Reasons For Refinancing a Home

Updated: Apr 9, 2015

Highlights

  • Know your goals, before refinancing.
  • A lower rate can cut your monthly payment and save you money.
  • Evaluate whether a cash-out refinance to pay other debt is wise.
4.8
/5.0
(10 Votes)

Is Now the Right Time for You to Refinance?

For many homeowners, deciding if a mortgage refinance makes sense is a key question, more important than knowing what the current mortgage rates are or which lender to trust. A smart decision requires weighing different factors, ones that vary based on the needs of each homeowner.

You are wise to consider refinancing if:

  • Your current mortgage has a high interest rate
  • You are stuck in an adjustable rate mortgage
  • You want cash out or to consolidate your debt
  • You need a lower monthly payment and are willing to extend the time frame to pay off your loan
Quick tip

contact one of bills.com's pre-screened mortgage providers for a free, no-hassle mortgage quote. the only way to see if you can save money is by actively investigating your options.

this is text

know your goals

the number one reason that homeowners refinance their mortgage is to lower their payment! with a rate and term refinance or even a cash-out refinance, homeowners can lower the amount of money that they spend on their mortgage each month. by lowering the current monthly mortgage payment, a homeowner is basically picking up free money. who doesn’t like that!?

your situation — are you ready?

before trying to determine if the timing is right for you to refinance, assess your current situation and goals for the property.

  1. do you plan to be in your home for a short or long term?
  2. are you currently in an adjustable rate mortgage (arm) and willing to pay a higher rate to gain the security of a fixed-rate mortgage?
  3. might you benefit from the lower rate and payment that a short-term arm might provide?  
  4. do you have enough equity to pull some cash out of the home to pay off other debt or use for home improvements?

once you’ve considered your short- and long-term goals in relation to your current house, you can find the right loan for your situation.

stable income

next consider whether your are in a stable enough situation with your job, income and the local housing market.  

  1. have you been at your job, or in the same industry for two or more years?
  2. have you recently lost a job or had your income reduced?
  3. are your expenses stable or are they increasing?
  4. are houses in your neighborhood selling well, or is the market depressed?

the answers to these questions will tell you whether your situation is stable enough to qualify for a new mortgage. if your situation is not stable, you are probably not ready and not as likely to qualify. in that case, use this time to work on a budget, trim your expenses and work on improving your income situation. then wait for the home values in your area to turn around and stabilize. if your situation is stable, then it's a good time to look at refinancing.

lower rate and save cash

the no. 1 reason for refinancing your mortgage is to save money off of your current mortgage payment. a rate and term refinance can shave hundreds, even thousands off of your monthly payment. and the effort to do this is usually relatively light. with a rate and term refinance, you are going to a new lender (or even your current lender) and asking them for a new loan to pay off your existing loan, though the terms of the new loan are more favorable to you. one important consideration is to avoid paying a significant amount of out-of-pocket fees in order to get your loan done. the more you spend up front, the larger your monthly savings will have to be to earn that money back.

cash-out refinancing — when is it smart to pay other debt?

if you have a significant amount of outstanding debt (including credit card debt, home equity lines or loans, unsecured loans, even student or auto debt), and a good amount of equity (generally 30% or more), then you are in a position to consider a cash out refinance. when considering whether to add non-real estate debt (that is all debt other than your current mortgage balance) to your mortgage, you should understand the positives and negatives.

one positive is the ability to lower the current interest rate that you pay on your other debt. more often than not, a mortgage loan will be the cheapest way to access credit. if, for example, you are paying 15% on a credit card balance of $10,000, by paying the credit card company off with proceeds from a cash out refinance, you will effectively lower that interest rate to 5% (or the rate you get on your mortgage) on the $10,000 balance.

on the negative side, that debt will now be paid back over the same term as your mortgage loan, which is usually a 15- or 30-year period. you will reduce the amount interest you pay over a shorter time period, you are now extending that $10,000 credit card balance over a period of up to 30 years, and you’ll pay 5% over that whole period. in short, it will reduce your payments in the short term, but because you pay for it over a far longer period, your expense is greater.

another advantage is the ability to take cash to use for other purposes... an investment opportunity, college education, a vacation or even setting up a rainy day fund. when you refinance short-term debt into a long-term mortgage, you end up paying for whatever you use the cash for a very period. it’s a personal decision and depending on your situation, it may make sense to take cash now that you will end up paying back at a low rate but over a longer period. be sure to understand that when you use a mortgage refinance to take cash from your home, you reduce your equity (or ownership) in your home. if housing prices fall and you end up owing more on the home than it is worth, you could end up unable to sell the home easily.

easiest way to get an answer

so what now? you have asked yourself all of the right questions and have gotten your answers. what to do next? try the bills.com mortgage calculator or get a bills.com quick quote and find great mortgage lenders ready with rate quotes on the best loans for your situation.

4.8
/5.0
(10 Votes)

People also like to Read

Daniel Cohen

Learn home equity basics, how to use home equity, and the different types of home equity loans. ... Read more >>

Betsalel Cohen

Obama Passes HARP, but borrowers are looking for HARP 3.0 Mortgage Refinance programs. When a HARP 3 update is announced, you... Read more >>

Daniel Cohen

HARP Mortgage Program Refinance | Home Affordable Refinance Program (HARP) was just updated to avail low interest rates to mo... Read more >>

Daniel Cohen

US Bank | Learn about US Bank and no-closing-cost refinance mortgage loans. US Bank offers no closing cost mortgage loans, bu... Read more >>

18 Comments

Recent Best
1500 characters remaining
  • AR
    Mar, 2015
    Adam

    My desire is to pay as little for my house as possible in the long run. Our family’s plan is to have it fully paid off in approximately next 5-8 years as the current mortgage agreement sits now, but with ailing mother-in-law only the good Lord knows if that will be feasible. We are going to accomplish this simply by throwing as much extra money as possible each month at the principal. I don’t know how to figure out if it is worth it to refinance for a lower interest rate, or just keep things the way they are right now. If you can help, I would appreciate knowing how people figure these out. I need to know for both possibilities (5-8 year plan as well as the full 30 yr). I would really like to know how to do this myself, so if it is not too much trouble please include in your response the math for how to figure this out. :-) Below are my numbers, if not all you need, I can add to: Loan start July 2011. 30 Year mortgage. Original loan 170K. Current loan +/- 159K. Fixed interest rate 4%. Current monthly amount – about $1200. Can afford up to about $3500/month. Credit rating +/- 760. Thank you so much for your help! Adam from Alaska Laus Deo

    0 Votes

    • 35x35
      Dec, 2015
      Betsalel

      You can figure out your savings by checking the interest rate differential on your new loan versus you current loan less your upfront fees (including lender fees and third-party fees. Since you are not sure how much you can commit to each month, you probably want the flexibility of having a longer term loan and then making prepayments. Given your low-interest rate you are probably not going to find anything that lowers your interest rate by more than 3/4%, assuming that you take a 15-year loan. If you were to compare two loans (you can create an amortization table on an excel spreadsheet), one being your original loan with a principal and interest payment of about $811.61 at 4% interest, $159,000 balance, and about 25.5 years left, versus a $159,000 ,15-year loan at 3.25%, $1117 per month, the you would have potential saving of about $29,000 after 15 years (in interest payments). Part of the savings is due to the interest rate and part due to the higher monthly payment. Your breakeven point, assuming 2% upfront fees would be 27 months (and 3% fees would be about 41 months). Assuming that you were to add accelerated payments of $1000 per month, you would pay off your loan in 8.5 years and pay about $4500 less in interest during that time (and that doesn't include the extra closing fees on your new loan).

      0 Votes

  • CH
    Sep, 2012
    cynthia
    Brooklyn, NY
    I am trying to refinance with Chase Bank. If i should cancel out will I have to pay a fine. The refinance rate is 2.5% less that the original.
    0 Votes

    • BA
      Sep, 2012
      Bill

      It is not clear to me why you are considering canceling, if you can reduce your interest rate so significantly. However, as I don't know your current rate, the rate Chase offered you, or the size of the penalty, it is hard to give you any solid advice. Perhaps you can check with other lenders, to see if you can get an even lower rate, one low enough to make it worth paying the penalty to Chase.

      0 Votes

  • EJ
    Feb, 2012
    Eric
    Lancaster, CA
    Under HARP 2.0, Wells Fargo (my current lender) and GMAC (my friends current lender) is adding an additional risk factor to their offered interest rates depending how far upside down on your mortgage. My mortgage ammount is $250,000 and my house value is $110,000. Does Fannie/Freddie rules allow banks to add risk factor and offer me a higher rate than the market rate? Is it worth it to wait til the Frannie/Freddie automated system is established in mid-March or should I go with the Wells Fargo rate of 4.625 (vs the market rate of ~4.0)
    1 Votes

    • BA
      Feb, 2012
      Bill
      Fannie Mae and Freddie Mac have set prices for guaranteeing the loans, depending on several factors, including LTV. However, they have set maximum pricing limits. In general, banks can set the interest rate as they please, and their rates are determined by market prices and competition. The new system will be activated soon, although there is no way to know what rates will be offered on HARP loans. Check with your lender and see how long you can lock on to a rate, and at what the fees will be. Then you will be able to compare better your alternatives.
      0 Votes

  • MC
    Jan, 2012
    Mark
    Foster City, CA
    Rates keep dropping. How do I know when is the right time to move forward?
    0 Votes

    • BA
      Jan, 2012
      Bill

      The key to timing things right, in my view, is to refinance when it is clearly demonstrated that you can improve your financial situation by doing so. Don't try to time things to get the lowest rates that may happen. It may end up that they never occur. Clearly, most borrowers are not going to refinance at the very bottom of the market. So, focus your energy on seeing if refinancing today will save you money each month, lower your long term total interest costs, or help you reduce your risk by moving from an adjustable loan to a fixed-rate loan.

      0 Votes

  • EG
    Jan, 2012
    erick
    Gilbert, AZ
    I've been contacted by Chase to refinance my existing mortgage through their HARP program. By qualifying through the HARP program, they've stated that they can drop my interest rate to 4.25 from 5.5 on a 300k mortgage. They've also stated that they would provide me credit to cover all closing costs? Is this too good to be true? I can't seem to find any lenders that can refinance my mortgage through the HARP program until March. Any reason why Chase seems to be the only lender able to offer the program now?
    0 Votes

    • BA
      Jan, 2012
      Bill
      I don't know why Chase is the only bank offering you a refinance. Perhaps they are your original lender, and are doing the HARP 2.0 refinance through a manual system. Original lenders are allowed to solicit if the LTV is over 80%.

      If you qualified according to the old HARP rules, then any participating lender could have processed the application. If you only qualify through the new HARP 2.0 program, then new lenders are waiting for the new automated underwriting systems to be operative.
      0 Votes