New American Funding Blog

A Simple Guide to Refinancing

By Courtney Lynch   |  February 24, 2015

Current mortgage rates might mean refinancing could save you money.

Refinancing your current home mortgage could potentially save you a great deal of money. It is important to understand the process of refinancing as well as the benefits and costs associated with this option. 

The Mortgage Bankers Association recently relayed that the average interest applied to a 30-year fixed rate mortgage valued at $417,000 or less fell to 4.06 percent, while loan balances valued higher than $417,000 dropped to 3.99 percent. Even the 15-year fixed-rate mortgage average decreased to 3.33 percent from last week to this week. These drops in rates afford a homeowner the opportunity to save a great deal of money should they choose to refinance his or her home. 

In addition, Freddie Mac reported an average savings using the Home Affordable Refinance Program equated to a 1.7 percent average reduction rate

Refinancing basics
Refinancing is the process of replacing an old mortgage with a new one. If you decide that refinancing is a good option for you, the first step is understanding the fees and expenses associated with your decision. Additionally, you need to apply for refinancing. This process is similar to that of applying for your initial mortgage. Another appraisal of your home will be conducted and there will be evaluation of your credit score, income and assets. Make sure that you understand how the local housing market is doing. If your home value has dropped or is falling, refinancing may be far more difficult.

If you are able to proceed with refinancing, you will start by paying off your initial loan with your new mortgage and then assume payment of your updated loan. 

A Consumers Guide to Mortgage Refinancing, published by The Federal Reserve Board, outlined the top reasons for beginning the process of refinancing a home loan:

  • Lowering your current interest rate
  • Switching from an adjustable-rate mortgage to a fixed-rate mortgage
  • Adjusting the length of your mortgage
  • Home equity 

Especially with the low interest available now, refinancing to achieve a lower overall interest is a principal reason for beginning this process. Your interest rate will also determine the monthly payments that you will make. In addition, refinancing for a lower rate may give you the opportunity to quickly build up home equity.

Adjustable-rate mortgages might give you a lower monthly payment and interest rate sometimes, but that will fluctuate with the housing market. If you are uncomfortable with the prospect of an ever-changing payment on your home loan, replacing your ARM with a FRM might be a valuable switch. 

The interest rates on short-term mortgages are typically lower and you have the opportunity to pay off the loan earlier. However, the monthly payments are usually more expensive than on a long-term mortgage. Consequently, switching to a long-term mortgage might be worthwhile if you wish to lower your monthly payments. 

The monetary difference between the value of your home and the balance you still owe on the loan is your home equity. A cash-out refinance might be something to look into if you are considering an investment in education or a home improvement project and need money to finance these expenses. 

When not to refinance
While refinancing may be an appealing option, there are some reasons why refinancing might not be as beneficial as sticking to your current mortgage. As mentioned previously, the costs and fees associated with refinancing must be known before making a commitment. Oftentimes, penalties are written into contracts in an event such as refinancing. Before moving forward with this process, ensure that the new mortgage will cover the cost of fees and still remain worth the trouble. 

Additional expenses to factor in include, but are not limited to, paying for an attorney, application costs and potential bank fees. Consider waiting for lower or even free refinance options before proceeding. Always shop around for a new loan and discuss options with potential lenders and ensure that everything discussed and agreed upon is in writing. Think about also speaking with your current lender or broker. There is a good chance they will want to keep your business and may eliminate certain refinancing fees. 

Do not turn refinancing into a habit. The fees and added expenses will outweigh any savings you appear to be benefiting from in the long run. 

The benefits of refinancing now
If you determine that refinancing will be most beneficial to you, it may be time to refinance due to the current historically low rates. In accordance to the aforementioned report released by Freddie Mac, the average savings reported, 1.7 percent reduction rate, indicates that if a home valued at $417,000 is refinanced, the potential savings equates to $7,089 annually and just below $600 monthly. Calculate whether your savings will cover the costs and expenses associated with refinancing and keep yourself updated on fluctuating rates and the present housing market trends and proceed with a conversation with your lender.
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