Mortgage refinancing offers a chance to lower your monthly payments, reduce your interest rate, pay your loan off sooner, or even tap into your home’s equity.
And with student loans coming due again in autumn 2023, a strategic refi can help you consolidate them and strengthen your financial position.
There’s a plethora of refi options and trade-offs, so it’s important to have a dedicated professional like David Haley in your corner to make sure you come out ahead.
This brief guide will cover the main ins and outs of refinancing, so you can better prepare for a more personal discussion with a mortgage professional.
Is refinancing the right move, right now?
Generally, it makes sense to refinance your mortgage if you’d like to:
- Use your equity to consolidate debts or pursue major projects or goals.
- Access a better interest rate or avoid an imminent rate adjustment.
- Lengthen your loan term to decrease the monthly payment amount.
- Shorten your loan term to decrease total interest paid.
- Contribute cash to eliminate PMI and/or reduce your interest rate.
- Consolidate first and second mortgages into a single loan.
These goals are simple enough, but the math may not be.
Firstly, loan variables don’t change in isolation.
Your interest rate, payment amount, cash in/out, and loan duration tend to affect each other. For example, extending a 15-year loan to 30 years at the same rate would reduce your monthly payment by roughly one-third, but it would more than double your total interest paid.
Secondly, you’ll need to account for closing costs.
They vary widely, and can be handled in different ways, such as by “rolling” them into the loan. With all this variability, back-of-the-envelope numbers aren’t much help. Your mortgage advisor is the best source for specific estimates and guidance.
What type of refinancing makes sense?
Most refi options fall into one of five categories.
1. Rate-and-term refi
True to its name, this involves changing the interest rate and/or loan term, but not the balance. It’s a great way to save on interest or improve monthly cash flow without impacting your overall debt-to-income ratio.
2. Cash-out refi
If you need to put your home equity to use, then one option is to borrow against it via cash-out refinancing. For instance, this might provide cost-effective funds to address high-interest debt or handle major repairs or improvements.
3. Cash-in refi
If you have a large lump sum available, then you might consider using it to reduce your principal, and refinance the new, smaller balance. Depending on your original down payment, this may eliminate private mortgage insurance (PMI). In some market conditions, it also opens the door to lower interest rates.
4. Reverse mortgages
If you’re a senior with significant home equity, a reverse mortgage lets you receive cash either monthly or upfront, then repay it only when you vacate your home. It bears some similarities to a cash-out refi, but with a significantly different time frame and pay-off rules.
5. Government-backed refi programs
The FHA, VA, and USDA all offer government-insured refinancing programs with competitive interest rates and/or reduced costs. Eligibility depends on the specific program, the details of your property, and any other loans you have or have had.
How to plan for your refi
As we’ve covered, the math behind refi savings is a bit complicated. But, all else being equal, four things will help secure the best possible deal for your needs.
Prioritize monthly vs. long-term savings
Unless rates are falling sharply or you’re putting in significant cash, you can expect to reduce either monthly payments or total interest paid—not both at once.
For a given balance, extending the loan term decreases payments by spreading the principal over a longer period. However, time equals risk (from a lender’s perspective), so a longer term also translates to higher rates.
This trade-off may be fine if you need to free up cash flow for living expenses, life goals, or other investments.
But if you’re more concerned about total interest costs, then consider reducing the loan duration—that is, provided you have enough income to absorb the higher payments without destabilizing your finances.
Look into government-backed loan programs
Many borrowers don’t realize they’re eligible for more competitive loans backed the federal and/or Washington State government.
Numerous programs are available today. Make sure to review them with your loan officer, since limits and criteria are often complex and may change every year.
Establish your break-even period
Your mortgage advisor will use up-to-the-minute data to estimate when your loan savings will exceed upfront closing costs and other expenses.
That date, known as the break-even point, should happen long before you plan to sell the house. Otherwise, if you sell before breaking even, you won’t have time to reap the benefits of those substantial upfront costs.
Shore up your personal finances
Like any home loan, refi loans depend on things like your credit score, debt-to-income ratio, employment history, and cash in/out.
The more you can strengthen any or all of the above, the more competitive your rate will be. Your mortgage advisor can help you work through different scenarios to see how your personal finances might impact your refi options in the near future.
Final thoughts on residential refinancing
Refinancing your home is a popular way to take advantage of market changes, meet financial goals, or even pursue life priorities.
Options range from reducing payments to aggressively paying down principal to taking out cash for other purposes. That’s why it’s critical to start with a clear statement of how you hope to benefit.
Veteran advisors like David Haley and team are here to walk you through current options, explore government loan opportunities, and ultimately refinance under the right terms for you.