by Chelsea Springli 
The average mortgage rate has been slowly dropping since 2023. With this in mind, I want to get a lower mortgage rate for my home. When mortgage rates are low, what should you do? Here are a few of the benefits of refinancing your home to lower your monthly payment.
What is Refinancing?
Refinancing is the process of replacing an existing mortgage with a new loan. Typically, people refinance their mortgage to reduce their monthly payments, lower their interest rate, or change their loan type from an adjustable-rate mortgage to a fixed-rate mortgage. Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. You file an application, go through the underwriting process and go to closing, as you did when you bought the home.
Reasons to Refinance
There are three major reasons many choose to refinance their mortgage. Keep in mind that when you refinance your mortgage, you have to pay for closing costs again. This will cost you a few thousand dollars upfront.
A Lower Monthly Payment
When homeowners refinance their mortgage to lower their monthly payment, this can happen a few different ways. However, first their credit scores must increase, and the average mortgage rates must drop. Once these happen, homeowners can refinance to reduce their interest rate, resulting in a lower monthly payment. Depending on the situation, a homeowner can refinance and opt to may more toward the principal and less toward the interest. This can still result in a lower monthly payment but also speed up paying off the new mortgage.
Get Rid of Private Mortgage Insurance
Low or zero down payment options can allow buyers to purchase a home with less than 20% down. Unfortunately, they usually require private mortgage insurance. PMI is designed to protect lenders from borrowers with a loan default risk. As the balance on the mortgage decreases and the value of the home itself increases, borrowers may be able to cancel their PMI when they refinance their mortgage by paying an additional sum toward the principal at the same time. The lender will remove PMI if the homeowner will have 22% of more of the home’s equity.
Cash Out a Portion of your Home’s Equity
Generally, most homes will increase in value, and are therefore a great resource for extra income. Increased value gives the opportunity to put some of that cash to good use, whether it goes towards purchasing a vacation property, buying a new car, paying your child’s tuition, home improvements, or paying off other debt like high interest credit cards.
When to Not Refinance
Even though average mortgage rates are lower than they were a few years so, there are a few scenarios where it doesn’t make sense to refinance. Here’s a short list.
Poor Credit Score
Just because the average mortgage rate is low, that doesn’t mean you’ll qualify for a low rate. If your credit score has dropped since getting your original mortgage, refinancing likely won’t make sense for you. Your low credit score will likely give you a higher interest rate compared to the average. This means that your mortgage rate likely won’t drop enough to make a difference.
Relocating Soon
Refinancing your mortgage costs a few thousand dollars upfront. While it will save you money over time, it’s not a wise decision to refinance if you plan on selling your house soon. You likely won’t have enough time to make up the cost of refinancing fees. As a result, you have a lower interest rate but you’re down a chunk of money that you don’t have time to recover.
Does it Cost to Refinance?
In general, you can plan to play closing costs again like when you first bought your home. This will be around 2-5% of your remaining loan balance. Refinancing includes other fees like an application fee, title insurance or title search fee, and depending on the lender, there might be more. Alltru mortgages have no origination fees which can save you some cash too.
While it does cost some money up front to refinance your mortgage, some homeowners can make up this money over a few years. Since many refinance to get a lower monthly payment, they can save that money every month to make up the cost.
Next Steps to Refinancing
Before you refinance, take a careful look at your financial situation and ask yourself:
- What is the current interest rate on a mortgage?
- How long do I plan on living in the house?
- How much money will I save by refinancing?
If you’ve decided refinancing could be a good option, it’s time to work the numbers. Using a mortgage refinance calculator can help you decide on the term (number of years) of your loan so you can see how much you’ll save. Next, you will need to reach out to the credit union and discuss all your options. This will allow you to lock in your low-interest rate and get started on the closing process.
Refinancing for Real
To help you wrap your head around the terms and costs, let’s walk through a basic example of the refinancing process.
In this example from UMA Technology, Sarah purchased her home with a 30-year fixed rate mortgage with a 4.5% rate. Over the past five years, she improved her credit score. She refinanced to a lower rate of 3.25% and opted for another 30-year mortgage. This reduced her mortgage payments by $175 each month. Her closing costs totaled $3,500. However, because of her lower monthly payments, she was able to make up her closing costs in under two years.
However, Sarah will now be paying her mortgage for another 5 years. In her mind, it seems like this trade-off was worth the savings every month. She estimated that she will save over $90,000 in interest payments because of her new 30-year mortgage.
Ready to Apply?
Before refinancing, consider the reason why you want to apply. Can you get a lower monthly payment? Are you eliminating your PMI? Do you want to cash out your home’s equity? Remember to ask yourself the three key questions and run the numbers. If refinancing your mortgage is the better option, what are you waiting for? We are here to help you along the way.
