All Financial Education

Reasons to Refinance

March 13, 2016

Happy online couple working on a laptop computer to refinance mortgage

As interest rates continue to stay at record lows, today might be a great time for you to consider to refinance your mortgage.  Refinancing your mortgage can not only lower your interest rate, but can allow you to change the term of your loan, cash out some of your equity, or convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.  However, the motivation to refinance may also include some drawbacks.  As such, it is important to familiarize yourself with the pros and cons of refinancing before you decide the route that is best for your financial success.

Lower Your Interest Rate

Lowering your interest rate is one of the best reasons to decide to refinance.  Reducing your interest rate can help you lower your monthly payments and can help you increase the rate at which you build equity.  If your current payments are leaving you a bit strapped for cash, a refinance could mean lessening that monthly burden all while being able to stay in your home.  According to Ed Tierney, Vice President of Mortgage Lending at Idaho Central Credit Union,  “The best time to consider refinancing is when you have a .50% rate decrease or greater for refinancing due to closing costs and overall payment savings.”

Shorten the Term of Your Loan

If you have a $150,000 mortgage, with a loan term of 30 years, at an interest rate of 5%, you’ll spend about $140,000 in interest (in addition to the loan amount).  However, shortening the term to a 15 year loan at the same interest rate, the interest paid is closer to $60,000.  So doesn’t it seem like a no-brainer to refinance if interest rates have dropped low enough for you to pay around the same per month for a 15 year loan as you were for your 30 year loan?  Yes and no.  Remember you may still need to pay the costs associated with your refinance (Idaho Central has a no-fee Freedom loan) and there are other factors to consider.  Could you pay off your loan just as fast by doubling up on payments? Maybe you are not planning to stay in the house for very long, which could cost you because of the closing costs.  Will your monthly payments actually increase? It’s important to take a holistic look at the effects of shortening your term before jumping into your refinance just to shorten the term.

Cash Out Your Equity

Equity is the difference between what your house is worth and what you owe the mortgage lender.  A home equity loan is a separate loan on top of your first mortgage.  A cash-out refinance is a replacement of your first mortgage.  This is when you basically borrow against your equity and refinance for more than your house’s current principal balance.  Those who take out the equity in their homes typically are looking to pay for a larger ticket item such as paying down debt, home improvements, or college tuition.

Although this may work great for some, many others, who once generated high-interest debt will do it again after the mortgage refinancing gives them the available credit.  It is important to utilize your cash-out refinance appropriately so that it doesn’t lead you to further financial hardship.

Convert Between Adjustable-Rate Mortgage (ARM) and Fixed-Rate Mortgage

When choosing a home loan, buyers can typically choose from programs that have a fixed interest rate or a variable interest rate.  Both choices have their strengths and appeal to different types of buyers.  A 30-year conventional mortgage is set up to have the same interest rate and the same payment for life of the loan.  An ARM typically features lower rates for the first few years of the mortgage, but also has a rate that can change periodically depending on the terms of the loan.

Converting to a fixed-rate mortgage may result in a lower interest rate as well as eliminate concern over future interest rate hikes.  However, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment.

Whatever your reason for refinancing, Idaho Central Credit Union has a number of options for you to choose from and an expert team to help guide you through the process.  Please stop by any of our branches or give us a call to talk about refinancing your home today!