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To Refinance or Not to Refinance? That is the Question.

5 min read

With mortgage rates at or near historic lows in many areas due to the impact of COVID-19, you might be asking yourself whether or not you should refinance your home right now. It is important to establish your reasons and goals for refinancing and then to consider the associated pros and cons.

Reasons to Consider a Refinance:

  • • You want to lower your monthly payment.
  • Lowering your monthly payment can be accomplished in a number of ways. First, you may be able to refinance to a loan with a better interest rate. Current market conditions are yielding favorable rates, and factors such as your credit score, loan to value amount, and debt-to-income ratio can play into your eligibility for lower rates.

Second you may be eligible to eliminate or obtain better options on your PMI, or Private Mortgage Insurance. PMI is usually required when you put down less than 20% on your home and typically costs between 0.5% to 1% of the loan amount annually. While some homeowners can easily eliminate PMI once equity is accrued, others may benefit from refinancing out of it if the savings outweigh the refinance closing costs.

Third, you could refinance into a loan with different repayment terms. For example, if you currently owe 20 years on a 30-year loan, you could refinance into another 30-year term loan. Your monthly payment should decrease, but you will pay more over the life of your loan.

Check out NRL’s Payment/Amortization Calculator to calculate your monthly payment for fixed or adjustable rate loans.

  • • You want to save money over the life of your loan.
  • Consider refinancing into a shorter term loan. For example, you could refinance a 30-year term loan into a 15-year or even a 10-year fixed repayment term. It is likely your monthly payment will increase, but you will save money over the life of the loan since you will be paying interest fees for a shorter period. Keep in mind that you will likely qualify for lower interest rates in a shorter term loan as well.
  • • You want a different type of mortgage.
  • Refinancing allows you to trade in your current loan type for a new loan type. For example, your current mortgage may be an ARM, or Adjustable Rate Mortgage. While it might have carried a low rate for the first few years of its term, you could be up against rising mortgage payments in future years. Switching to a fixed rate product could be a great solution to keep your payments low and consistent.
  • • You want to “cash-out” and leverage the equity in your home.
  • Cash-out refinances can be attractive for a number of reasons. You may wish to take out some of your home’s equity for some home renovations, to consolidate higher rate debts, to jumpstart your path to owning an investment property, or even to increase your financial liquidity during these unprecedented times. Whatever your reason, it is important to consider the impacts of decreasing your equity position and extending the size and life of the loan.

Regardless of your motivations for refinancing, it is important to remember that there are closing costs and fees associated with the process. As such, consider whether you will be staying in your home long enough to recoup those costs. Check out NRL’s Refinance Break-Even Point Calculator to calculate the number of months to break-even if you refinance your loan. Also keep in mind that loan guidelines have become more stringent amidst current market conditions, so it is important that you work to maintain a good credit score and to keep your total debt-to-income ratio below 45%.

As you can see, there are several reasons to consider a mortgage refinance. Continue your research so that you are an informed borrower, and remember that your lender can be an invaluable resource in helping you understand your options in today’s market. Wishing you health and happiness as you ponder the question, “To Refinance or Not to Refinance?”

Coming Soon: “Home Improvements That Are Worth It”