation.
5. New Loan Amount. This is the new amount you would be expected to pay on your loan. Compare it carefully to the current loan amount to see if there is a considerable savings difference. 
6. New Interest Rate. Locking in a lower interest rate is usually one of the primary goals for homeowners when looking to refinance into a new loan. You will want to ensure that the interest rate is significant enough to offset closing costs and fees incurred when refinancing your loan.
7. Refinance Fees. These fees are typically bundled into the loan total.

This can include lender fees, credit report fees, appraisal fees, title-related fees, insurance-related fees, escrow fees, property fees, state-specific fees, and more. Homeowners can estimate these fees usually at about 3% of the loan amount; talking with a lending expert can give you a more exact figure of what to expect. 

How Does a Refinance Calculator Show me How Much I Can Save?

Also, a cash out refinance calculator shows you savings based on the breakeven period, or, the number of years you’ll have to make the new monthly payment before you recoup the costs of refinancing. Two main components intersect to show homeowners the breakeven point based on the time you plan to stay in your home: how much cash you’ll save and the difference between the original mortgage loan and your new loan.

Cha-ching! Cash savings resulting from the difference between your current monthly payments and your new monthly payments benefit homeowners as money that stays in the bank. Closing costs, at about 3-5% of the loan will still need to be taken into consideration, which is why it is recommended that long-term intended home dwellers invest in themselves by refinancing on their loan. These costs may be paid upfront, but are usually rolled into the overall loan.

What’s the difference in the amount you’ll still owe? That’s the difference between the amount of principal on your current mortgage and the amount of principal you’ll owe on your new loan when you refinance.

How Can The Home Loan Expert Help You Save?

The Home Loan Expert started out going door-to-door more than 15 years ago, showing homeowners how they can save money by refinancing their current mortgage loan into a loan with better rates and terms. Thanks to our grassroots-like approach to lending, our company has grown nationwide to help homeowners take control of their financial future by getting the best deal possible on their loans. 

Our highly qualified lending Experts are well-equipped to serve our neighborhoods and communities because our team comes from them. Our personalized, customer-centric approach can be executed efficiently thanks to our in-house underwriting process that can get you approved on a loan in as little as 5 minutes. While using a refinance calculator is a great jump-off point that can show you your savings in more defined numbers, a lending service provider can give you more accurate results and can discuss the inputs that are not visible or easily calculated. Give us a call today at 800-991-6494 or fill out our application to find out more about if refinancing your mortgage is the right financial option for you.