Should I Refinance?

When mortgage interest rates drop more than a percentage or so, some homeowners will decide to refinance their loans to get a better rate. A general rule of thumb is to refinance when interest rates drop 2 percentage points or more. Refinancing can result in significant savings for the homeowner, if done correctly and with a mortgage specialist.

Mortgage refinancing refers to the process of taking out a new home mortgage and using some or all of the proceeds to pay off an existing mortgage on your home. The main purpose of refinancing is to obtain a lower interest rate or lower your monthly payments by extending the term of your loan. Remember that if you extend the term of the loan, you will reduce your monthly mortgage, but you will end up paying more total interest over the years.

If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with refinancing while you are still living in your home. If you move before your refinancing has paid for itself, you really won't be saving any money. You can determine how long it will take for you to pay off the refinancing by dividing the cost of refinancing (points, closing costs, and private mortgage insurance) by the amount you will save each month from refinancing. Alternatively, you can eliminate the problem if you can find a no-point, no-closing-cost mortgage.

There are two types of mortgage refinancing:

  1. No cash-out refinancing: Amount of the new loan does not exceed the mortgage debt that you currently owe. Typically, you can borrow up to 95 percent of your home's appraised value with this type of refinancing.
  2. Cash-out refinancing: Occurs when you borrow more than you owe on your current mortgage. You are usually limited to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards). Also, mortgage interest is typically tax deductible, while consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.


There are many things to take into consideration before opting to refinance.

If you would like a confidential consultation with one of our mortgage specialists, give us a call at 800-943-1314 or email us today.