Refinancing: What Are My Options?

Refinancing is a powerful tool. There are many ways to manipulate terms and features to fit your needs. Be careful, though. Refinancing can be time intensive and costly.

The Ground Rules

Refinancing multiple times can decrease your overall financial benefit. Individuals who refinance repeatedly seeking the lowest mortgage rate possible pay a hefty price by leaving a trail of closing costs in their wake, however. Remember that refinancing a mortgage doesn’t erase the debt; it just restructures it, often at a different loan term and a lower interest rate than that of the previous mortgage. Ideally, you only want to refinance once per mortgage.

Reasons To Refinancing

Reducing the interest expense is the most common goal of refinancing. To reduce the monthly payment, some homeowners refinance to extend the loan term. Debt consolidation is another goal of refinancing. Combining two mortgages into one fixed-rate mortgage levels out the payment over the loan term. Refinancing to get out of a piggyback mortgage, interest-only mortgage, ARM, or another kind of specialized mortgage is oftentimes a valid reason to refinance.

From The Expert

For refinancing to make sense, a homeowner needs to plan on staying in the home for at least three years, says Charles Delaney, associate professor of finance and director of the real estate program at the Hankamer School of Business, Baylor University in Waco, Texas. “You have to look at the savings relative to the cost, and then consider: How long am I going to be in this property?”

Types Of Refinancing

There are two types of refinancing, cash-out refinancing and regular refinancing. Cash-out refinancing involves a new mortgage on the same property in which the amount borrowed is greater than the amount of the previous mortgage. The difference is taken out in hard money, or cash. Regular refinancing is intended to replace your existing mortgage with a lower rate. Cash out is not required, unless it is being used for the purposes of covering closing costs.

Things To Consider

Homeowners are urged to calculate how many months of lower payments it will take to recoup the closing costs of a refinanced mortgage. Also, compare the interest savings to see if refinancing helps you reach your intended goal. Some people refinance simply to make the monthly mortgage payment cheaper. A lower interest rate/longer loan term helps lower the monthly payment. Homeowners should understand that they may not be reducing the total interest expense.

Closing Thoughts

Interest points are a key part of the refinancing process. There are two types of points: discount and origination. Discount points allow the borrower to pay part of the interest expense upfront, as well as, lower the nominal or stated interest rate on the mortgage loan. The points paid are considered in calculating the annual percentage rate, or APR. During closing, don’t forget about accessories such as private mortgage insurance . If your loan-to-value ratio is more than 80% of the appraised value of the home, the lender will require PMI.