Refinancing a mortgage can score you some savings, but it’s not free. Any time you take out a new loan—whether it’s a personal loan, mortgage, or business loan—there are fees and closing costs related to the transaction. The same is true when you refinance a mortgage. Refinancing might be a great financial move, but it’s still a transaction that comes with costs and can impact your finances and credit. So before you decide to refinance, make sure you know what’s involved and how you can minimize the potential negative impact on your finances.
What Is Refinancing?
Refinancing is replacing an existing loan with a new (and hopefully improved) loan. If you’ve got 20 years remaining on your current mortgage and refinance to a new 30-year, fixed-rate mortgage, you’ll now have 30 years left on your term. A shorter term means higher monthly payments but less interest over the life of the loan. If you’ve got 20 years left on the current mortgage and refinance into another 20-year fixed-rate mortgage, you’ll keep your payment steady (though long-term interest will still be higher).
How You Can Do It
Before comparing rates and fees from different lenders, do some research to know exactly what kind of loan would be ideal for your situation. For example, if you want to lower your monthly payments, consider a refinance that includes moving from a 30-year loan to a 15-year loan. Or, if you want to tap into the equity in your home and use it for other purposes, look at options like a cash-out refinance or home equity line of credit (HELOC). Next, consider all the costs involved with refinancing, such as closing costs, points, and other fees.
Why Refinance?
You may want to consider refinancing if:
Your credit score has improved: You could qualify for a lower interest rate when you refinance if your score has increased since you took out your first mortgage.
You want to shorten the term of your loan: If you’re paying off your home over 30 years, refinancing to a 20- or 15-year loan will probably get you a lower interest rate. Plus, you’ll pay it off faster and own it sooner. Shorter terms come with higher payments, so make sure this fits into your budget before taking this step.
You are considering tapping into equity or consolidating debt: If you have equity in your home (meaning you’ve paid down some of the principal), you can use it as collateral.