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Refinancing is the process of trading in an old mortgage for a new one. It's a two-step but simultaneous transaction in which the proceeds from a new loan are used to pay off the balance of the original loan. Often, fees for the new mortgage are rolled into the new loan amount, so there is little or no out-of-pocket cost to the borrower. Everyone is a potential candidate to refinance, even those fortunate enough to obtain their loans at the bottom of a recent interest-rate cycle.
Refinancing makes sense if:
- Rates have lowered significantly since obtaining your original loan
- You want to use the equity that's built up in your home since you bought it
- You want to shorten your mortgage payment period
- You want a fixed-rate mortgage instead of an adjustable rate, or vice versa
Refinancing doesn't make sense if:
- Rates aren't significantly lower since you obtained your original loan
- You've had your current mortgage for a long period of time
- You've paid off most or all of the interest on your current mortgage
- Your existing mortgage contains a prepayment penalty clause
Can you afford to refinance?
Since refinancing means you're taking on an entirely new loan, plan on spending as much as you did to close your original mortgage. You'll likely be charged an application fee, points, a loan origination fee, title search fee, title insurance binder, an appraisal fee and other miscellaneous costs.
What you pay is up to you and your ability to bargain. Generally, you can obtain the lowest rate on your new loan by paying the loan costs yourself. But you could get fees waived if you use your original lender. Other lenders, though, could omit charges to get your business. Bear in mind that it's also possible to finance your closing costs as part of the amount you're borrowing or eliminate them altogether by paying a higher interest rate.
If you're not sure whether you can afford to refinance, your best option is to speak directly to a lender, who can review your financial situation and discuss it with you. Together you may be able to find a way to refinance without causing too much stress on your wallet.
Refinance Calculator
This Refinance Calculator will compute your monthly mortgage payments for refinancing your home. Simply fill out the refinance mortgage information below and click on Calculate to find your PITI Payment (Principle, Interest, Taxes, and Insurance).
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