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Refinance My Home

By Brad Stroh Apr 18, 2013
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HIGHLIGHTS
  • Examine your costs, as well as your savings, before deciding to refinance.
  • Define your goals, to make sure that refinancing will meet them.
  • Research rates and compare banks and lenders, if you want to get a refinance mortgage loan.

Top Answers to the Question: Should I Refinance My Home and Mortgage Loan?

Refinancing your home can be a great way to save money or to improve your financial situation. However, before you refinance, you need to determine if you are refinancing for the right reasons and if the market conditions are right for refinancing. To have a successful refinance, it is also important to locate a lender who will work as your partner when you ask yourself, “Is it the right time to refinance my home?”

Your home is most likely your biggest investment. So, a decision to refinance your home is not to be taken lightly. To help you decide whether refinancing makes sense, start by reviewing the basic reasons to refinance. Learn why other people refinance their homes, when refinancing may not be the best decision, so you can determine if refinancing is right for you. Before you decide to refinance, define your goals.

Four Reasons to Refinance Your Home

1. Lower Your Monthly Payment

Refinancing can be an effective way to save money on your monthly mortgage payment. Refinancing can save you money, each month, by lowering your interest rate and the size of your monthly payment. Even homeowners who owe more on their home than it is worth are finding refinance programs to help them, such as HARP and FHA Streamline or VA Streamline Refinance loans.

2. Lower Your Total Costs

Refinancing can help you pay off your loan faster and greatly reduce the total amount of interest you pay. Many people are refinancing to shorter-term loans, such as a 15-year loan, to save money over the long term. Refinancing to a shorter-term could increase your payment, so be careful about taking on a payment that could be difficult to afford. It may make sense to refinance at a slightly higher interest rate for a longer term and then to accelerate your payments to pay off the loan faster.

Quick tip #1  Contact one of Bills.com’s pre-screened refinance partners for a free, no-hassle mortgage quote.

3. Reduce Your Risk: Change an ARM to a Fixed-Rate Mortgage

A good reason to refinance can be when you have an adjustable rate mortgage (ARM) and you refinance to lock into a fixed-rate mortgage. This protects you from an increase in future interest rates, which would cost you money and may make it harder for you to afford your mortgage payment. Many people are taking advantage of the low rates available to refinance their ARMs into a a fixed-rate loan in order to reduce the stress and worry that comes with the uncertainty of an adjustable rate loan. Moving into a fixed-rate mortgage can help you avoid financial trouble before it starts.

4. Cash-out Refinance: Getting Money Out of Your Home

Another reason to refinance is to get money out of your house, which is known as a cash-out refinance. This type of refi allows you to access the equity in your house to use that money for other purposes. Popular reasons to do a cash-out refinance include: consolidating debts that have a higher interest rate than the new loan, making home improvements, and paying for college costs. Of course, any time you take equity out of your house, you want to make sure you assess the risks involved. Be careful that your new mortgage payment is affordable, so you don’t put your house in jeopardy.

Quick tip #2  Are you thinking about refinancing? Bills.com provides you today’s mortgage rates.

Two Reasons Not to Refinance a Home

A refinance is not an easy fix to complicated problems, nor is it an ATM for making unneeded purchases. As with anything relating to mortgages or your house, you need to be smart about a refi and know when it is not the right decision.

1. When a Refinance Does Not Save You Money

Lower rates do not necessarily mean that a refinance will save you money. An important factor is how much will refinancing cost you. Compare your costs to your savings. Lender closing costs and third party fees can add up to several thousand dollars, which can prevent the refinanced loan from saving you money. Make sure to weigh whether you are adding years to your loan, by resetting the clock to a 30-year term, when you have fewer years left on your current loan.

You also need to consider how long you plan to stay in that specific house. If you plan to move in the near term, a refi may not save you money. Talk to a mortgage professional or trusted financial planner, if you are not sure where you stand.

2. Cashing Out for the Wrong Reason

Using the equity in your home to finance a purchase or expense should only be done for important reasons. Millions of Americans used their homes as piggy-banks, during the period of time that home values were rising year after year. People used equity to finance vacations or to spend on frivolous purchases.

Before you take cash out of your home, make sure that the cost is worth the benefit. Any time you pull out equity, you increase the risk of losing your home. Using equity for home improvement projects can increase the value of your house, though you rarely get a return equal to what you spent on the improvements. Don't use your home as a piggy-bank. Using equity for luxury purchases saps the value from your home.

Summary

There are four good reasons to refinance a mortgage, and there are valid reasons not refinance, too. Everyone’s situation is different, and it is important to analyze yours before making any big decisions about your home. If you use a refi wisely, you can benefit, but knowing when to say “no” is also important.

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Comments (224)


Jennifer P.
Greenwood, IN  |  October 16, 2012
In 2009 we were able to do a modification after much stress, lawyers, and fees. Our balance was $135,000 but after fees and such this became $145,000. But we were grateful we could save our home. This month we were going to refi with our lender, which we were lead to believe would be easy and of course costs us about $2,000. This week we were told that since we are still above the $135,000 level we can not refi even though they tacked on the fees and such to our loan. I started searching for other lenders to refi with and were told that since it is a temporary modification they cannot help us. Why? What does this have to do with anything?
Bills.com
October 29, 2012
Jennifer, Your current lenders seems to be saying that your LTV is too high. Maybe that is the reason other lenders are not willing to work with you? I think the best solution is to call more lenders and pin anyone down who tells you that it is the temporary status of your loan mod that is preventing you from refinancing.
Dara E.
San Marcos, CA  |  July 20, 2012
I have a 5.75% 30-year fixed on my house. The loan is about $350,000. I want to refi to a lower interest rate, but the value of my house has dropped almost to what I owe, a bit more than that luckily. I am not underwater, but would like to know if I should bother to refi to a lower rate? I am not selling anytime in the next 15 years.
Bills.com
July 20, 2012
Look into refinancing, given that mortgage rates are at an all-time low. Maybe a HARP loan would be a possibility. It does not require that you be underwater and would be a way of avoiding PMI, if you currently don't have PMI.
Brian Y.
New Richmond, WI  |  June 11, 2012
I purchased my home 3+ years ago for $188,000 @ 4.875%. I was thinking about refinancing to 3.75% my question is since I first gotten my mortgage my credit score was around 730, now (after i got a divorce) my credit score is about 100 points lower. How will this reflect if I want to refinance?
Bills.com
June 12, 2012
The drop in your credit score could prevent you from qualifying for a conventional refinance loan. I suggest you speak with your current lender, to see if it will offer you a streamline refinance. Your credit may not be as big an issue with them, as long as you've never been late on a mortgage payment.

Other than that, you could look at an FHA loan, as FHA loans have less strict credit score requirements than conventional loans. You probably need a 620 credit score with most FHA lenders, although there are some that accept scores as low as 580. Make sure to factor in the costs for upfront Mortgage Insurance Premium (MIP) that come with an FHA loan.
Lois F.
Glen Carbon, IL  |  May 22, 2012
Bought my home in 1999.
  • Balance $63,000 w/ARM @3.25%
  • Value $125,000.
  • Credit score 810.
  • Want to refi to fixed.
  • I'm now retired

Have bank offer of 15-year @3.25% locked until 7/30/12 and closing costs of $1,600. Any additional questions I should ask?

Bills.com
May 22, 2012
Shop around. The rate strikes me as a a quarter-point too high given your LTV and credit score. Of course, I do not know your debt-to-income ratio, so if your DTI is sky-high your rate might be reasonable.
Jo P.
Montgomery Twp, NJ  |  April 23, 2012
I just received a quote of 3.75% on a 30-yr fixed or 3.375% on a 20-yr fixed. Mortgage at $363k, into it for about 3 years now. Closing costs are about $2,700. We can roll $2,400 into new mortgage. The 30-yr will save us about $372/month, but tack on 3 years to the mortgage. The 20-yr will add about $30-$50/per month and will knock off 7-yrs from the mortgage. We have no intentions of moving until we retire (another 25 years), but who knows what life will bring in the future. Which would you recommend?
Bills.com
April 24, 2012
Both quotes look good. You don't mention your interest rate, but it appears to be around 5%, so those rates are big improvements. In addition your closing costs are quite reasonable. Either way, financially it is a good deal.

The decision you need to make is a personal one. The main factor in your decision should be your cash flow needs. Can you afford to pay the extra $50 per month or do you need the lower mortgage payment, which will put another $372 in your pocket? Do you have a rainy day fund? Are you putting away money into your retirement accounts? If your finances are in good order, then paying off the mortgage is a good long term investment. But, if you decide to go with the lower payment and longer period, then make sure you do not just spend the extra money, but also build your equity. If you have extra funds, you can then decide to accelerate your payments, or make a lump-sum payment.
Chris J.
Copley, OH  |  March 28, 2012
We have a 5.25% rate on a 30 year loan with around $96,000 left. We also have a HELOC at 4.5% interest only with a $30,000 balance. Would you recommend combining the two loans at a lower fixed rate on another 30-year mortgage? We're a little over 3 years into the home but we have about a 50% LTV due to a large down payment. We'll probably be in the home for a while.
Bills.com
March 28, 2012
As the cliche goes, "The devil is in the details." What are the closing costs for the refinance? Closing costs determine the payback time on a refinance. Lower costs = faster payback. Get a quote and then calculate your time to payback and lifetime savings.
Lindsay D.
Martinsville, IN  |  March 19, 2012
We purchased our home a little over 2 years ago. We owe $115,000, we pay $707 a month before escrow and have a 5.875% interest rate. We have good credit high 700 range. We are considering refinancing down the road but my question is should we save $ every month to put towards a "down payment" when we refinance or should we just be sending in whatever we can towards to principle every month? I'm wondering if we saved long enough to have enough to put 20% so we wouldn't have to pay the private mortgage ins. (about $50 a month). It would take us around 4 years to do so. What will save us more in the long run?
Bills.com
March 19, 2012
If you can receive a return on your money at a higher rate than your mortgage interest, then it would be better to invest the fund rather than accelerate payments. In general mortgage rates are higher than money that can be save. There is no way to know what the interest rates will be in 4 years time. Another unknown is the future value of your home, which you did not mention in your question. However, if you bring the LTV down to 80%, you can request that the Mortgage Insurance company terminates your PMI. Their decision will be based on an appraisal report, or whatever method they use to determine the property value, at the time of the demand.
DEE 7.
Detroit, MI  |  February 29, 2012
I have a 3-year old, $90,000 mortgage. My lender got in touch with me offering reduced rate from 5% to 4%, VA, fixed, 30-yrs, no-cost to me. Would this be good opportunity or would this not be worth the lost having paid the loan for three years. This is all new to me, being a first-time buyer and all.
Bills.com
February 29, 2012
When you say "no cost to me," do you mean that the lender is not rolling any fees into the loan, increasing what you owe? If the loan balance is the same, then reducing your interest rate is a clear winner.

If fees are being added into the loan total, then you need to think about how much the fees are, how long you will stay in the home, and how long it will take you to pay off the home if you were to make the same payment you are making today.
Erica M.
Ludowici, GA  |  February 24, 2012
My husband and I are in the process of building a home, which is 90% complete. We were pre-approved for a loan of 200,000. When we spoke to our lender, they informed us we had an account in our credit that was reported to the credit bureau for a no initial payment made. My husband and I tracked down the account and it turns out the company reported the wrong information, however will get it fixed on their end and report it as fixed in all three credit bureaus. My husband and I also filed a dispute. Prior to this inaccurate report, our credit report was about 730. This wrong allegation against our credit dropped our credit score by at least 100 points. Once the credit departments are notified of this wrongful allegation towards our credit from the company, how long will it take to fix and update on our credit report? I already obtained a letter from the company stating the company messed up, it was not our fault and it will be fixed at all three bureaus. I have provided this letter to our lender. Is there any way we can fix this so it wont damage our APR rate with the lender? What's the next step? The house will be finished in a week as well.
Bills.com
February 26, 2012
Speak to your lender about a rapid rescore. This is your best chance of updating the score quickly.
Scott C.
Faribault, MN  |  February 14, 2012
I'm 8 years into a 30-yr fixed loan @5.75%. I purchased the home for $155k and still owe $137k. with today's market, I'd be lucky to sell it for more than $110k, but have been wanting to move for a couple years now. I've been checking into refi's, and can get a 30-yr fixed @ 4.25% and save $270/mo. I can get a 5/1 ARM @ 3.25% and save $350/mo. My question is, should I refi when I intend to sell my home as soon as I can at least break even?
Bills.com
February 15, 2012
Your breakeven point would be about 12 to 18 months, if your closing costs are about 2%.

I understand from your question that you are underwater, your loan balance is larger than the value of your home. It is impossible to tell when the market will change and you will be able to sell the house at a price that will allow you to repay the loan.

The type of loan you take will depend on both the amount of risk you like to take and the monthly payment you wish to take. If you wish to reduce the monthly payment as much as possible, then a 30-year ARM mortgage will accomplish that goal. However, if you are refinancing through the HARP program, then you will be limited in your choices, as an ARM is possible, only when your LTV is 105% or less. If your current monthly payment is manageable, then you might want to refinance into a 20-year loan, which would keep about the same payments, but pay off the loan a little quicker than your current loan.
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