Fees And Other Costs Would Offset The Savings
There are closing costs associated with refinancing. In 2021, the average cost to refinance was just under $2,400, according to data compiled by CoreLogic, though it varies by location and lender. According to the Federal Reserve, it can sometimes cost as much as 6% of the loan amount.
For refinancing to be worthwhile, youd want to make sure the savings would outweigh those initial costs in the long run. As Dallal explains: Closing costs can be high, so it may not always be worth the time and effort to refinance a mortgage.
You can use Personal Finance Insiders mortgage calculator to get an idea of how much a refinance could save you over time. Then, compare that to average closing costs in your state to see if the move is worth it.
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
Is It Worth Refinancing To Save $200 A Month
Reducing our original payment example by about $200 â to pay $994 a month â requires refinancing to a 30-year, fixed-rate loan at a 3.15% interest rate. You would pay a total of $126,525 in interest on the new loan. When this amount is added to the $38,574 paid on the original loan, the total comes to $165,071 â which means you would save $14,575 in interest.
If you instead focus on reducing your interest rate, you could save even more. Refinancing the above mortgage to a 30-year, fixed-rate loan for $231,284 at a 3% interest rate lowers your monthly payment to $975 â which is $219 less per month â and your total interest comes to $119,753. That saves you $21,347 in interest over the original loan.
What Is An Origination Charge
The origination charge is the amount charged for services performed on the initial loan application and loan processing. This includes all charges that lenders and brokers involved in the transaction will receive for originating the loan. It includes any fees for application, processing, underwriting services, and payments from the lender for origination. Learn more about closing costs.
If you are a service member on active duty, prior to seeking a refinance of your existing mortgage loan, please consult with your legal advisor regarding the relief you may be eligible for under the Servicemembers Civil Relief Act or applicable state law.
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Add A Home Equity Line Of Credit
A home equity line of credit gives you access to the equity in your home, at your own discretion. A HELOC works a lot like a credit card account, but because its a secured loan the interest rates are much lower. If you do take money from it, youll be responsible for monthly interest-only payments on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.
You Want To Shorten Your Loan Term To Pay Off Your Home Sooner
Refinancing will often lower your monthly mortgage payment, but not always. If you refinance from a 30-year loan to a 15-year mortgage, you’re likely to find that your monthly payment goes up, because you’re now paying off your home in half the time. However, you could still reap major savings on interest throughout the life of your repayment period.
Usually, you’ll get a lower interest rate on a 15-year mortgage than you will for a 30-year loan. Going back to our example above, refinancing that $100,000 mortgage to a 15-year loan at 2.35% will raise your monthly payment by $197.06 rather than lower it. But you’ll also enjoy $47,825 in interest savings by repaying your mortgage loan in 15 years instead of 30. And, you’ll be clear of your mortgage debt sooner. That’s important if you’re aiming to have your home paid off in time for a specific milestone, like retirement.
For more on refinancing to a 15-year mortgage, check out our guide on the topic.
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How Much Will It Cost To Complete The Refinancing
Depending on your lender and your loan terms, you may pay as little as a few hundred dollars or as much as 2% to 3% of the new loan value to complete a refinancing. If its going to cost you $3,000 to complete the refinance and it will take four years to recoup that money, it may not make sense for you.
Alternatively, if you can refinance and pay only $1,000, and have no plans to sell anytime soon, its very likely worth paying that $1,000 to save over time. In addition, some lenders allow you to roll your closing costs into the amount of the loan, so you dont have to come up with money out of pocket for closing costs.
Refinancing To Shorten The Loans Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if youre already at 5.5% for 30 years , getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.
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Youll End Up Paying More In Interest
Saving money might be why youre refinancing, but you could actually pay more over the life of the loan in some cases.
But if you had stuck with the original mortgage, your total interest costs would have been lower. To avoid paying extra interest, you might consider refinancing into a shorter-term loan.
Heres how the costs ultimately break down:
- Interest youll pay with the refinance: $135,610
- Interest you would have paid had you not refinanced: $132,129
Kim Porter is an expert in credit, mortgages, student loans, and debt management. She has been featured in U.S. News & World Report, Reviewed.com, Bankrate, Credit Karma, and more.
How Does Mortgage Refinancing Work
When you refinance, your current loan gets paid off and replaced by a new one with different terms. In the transaction, several things about your loan could change, including your interest rate, the length of your loan, the loan balance itself and even the type of loan you have.
When youre refinancing, the loans break down into the following two categories. Which path you take depends on what you want to accomplish through the refinancing process.
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To Access Your Homes Equity
Homeowners will often access the equity in their homes to cover significant expenses like paying for life insurance, college education, or renovating their homes. They will justify the additional debt, for example, to remodel as it will increase the propertys value. The interest on the new loan may also be lower than the interest on the previous mortgage, which helps save money.
Cash refinancing is especially popular among modern homeowners. You can access your homes equity through a cash-out refinance if you will have at least 20% equity after completing the transaction. Cash refinancing rates are often higher than rate-and-term refinance rates, but it is still one of the cheapest ways to borrow money.
Refinancing A Large Loan Amount
A quarter-point rate drop may also benefit someone with a large principal borrowed.
To illustrate this point, consider the following example from Steven Ho, senior loan officer at Quontic Bank:
- Assume you have a $500,000 mortgage at a 4.5% rate
- Your monthly principal and interest payment is $2,533, with a PMI payment of $250
- So your total monthly payment is $2,783
- You opt to refinance to a 4.25% rate
- This would reduce your monthly payment to $2,459 saving you $324 per month
Over five years, that adds up to over $19,000 in savings, Ho notes.
Even if you pay 2% in closing costs on that $500,000 loan, your upfront cost is just $10,000. So you save almost twice as much as you spent on the refinance within the first five years.
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Things You Need To Know
This can be a big decision. When you first bought the house you probably thought you were done thinking about mortgages, interest rates and all of that. But as with many financial decisions, its a good idea to revisit your mortgage situation and make sure it is still in your best interest.
There are many factors you should consider when determining whether to refinance. These include your current mortgage size, the new mortgage you would be taking out, the current home value, the current interest rate of your loan, the new interest rate and the closing costs.
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Super: TD presents Asking for a FriendWhy Would You Refinance?
Welcome to Asking for a Friend. Lets see who could use some financial advice today.
Dear Asking for a Friend,My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wondering…what exactly IS refinancing and why do people refinance?Sincerely,Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Let’s say the value of your home is $500,000.
80% of home value 0.8 x $500,000 $400,000Outstanding balance of your mortgage $300,000How much you can borrow $100,000
Subject to the bank’s approval, you could borrow up to 80% of the value of your home less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 .
So WHY do people refinance?
Super: To consolidate debts.
Super: Provide flexibility to pay for big ticket items.
Book an appointment and get financial advice for what you feel is most essential, through TD Ready Advice
Endslate: Visit td.com/readyadvice
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How Do I Get The Best Refinance Loan Rates
Try to go through the mortgage pre-approval process with at least three lenders to find out your real rate and make sure you are getting the best deal. Freddie Mac has found that borrowers save an average of $1,500 over the life of the loan by getting one additional rate quote and an average of about $3,000 if they get five quotes.
Refinancing To A Shorter Term
On the other hand, refinancing into a shorter-term mortgage can be an unequivocal win.
Interest rates are lower on 15-year loans compared with 30-year loans. In that same example, if you instead refinanced into a 15-year mortgage with a 3% interest rate, youd save a whopping $94,000 in interest compared to sticking with the original loan. Plus, you would be free from mortgage payments seven years earlier.
The tradeoff is that youll pay roughly $250 a month more compared to keeping the original loan.
|Years left to pay|
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Your Credit Has Improved
Your credit is a significant factor in determining your mortgage rate. Generally speaking, the better your credit is, the lower the interest rate youll receive.
Lets look at an example based on recent interest rates. If you have a 30-year fixed-rate mortgage of $150,000 and your FICO® credit score is within the 660 to 679 range, the myFICO Loan Savings Calculator estimates you could pay 3.375% APR .
With this interest rate, your monthly payment would be $663 and your total interest paid across 30 years would amount to $88,732.
In comparison, if your credit score was in the 700 to 759 range, the calculator estimates your monthly payment would drop to $631 . And over the life of the loan, you could save more than $11,500 in interest.
When Is Refinancing Not Worth It
Its important to remember that refinancing starts your loan term over. That means youre spreading the remaining loan principal and interest repayment over a new 30-year or 15-year loan term.
This has big implications for the long-term cost of your new loan. As such, refinancing might not be worth it if:
- Youve been paying your original loan for quite some time
- Refinancing results in higher overall interest costs
- Your credit score is too loan to qualify for a lower rate
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If Both The Monthly Payment And Interest Will Be Higher
If you’re not going to save money either way, you probably don’t want to refinance. But you might be compelled to refinance anyway as part of a divorce settlement or to switch from an adjustable-rate mortgage to a fixed-rate loan, for example.
The slider and the bars under it are red in this scenario.
What Is Mortgage Refinancing
Refinancing a mortgage is the process of replacing your existing loan by acquiring a new home loan in its place that suits your financial circumstances. The funds from your new mortgage pay off your existing mortgage.
Just like acquiring your purchase mortgage, youll need to gather your supporting documentation such as your recent pay stubs, W-2s, and bank statements. But youll also need details about your existing mortgage, including the remaining loan amount, the number of years left to pay and the interest rate. This information helps you and your lender calculate the best refinance loan option for your financial situation.
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To Switch From A Fixed
When you apply for a mortgage, you choose between two basic types of loans: fixed-rate mortgages and adjustable-rate mortgages, or ARMs.
Adjustable rates often start lower than fixed rates. You may be tempted to refinance from a fixed-rate mortgage into an ARM so you can score low rates for the first five, seven, or 10 years, and have lower monthly payments in the short term.
“I would never suggest refinancing out of a fixed-rate mortgage into an ARM just to reduce the monthly payment,” English said, “simply because even if it’s fixed for a period of time that you can measure, you don’t really know where the economy will be once that loan begins to adjust.”
Other Common Mortgage Repayment Strategies
We also know that many of our readers believe you should take out as big a loan as possible and for as long as you can and use those funds to invest in the stock market.
LetÃ¢s say you borrowed the money at around 3 percent and you can use that cash to invest in stocks and earn 8 percent on your money, that would be neat, right? But some of our readers canÃ¢t stomach any sort of risk when it comes to their homes. These readers would prefer to know that they have paid off their mortgages, no longer have to deal with a mortgage lender and that they own their home free and clear.
We also have plenty of readers who will take out a mortgage and never prepay that loan. They will feel that theyÃ¢ve borrowed money at a cheap interest rate, and use the extra cash to either save for retirement, invest or perhaps buy another property. They hope that by leveraging historically cheap interest rates, theyÃ¢ll make their money work harder for them.
So, how much risk are you willing to take? Will you sleep at night if you invest the difference and the stock market declines by 30 percent, as it did at the start of the Covid-19 pandemic? Or, will you sleep better knowing your home is paid off.
Only you can decide whatÃ¢s right for your financial and personal life.
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How Soon Can You Refinance A Mortgage
How soon youll be able to refinance your mortgage will depend on the type of loan you have, what kind of loan you want to refinance into and the lenders requirements. If you have a conventional loan, you might be able to refinance as quickly as youd likeunless your lender requires you to wait for a certain amount of time .
One exception is if you want to pursue a cash-out refinance. In this case, youll generally need to wait for six months after getting your primary mortgage before you can refinance.
There are also specific seasoning periods for loans backed by the FHA, VA or U.S. Department of Agriculture .
- FHA loans: 210 days after closing date
- VA loans: 210 days after closing date or after six consecutive payments, whichever is longer
- USDA loans: After making consecutive, on-time payments for 180 days
Note that while theres technically no limit to how many times you can refinance a mortgage, you might not be able to refinance your home very often due to these waiting periods.