How to figure out what makes sense for you.
When interest rates go down, many homeowners think of refinancing. It's an opportunity to replace your current mortgage with a new loan that may be a better fit for you than your original loan. But, much like when you initially bought your home, you'll want to make sure refinancing is a good choice for you at this time.
Why refinance?
There are lots of reasons to refinance, but these are the most common:
- Change your loan to a fixed rate.
If you opted for an adjustable-rate mortgage (ARM) when you purchased your home, you may want to change to a fixed-rate mortgage to avoid future changes in your interest rate and, ultimately, your monthly payment. - Lower your monthly payments.
There are different ways to achieve this, including switching to another loan type, taking advantage of a lower interest rate, or extending the term (or length) of your loan.1(Keep in mind that while your monthly payment will go down if you extend your loan term, you will end up paying more in interest expenses over the life of the loan.) - Pay off your mortgage faster.
If you'd like to shorten your repayment schedule by reducing your loan term—and can afford the monthly increase—this can save you a significant amount of money by reducing the interest you'll pay over the full term of the loan.2 - Borrow from your home equity.
If you've paid off enough principal, you may be able to borrow from the available equity in your home to get a cash-out refinance. For example, you might want to remodel your kitchen to add to your home's value or pay down higher-interest rate debt to improve your financial position.3 Just be aware that how you use your available home equity to pay for things may affect the overall interest you pay (by extending the length of your loan).
Find your loan-to-value ratio.
When you refinance, your home will be appraised to determine your loan-to-value (LTV) ratio. Loan-to-value ratios are used as one of many bases to determine the amount you can borrow. A loan-to-value ratio is the ratio between the unpaid principal amount of your first mortgage and the appraised value of your home. For example, if you still owe $120,000 on your loan and your home appraises for $150,000, you have an LTV ratio of 80%. Typically, a higher LTV ratio is generally seen as a higher risk to a lender.
Take action now.
If you're ready to refinance, keep your end goal in mind and contact your lender to talk about your options. Ask how your monthly payments will change and look at your budget to see how a refinance would affect your finances over the full term of the loan. There are fees associated with refinancing—including appraisal, credit report, processing, underwriting, and administrative fees. Understand the total cost before you sign on the dotted line.
Learn more about refinancing so you can have an informed conversation with your lender. Use the refinance calculator, find out more about the right refinance for you, or get the details on the step by step refinance process.
What's next? Managing your mortgage
1Refinancing or taking out a home equity loan or line of credit may increase the total number of monthly payments and/or the total amount paid when compared to your current situation.
2The relative benefits of these alternatives may vary over time and will depend on individual circumstances. The longer you keep the property and your loan at the new rate, the more interest savings will be realized when compared to your current situation. Lifetime interest savings amount assumes no prepayments on current loan.
3The relative benefits of a loan for debt consolidation depend on your individual circumstances and your actual debt payments. You will realize interest payment savings when you make monthly payments toward the new, lower interest rate loan in an amount equal to or greater than what you previously paid towards the higher rate debt(s) being consolidated.
