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Mortgage Refinancing

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HIGHLIGHTS
  • A mortgage refinance may reduce your monthly payment and save money over time.
  • Make sure that your savings justify your closing costs.
  • Programs exist to help underwater homeowners refinance.

The Scoop on Mortgage Refinancing

What is a ‘Refinance’?

A mortgage refinance involves taking out a brand new mortgage, the proceeds of which are used to pay off your old home loan.

The mortgage refinance process involves the same steps as finding a mortgage for a home purchase. Both a purchase and refinance loan involve finding a good lender, submitting a mortgage application and producing a host of supporting documents, having a credit report pulled, having your home appraised, and dealing with title insurance, escrow and closing. All that’s missing in the refinance process from the purchase loan process is finding a real estate agent and a new home you want to buy.

Generally, there are two kinds of refinances: rate and term refinances and cash-out refinances. In a rate and term refinance, you take out a new loan at a lower interest rate or different term and the funds from the refi are used only to pay off the old mortgage. In a cash-out refinance, you borrow additional funds, using the equity in your home. This additional money may be used to pay off other, more costly debt, such as credit card debt, or for any personal need.

Why Refinance?

As a homeowner, you are probably familiar with the constant stream of direct mail urging them to “Refinance Now!” that perhaps arrive in envelopes marked “Important Information about your Mortgage” or “Your loan information has changed!” These solicitations may contain good information or advice, but how do you know if refinancing makes sense for you?

Broadly, you should only refinance when there is a tangible benefit of doing so. In most cases, only you can measure whether a benefit exists.

Four reasons for refinancing that may produce a tangible benefit are:

  1. Overall Cost Reduction. If the new mortgage has a lower interest rate than the old, there is a potential cost savings through refinancing. However, you must make sure that these savings are sufficient to pay for the closing costs of the loan and make up for the fact that you may be taking an old loan with only X years to go and are now spreading that debt back out over 30 years. This can be a complex calculation to make, and an important determinant is information that only you know: how long you plan to spend in your home. Fortunately, Bills.com’s Should I Refinance mortgage calculator does the complex calculations for you based on your time horizon (the time that you plan to remain in your home). Check it out.
  2. Payment Reduction. For some, monthly payment reduction is the only consideration; if the payments don't come down, default and foreclosure may ensue. In these cases, the cost reduction calculation above may be immaterial, and it 1s just a matter of how much monthly payments can be lowered for some period of time, until the tough times are over. Only you can decide whether it is worth perhaps reducing your future net worth in order to make your monthly budget work. Again, our mortgage calculator can help you to find out if there are mortgage refinances out there that can meet your payment reduction needs. 
  3. Risk Reduction. Adjustable Rate Mortgages (ARMs) typically offer lower initial interest rates than are available for Fixed Rate Mortgages, but after an initial fixed period the rate and payments become variable — and they can rise substantially. During a period when rates are expected to rise in the future, some borrowers may prefer to refinance their ARM into a fixed-rate to reduce risk. Only you know if that applies to you.
  4. Cash Out. If you need additional funds — to remodel your home, to take care of an emergency, or to pay off other, high cost, debt — refinancing your mortgage with a new loan that both pays off your old home loan AND leaves you with cash in hand to meet the new need can be a good way to go. There is a cost to taking out the new cash out refinance loan — in many cases, only you can know whether access to the new cash is worth the expense.

Is it Time to Refinance?

If rates have fallen a long way since you first took out your home mortgage, there may well be a benefit to refinancing, whatever your reason to consider a new loan. If you are looking to save money on your mortgage over time, you should:

  • Estimate how long you plan to remain in your home. If you only plan to remain in your house for a short time, any savings you may generate in reduced mortgage payments may not be enough to cover the costs of refinancing. If you plan to remain in your home a very long time, your initial savings may be outweighed by the fact that you are now repaying your mortgage over a longer period of time. This is particularly likely to be true if you have had your existing mortgage for many years.
  • Find quality lenders. The right lender will help you determine if you qualify for a refinance and, if you do, what rate and payment you can expect, and how much it will cost you to refinance. To find a great lender and get a refinance quote, reach out to Bills.com’s network of pre-screened lenders.
  • Determine if the rate and payment you qualify for will produce a big enough benefit for you over time to justify spreading out your debt and paying closing costs (or financing them in).

This can be a lengthy process. Fortunately, our Should I Refinance mortgage calculator takes care of all these steps for you and gives you a clear answer in most refinancing situations.

How do I Refinance?

First you must find a good lender. Bills.com’s mortgage quick quote offers the choice of selecting from multiple lenders who will call you to discuss your loan options. They will require a small amount of personal information, or will ask you to provide a little more information in order to see real time rates, payments, and the loan products you qualify for online. Once you find the lender, loan, rate and payment you like, the lender will take you through a series of mortgage application steps, which end with your new loan getting funded.

Frequently Asked Questions:

  • Should I look for a No Cost mortgage refinancing?
    Conventionally, you must pay closing costs when your mortgage refinance is closing. With today's low interest rates, many people are choosing a slightly different option — to take a higher rate loan in exchange for having their closing costs covered — a so-called no cost refinance. This may or may not be right for you; while you will not have to pay money to refinance, which is great, the higher rate will leave you somewhat worse off over the long haul, because your payments will be higher than they would be if you paid the closing costs in one go.
  • Should I pay points?
    Another option that is open to you is really the opposite of a no cost mortgage refinance. Instead of taking on a loan with a slightly higher interest rate in order to avoid having to pay closing costs, you have the option to pay additional fees (called points) at closing in order to enjoy a lower rate for the life of the loan. Paying points can often make sense if a) you can afford to pay them and b) your time horizon is long enough so that savings in lower rates and lower monthly payments are sufficient to justify the additional fees you paid. One rule of thumb is that if your time horizon is five years or less, then points are unlikely to be worthwhile — but the specifics will depend on the rate/point combinations on offer from your lender. Note that paying points on an adjustable rate mortgage with a short fixed period is unlikely to make sense.
 

Comments (17)


John P.
Jackson, TN  |  January 04, 2012
I have recently started a new job and my wife and are are looking to refinance our home which she bought 7 years ago pryor to us getting married and her loan has an owner occupancy through the life of the loan clause. Although we do not plan on moving in the next year we would like to get the house refinanced so if we decide to mover closer to my work we would be able to rent the house out. What type of loan would allow us to do this. We have tried to put it on the market with no luck but have had many people talk about renting
Bills.com
January 04, 2012
Most, if not all, owner-occupied mortgages and deeds of trust contain the clause you mentioned. Refinance now because rates are starting to creep up. Then later, if you decide to use the property as a rental, you can consider refinancing to an investment mortgage. Or, you can continue to make your payments to the mortgage servicer as usual, which will probably be none the wiser if you or a tenant occupies the property.
Laurie C.
Gibsonville, NC  |  October 24, 2011
If my credit is bad, can I refinance??
Bills.com
October 24, 2011
Please see the Bills.com resource Bad Credit Mortgage Refinancing for a discussion of this issue.
Melissa L.
Brandon, VT  |  October 01, 2011
I am listed as joint tenant with rights of survivorship with me ex. We were not married. He would not agree to sell when I left and the foreclosure process has begun as he has not made mortgage payments and I have moved into a rental. He says he can refinance or try to end the foreclosure without my participation. Is this so?
Bills.com
October 02, 2011
He may be able to modify a loan for which he is the sole borrower, but I don't believe he can refinance or undertake any process that requires the title to clear, without your permission as a person listed on the title. I suggest you speak with an attorney to fully understand your rights and to best protect yourself.
Leah S.
Hanson, MA  |  September 15, 2011
I currently have 22 years left on a 30 year fixed rate at 5.25% I plan to sell the house anywhere from 1 to 5 years from now. I would like to take advatage of these low interest rates but not sure what is the best thing to do. Can you make any suggestions? I have done some online reseach but find it very confusing due to varing closing costs and rates, just like every, one I am looking for the best deal/bargin I can get. Thank you
Bills.com
September 16, 2011
The devil is in the details, as you have found. The problem I have in offering you advice is you say you plan to reside in the property for "1 to 5 years." The break-even point in most refinances 18 to 36 months. Therefore, if you refinance and sell 12 months later you probably made the wrong choice. On the other hand, if you refinance and sell 60 months later, you will probably be money ahead.
Andy K.
September 06, 2011
We have a 1st and 2nd mortgage with Bank of America with rates at 5.75% and 3.25% respectively. We've been in the house since Summer 2005 financing $219k on the first. Our balance on the 1st mortgage is $190,136 and the 2nd is at $47,532. The house is Zillow-valued at $90,200. We don't pay PMI, we chose a 25 year loan and have never been late - both loans are on a auto-draft. We have excellent creadit scores/ratings. Are there any options for us to refinance the 1st?
Bills.com
September 06, 2011
See the Bills.com resource FHA Short Refinance Program to learn if you qualify for a short refinance.
Aly V.
Cottrellville, MI  |  August 27, 2011
I am not on the promissary note, or the refinance , or the second mortgage...I was married for 23 years and my husband passed away, the second mortgage will be put in charge off status in 6 days, I can walk away from this but the mortgage is affordable with my income,since i dont work, am I responsible for the second mortgage, or equity loan that was just in my spouses name? My financial advisor says walk away, and probate attorney says bring the second mortgage current and since my mortgage is paid till feb, to bring up the second equal to the first mortgage,what are my options...if I pay this does that make me responsible for his debt?
Bills.com
August 31, 2011
Aly, there is too much at stake for you for me to offer you a mere opinion. You really need legal advice, which only an attorney can give. I urge you to speak with an attorney that can advise you of all the pros and cons of your different options.
Brandy C.
August 04, 2011
Hi, thanks for your article. My husband and I have been following interest rates for the past year. We finally feel the time is right. I appreciate your note about how some homeowners are deciding to go with zero closing costs and a little higher interest rates. We recently decided this was our best option too. Thanks for the information.
Laura C.
Bellevue, WA  |  February 16, 2011
I see the link you posted to find some approved lenders, but I have a specific question. Do you recommend that a person work with a mortgage broker or with a direct lender? Does it even make a difference?
Bills.com
February 16, 2011
One big difference separates an independent broker and a bank's mortgage loan officer: An independent broker has the luxury of offering loans from a variety of sources and an array of rates. A bank's loan officer can offer what his or her employer offers — if the bank offers what you need then a bank is fine. See the Bills.com resource 7 Reasons to Choose a Mortgage Broker to learn six other reasons to choose an independent mortgage broker.
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Laura C.
Bellevue, WA  |  February 17, 2011
Thank you for the fast reply. Should I take it from what you wrote me that you recommend working with a mortgage broker? Are there reasons to choose to work with a direct lender? Is one going to give me a better rate than the other?
Bills.com
February 17, 2011
I don't recommend one over the other, actually. What I do recommend is that you shop around to find the best mortgage refinancing loan that you can.

It may seem odd, but sometimes a broker may be able to offer you the best rate on a mortgage and sometimes a direct lender can. A lender can have a retail division that solicits mortgage loans from end-user clients like you and, at the same time, have a wholesale division that markets its mortgage refinancing loan products to brokers. A broker has more flexibility, offering a greater number of products from a variety of lenders, but is responsible for covering all the operating costs to run the brokerage, which can result in you paying fees or points that you would not with a direct lender. A direct lender can only offer you the products available in-house, so you have less to choose from with a direct lender, but the costs may be lower. Another thing to keep in mind is that some lenders only offer their loans directly; they have no wholesale division that makes their loans available through a broker.

To find the best refinance mortgage, shop around. Speak to brokers and direct lenders. Use an online tool, like Home-Account.com that searches for and then matches you with the best loan available from a pool of lenders. Please come back and report to us on how your mortgage refinancing shopping experience goes.
Thanks for your feedback!

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