Whether you bought a home with a higher mortgage rate or have noticed interest rates are lower after already refinancing it may make sense to refinance that mortgage.  Just the fact that one can get a lower mortgage interest rate should not be the only consideration when thinking about refinancing.  There are additional costs associated with taking out a mortgage, whether one is buying with a mortgage or refinancing an existing mortgage.  This article looks at the factors homeowners should be thinking about when determining whether it makes sense to refinance their mortgage or not.

Cash-Out Versus No Cash-Out Refinance

With a cash out refinance the mortgage lender is going to look more closely at everything since the homeowner is not only refinancing but also taking equity out of the home in the form of cash.  Several loan programs like VA and FHA offer streamlined refinance loan applications where no cash is being taken out with the refinance.  A streamline refinanced mortgage can be done much quicker with possibly fewer hoops to jump through.  If one of the goals with the refinance is to reduce the monthly mortgage payment, then taking cash out at the same time as the refinance can be counterproductive since it can increase the monthly mortgage payment depending on how much cash is being taken out and the overall interest rate on the refinance.

Look at More Than Just the Interest Rate

Getting a lower interest rate than one currently has should not be the only consideration for the borrower. Instead, they should be looking at does the mortgage payment become lower with the refinance.  When the interest rate does not drop by a meaningful amount the costs associated with refinancing may make the refinance a net wash meaning after all expenses associated with the refinance are paid for, the mortgage payment is not lower than the current payment.  

Homeowners need to be doing some calculations to determine after all costs have been accounted for, will the monthly mortgage payment be low enough with the lower rate.  The borrower should also consider whether they will make back the costs spent on the mortgage through the lower mortgage payments.  For instance, if one is only saving fifty dollars a month on the mortgage payment yet are paying $5000 (for example) or more in costs the return on investment may not be there.  One would have to make a little over eight years of payments where the fifty-dollar savings will “pay back” the cost of the $5000.

Where the monthly payment is reduced by much more due to getting a much better interest rate and therefore having a smaller monthly mortgage payment the more sense the refinance will make.  It pays to shop around too.  Don’t just compare the actual interest rate being offered but also consider the costs/fees of the mortgage too.  Sometimes lower interest rates can be had with a buy down, a buy down means the borrower is paying additional money up front to get a lower interest rate.  Sometimes these buy downs might not necessarily mean more cash up front as they can be financed into the loan instead.  Yes, the mortgage interest rate is lower, but is the overall payment lower should be the question to answer first. 

The primary goal of any non-cash out refinance should be a lower monthly payment and one that results in a quick return on investment in terms of the reduced mortgage payments compared to the overall additional costs on the loan.  The homeowner needs to consider how long they plan on staying in the home as part of the decision making.  If there is a plan to move within the next few years, then the cost of refinancing may not make sense.

Credit Score

One’s credit score will have a big impact on the rate you will get in the refinance. If your credit score has went down since purchasing the home then your interest rate might not be as great. It may make sense to wait while you improve your credit score so you can get a better interest rate which means bigger savings.

Monthly Payment May Still Go Up

While refinancing into a lower interest rate can reduce the monthly payment of the Principal and Interest portion of the mortgage, the tax and insurance portion of the payment can go up.  For those who pay into escrow monthly amounts to cover taxes and insurance, as those numbers go up so will the monthly mortgage payment.  With home prices rising local governments adjust home valuations to get additional tax revenue.  Homeowners’ insurance has also gone up in recent years due to overall higher than normal inflation pushing the costs of everything up.  As a result, insurance companies raise their premiums as well to cover the costs of repairing or replacing a home at today’s pricing. 

Just because the monthly payment can go up due to increases in taxes and insurance does not mean the homeowner should not pursue refinancing if it makes financial sense and saves money in the long run.  Paying less interest on a mortgage is a worthy goal and can lead to a better financial outcome over one’s lifetime.

Documents Needed

Mortgage refinance is no different than applying for a mortgage for home purchase, the document requirements will be the same.  Having all documents ready to go when applying for a refinance will save a lot of time.  Check out this article to learn more about what documents are required when applying for a mortgage refinance.

Final Thoughts

Refinance may not always make sense for everyone especially if the goal is to reduce the overall monthly payment.  Homeowners need to consider not just the reduction in the interest rate but also the total costs for the refinance.  If you live in Ohio and need an opinion on whether refinance makes sense and the potential costs involved feel free to reach out to me!