Refinancing Your Mortgage: Everything You Need to Know

Mortgage refinancing is the process of replacing your current mortgage with a new one. Often, a homeowner will refinance to secure a lower interest rate or better mortgage loan terms.

What are the different types of mortgage refinancing?

Generally, the two most common forms of mortgage refinancing are:

• Cash-out refinancing, which occurs when you borrow more money than you owe on your existing mortgage. At closing, the difference in the amounts is delivered to the borrower as cash.
• Rate-and-term refinancing. In a rate-and-term refinance, the existing mortgage is replaced with a new home loan with a different (usually lower) interest rate or new terms. Because a rate-and-term home loan does not exceed the current mortgage debt, there is no cash advance for the borrower.

When should I refinance my mortgage?

When deciding if refinancing is right for you, current mortgage rates are probably the first thing to consider. Obviously obtaining a lower mortgage rate through refinancing is a way to lower your monthly payment. But there is more to the decision than just interest percentages. Other factors to consider are:

• The after-tax monthly savings (new payment compared to old payment, after any tax-favored treatment)
• The amount of time that you intend to be in the home
• The cost of obtaining the new mortgage

Once you know these three things, you can calculate your return and determine if a mortgage refinance makes sound financial sense.

What are the benefits of refinancing your home?

Refinancing your mortgage under the right conditions may provide notable benefits.

Lower your interest rate
Refinancing can save you a substantial amount of money over the life of the loan if current interest rates are lower than your existing mortgage rate. If interest rates have dropped since you first obtained your mortgage, a rate-and-term refinance can provide you with a lower rate.

You might also qualify for a better interest rate if your credit score has improved since taking out your current loan. So, check your credit score and report before applying.

Pay for large expenses with a cash-out refinance
In a cash-out refinance you can tap your home’s equity for ready cash. These funds can be used for any purpose, including:

• Lowering or paying off high-interest debt
• Renovating your home
• Paying college tuition
• Investing in property

Eliminate private mortgage insurance
If your home’s value has increased, that means your equity has increased. You could refinance your conventional loan using your new equity stake to eliminate your private mortgage insurance requirement.

Change your loan structure or term
If you’re not far into repaying a 30-year mortgage and want to pay it off sooner, you could refinance to a shorter loan term such as 15 years. This will save you money on interest, as well.

Likewise, if you have an adjustable-rate mortgage that’s about to reset and enter the variable-rate period (or is already subject to change every six months), refinancing to a fixed-rate loan replaces the uncertainty of fluctuating interest rates with the stability of a set interest rate. A fixed-rate mortgage means more predictable monthly payments, which can make it easier to budget for the future.

Reasons not to refinance your home

In general, you should avoid refinancing if the costs outweigh the benefits. This can happen when:

• Your new interest rate would be higher than the rate on the current mortgage.
• Your credit score has declined enough to prevent you from qualifying for a refinance at a lower interest rate.
• It would take too long to see the benefit of a lower rate. (see below for how to find your break-even point)
• The house has been converted from a primary residence to an investment property, and the investment property interest rate would not be worth refinancing.

How much does it cost to refinance a mortgage?

Just like a traditional mortgage, a refinanced mortgage comes with closing costs, including fees for appraisal, credit report, title insurance, and other elements of the closing process.

Is refinancing worth it? How to find your breakeven point

It may take some time before the financial benefits outweigh the cost of the refinance. The point at which the refinance savings exceed the cost is the break-even point. If you sell or refinance again before reaching that break-even point, you will have a net loss from the refinance.

The break-even point is calculated by dividing the closing costs by the monthly savings. For example, if your refinancing costs are $5,000 and monthly savings are $250, your breakeven point would be 20 months ($5,000 / $250 = 20). You would need to remain on this payment schedule for 20 months before seeing the financial benefit of the refinance.

Need help calculating your needs? With First National Bank’s (FNB) mortgage calculators, you can get helpful information about what may work for your specific circumstances.

Ready to Refinance? Let’s Get Started

Refinancing under the right circumstances can provide you with notable financial benefits such as lower monthly payments, lower interest expenses and even ready cash. Knowing when to refinance your mortgage – and when not to – enables you to capitalize on the advantages of refinancing while minimizing any risk.

Looking to refinance your home? At FNB, we have the solutions to align with your goals and experts to guide you along the way. Get started today!