A Complete Guide to Refinancing Your Mortgage

What Does It Mean to Refinance a Mortgage?

When you undergo a home refinance, you essentially switch out your old mortgage for a new
one. There are two main types of mortgage refinances:

• Rate and term refinance. The outstanding balance of your current mortgage changes to a new mortgage loan that offers a better rate and/or term.
• Cash-out refinance. You liquidate some of the equity in your home, thereby creating a new loan made up of your previous mortgage balance plus the amount you took out.

It is important to note that you get to choose your lender in a mortgage refinance; in other words, you don’t have to use your current lender. When considering a refinance, it is crucial to shop around and talk with different lenders to ensure the best terms.

Why Should You Refinance?

When deciding on a home loan refinancing, it is important to evaluate all of your current loan terms, including interest rate, loan type, and duration, as well as current cash flow.

There are a number of situations or reasons in which it may make sense for you to refinance:

• To lower your monthly mortgage payment
• To consolidate high-interest debts
• To remove PMI, or private mortgage insurance
• To change your loan structure
• To cash-out your home equity

Mortgage refinancing can significantly affect your finances, both short and long-term. While there are many reasons to refinance your mortgage, they almost always come down to one primary goal: to save money. When deciding if you should refinance, it’s essential to consider long-term objectives rather than solely focusing on the short-term benefits of refinancing.

How Often Can You Refinance?

There is no legal limit set on how often you can refinance your mortgage loan. However, most lenders have their own rules that can dictate the frequency, based on your loan type. To decide if this is the right financial move for you, you should discuss all options with a lender, including any specific restrictions and details for refinancing.

Keep in mind that even if there is technically no limit to the number of times you can refinance, you will have to pay closing costs and fees every time you do so — and these costs can take a long time to recoup. To decide if a refinance mortgage is a smart move for you, allow our Reali Loans team to help determine your break-even point.

Reasons to Refinance Your Home

There are several reasons why you may want to refinance your mortgage loan, including:

Lower Your Interest Rate
While securing a lower interest rate is one of the biggest reasons to consider a refinance, it’s certainly not the only one. In addition to your interest rate, you also want to consider the overall cost of the loan. For example, let’s say you only have 15 years left to pay off your existing mortgage. If you refinance at a lower interest rate into a new 30-year mortgage, you will likely end up paying more in interest over the lifetime of the new mortgage than you would have if you kept your original one. If your new interest rate is substantially lower, you can see significant savings by refinancing. Speak with the home loan team to decide if a mortgage refinance makes sense for your situation.

Remove Private Mortgage Insurance or Mortgage Insurance Premium
PMI and MIP are two types of policies designed to protect the lender in the event of mortgage default. If you purchased your home with less than 20 percent down, you most likely pay this extra charge with each monthly mortgage payment. However, if your home appreciates or you have paid down enough principal to now have more than 20 percent equity in your home, you may be able to remove the PMI or MIP by refinancing.

Speed Up Your Mortgage Payoff
Depending on your individual goals and whether you can comfortably afford a higher monthly mortgage payment, refinancing your existing mortgage into a shorter-term loan can be a great way to expedite your mortgage payoff. If you would like to pay off your mortgage sooner but aren’t comfortable with a shorter-term mortgage, consider refinancing into a traditional mortgage but paying extra toward your principal each month. You’ll still pay off your mortgage sooner while allowing yourself the cash flow for unexpected expenses.

Consolidate a Second Mortgage
Suppose you already have a second mortgage or a home equity line of credit, a home refinance can be a great way to help simplify your life by consolidating all of your mortgages or housing debt into a single monthly payment. Second mortgages typically come with a higher interest rate, so refinancing can be a great way to see significant savings.

Buy-Out a Borrower or Add a Co-borrower
Let’s face it: life happens. This means that some situations may require an adjustment to your mortgage. Whether you’ve gotten married or divorced or want to buy out a previous co-signer on your mortgage, a refinance can not only lower your interest rate and save you money but serve as an effective “housekeeping” tool for your finances.

Take Out Cash to Cover High-Interest Debt or Home Renovation
Homeowners with adequate equity in their houses may be able to undergo a mortgage refinance and take cash out. With a cash-out refinance, you replace your current mortgage with a new loan for an amount higher than your current balance and receive the difference in cash when the loan closes. This could be a good strategy if you are looking to pay off high-interest debt or need cash to cover the cost of a home renovation.

When Should You Not Refinance?

There are also some situations where a mortgage refinance may not make sense. So when is it not a good idea?

It will take you too long to break even.
Many make the wrong assumption that refinancing at a lower rate will immediately save them money. To calculate your savings and break-even point, you will need to consider how much you will spend to obtain the loan and how long you plan to stay in your home. Keep in mind that it can take a while to reach your break-even point. If you plan on moving within a couple of years, it may not be beneficial to refinance your home.

It will cost you more in the long run.
Depending on the type of loan you choose when refinancing, it could sometimes end up costing you more in the long run. For instance, when you extend the duration of your loan, you will naturally be required to pay interest for a longer period of time. However, this can sometimes still make sense, especially for those who have trouble making mortgage payments each month. In this case, it may be more beneficial to trade paying more in the long run for a more manageable payment each month.

You already have a low fixed interest rate.
It may be tempting to jump at any rate that is lower than your current one. However, keep in mind that if your rate is already competitive and your new rate isn’t substantially lower, you may not end up saving significantly by refinancing. The Reali home loan team can help you determine if a refinance is right for you.

You can’t comfortably afford the closing costs.
Each time you refinance your mortgage, you are responsible for closing costs which cover items such as an appraisal, origination fees, attorney fees, and other fees and expenses associated with closing your loan. These costs can easily run between 3 and 5 percent of your total loan amount. As tempting as it is to roll your closing costs into the new loan, you could potentially sacrifice your cost savings and pay interest on a higher loan balance.

How to Decide If Refinancing Is Right for You

If you are considering a refinance home loan, here are some steps to take when making your decision:

1. Check your current credit score.
2. Estimate the new interest rate.
3. Estimate your closing costs based on the amount you would be refinancing.
4. Use a mortgage amortization calculator to determine the short- and long-term
   effects a refinance would have on your finances.
5. Calculate a break-even period for refinancing your current mortgage.
6. To make an educated decision, discuss your options with Reali Loans.

Download the Complete Guide to Refinancing Your Mortgage