How to Refinance Your Mortgage and Save Money

October 21, 2020 – As homeowners, we’re always looking for ways to save money. One of the most significant opportunities often lies in refinancing your mortgage. But with so much information out there, it can be overwhelming. This guide breaks down the process, explains how refinancing can save you money, and helps you decide if it's the right move for you.

What is Mortgage Refinancing?

Mortgage refinancing involves replacing your existing mortgage with a new one, typically with different terms. This can include:

Lower Interest Rate: This is the most common reason to refinance. Even a small reduction in your interest rate can lead to substantial savings over the life of the loan.
Shortened Loan Term: Switching from a 30-year mortgage to a 15-year mortgage can dramatically reduce the total interest you pay and speed up your equity building.
Changed Loan Type: Consider switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more predictable payments.
Cash-Out Refinance: This allows you to borrow against your home equity to cover expenses like home improvements, consolidating debts, or funding education.

How Much Can You Save?

Let's look at a simple example:

Current Loan: 6.5% interest, 30-year term, $300,000 loan. Estimated monthly payment:$ 1,893.
Refinanced Loan: 5.5% interest, 30-year term, $300,000 loan. Estimated monthly payment:$ 1,794.

In this scenario, refinancing could save you approximately $99 per month, or$ 11,880 over the life of the loan! (This is a simplified calculation – actual savings will vary.)

The Refinancing Process – What to Expect:

Check Your Credit Score: A good credit score (generally 620 or higher) is crucial for securing a favorable interest rate. Get a copy of your credit report and address any errors.
Calculate Your Break-Even Point: Determine how long it will take for your savings to outweigh the closing costs associated with refinancing.
Shop Around for Lenders: Compare rates and fees from multiple lenders – banks, credit unions, and online lenders. Don’t just focus on the interest rate; consider the overall loan costs.
Get Pre-Approved: This gives you a realistic idea of how much you can borrow and strengthens your position when negotiating with lenders.
Review the Loan Estimate and Closing Disclosure: Carefully examine these documents to understand all fees, interest rates, and loan terms.
Close the Loan: Once you’ve agreed to the terms, you’ll sign the necessary documents and finalize the refinance.

Important Costs to Consider:

Closing Costs: These typically range from 2% to 5% of the loan amount and include appraisal fees, title insurance, recording fees, and origination fees.
Prepayment Penalties: Some mortgages have prepayment penalties, so check for these before refinancing.

Is Refinancing Right for You?

Consider refinancing if:

You've seen a significant drop in interest rates since you took out your original mortgage.
You plan to stay in your home for a long time.
You can comfortably afford the closing costs.

Disclaimer: This blog post provides general information about mortgage refinancing and should not be considered financial advice. Consult with a qualified financial advisor to determine the best course of action for your individual circumstances.