What is mortgage refinancing and when should you consider it

The journey to home ownership isn’t always easy and doesn’t end the day you get your keys. Once that day arrives, you usually have between 15 and 30 years of mortgage payments left in front of you. You can expect some changes during this time, especially when it comes to your finances.

When this happens, you might consider refinancing your mortgage.

What is Mortgage Refinancing?

When you refinance your mortgage, you take out a new loan to pay off your existing mortgage. The difference: This new loan will have new (and hopefully better) terms. Here are some major reasons why you might consider refinancing your mortgage:

  1. This could reduce your monthly payment: When you refinance a loan with a lower interest rate or a longer term, it can significantly reduce the amount of your monthly mortgage payment, making it easier for you to pay it off and cover your other expenses and debts.
  2. You will pay less interest during the term of your loan: When interest rates drop, you may find yourself in a position to secure a lower rate, which could translate into significant savings by the end of your term.
  3. You could access your home equity: Also known as a cash-out refinance, this is when you replace your existing mortgage with a new one with a higher balance. Then you take the difference as cash and use it to fund other expensive expenses or projects.

How does mortgage refinancing work?

Refinancing takes around 30-60 days, and the process itself is similar to the process you went through when you applied for your original mortgage, so try to be prepared by gathering all of your important financial documents ahead of time so you can that the process can be as transparent as possible.

“The lender will need to re-examine your financial situation to determine your ability to repay the new mortgage and will re-evaluate your home to get an updated property value,” says Thomas Parrish, managing director and head of retail lending product management at BMO. . Financial Group. “You will need to provide various documents (income documents, declaration of assets, property insurance policy, etc.) to your lender. Based on the evaluation of all these aspects, your lender will determine if you are eligible for a new mortgage. »

Pro tip: Get pre-approved from multiple mortgage lenders so you can compare interest rates and terms and choose the best option.

Refinancing — in numbers

So how much can you actually save by refinancing? Let’s break it down.

Say you have a 20-year fixed rate mortgage of $300,000 and you still have 15 years left on your loan:

Your interest rate: 6% (the current national average for a 30-year fixed rate loan is 7.04%).
Monthly payment: $2,200
Balance remaining on your mortgage: $270,000

Now suppose you refinance a 15-year mortgage (about the same term as you had left on your original loan) at a lower rate.

Your new interest rate: 3.5%
New loan term: 15 years old

Lowering your interest rate and choosing a 15-year term will help you save:

Your new monthly payment: $1,930.18
Monthly savings: $269.82
Difference of interest: $48,567

Want to try doing the math yourself? Try using our mortgage refinance calculator below:

What are the pros and cons of refinancing?

Many experts agree that while refinancing your mortgage can help you save at least 1%, it may be worth all the extra fees and paperwork. But if the savings aren’t significant, you might be better off sticking with your current mortgage and original terms. Here are some of the pros and cons you should weigh when considering refinancing:

Advantage: you could reduce your monthly payment. One of the obvious benefits of refinancing your mortgage is that you might get a lower interest rate which, in turn, lowers your monthly payment.

Advantage: you could get rid of your private mortgage insurance (PMI). If you paid a smaller down payment when you originally purchased your home, you may need to make monthly PMI payments now to offset the risk your lender has assumed by lending you the funds for your home. Refinancing can be a way to get rid of this requirement. The cost of PMI varies depending on a number of factors, but in general, Freddie Mac estimates that it costs between $30 and $150 per month for every $100,000 borrowed.

Con: You will be responsible for closing costs. Refinancing isn’t free, so you’ll need to crunch the numbers to determine if you’ll save enough to make those extra costs worth it. When you refinance, you will be responsible for closing costs…again. This could range from 2% to 5% of the value of your refinance. “Some aspects that homeowners need to keep in mind when refinancing are the costs associated with it,” says Parrish. “Typically, [there are] closing costs such as loan origination fees, appraisal fees, title searches and insurance, surveys, filing fees, closing attorney fees and taxes.

Disadvantage: refinancing does not always help you save money. If you’re planning to move or can’t get a low enough rate, refinancing may actually cost you more than you can save. For example, if refinancing your loan with a new lender costs $5,000 up front and your new monthly payment is only $50 less than what you were paying before, you will need to stay in your home. for at least 100 months to break even.

The take-out sale

Refinancing is not a panacea for your housing cost problems. This may help some homeowners keep their expenses down, but your financial situation and the rates you are offered will play a huge role in deciding whether or not to refinance your mortgage.

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