• Refinancing

  • The general rule of thumb is that refinancing to a fixed-rate loan makes the most sense when interest rates are low. While no one can predict whether rates will go up or down in the future, many homeowners are currently taking advantage of today’s low rates to refinance from their adjustable-rate mortgage to a new fixed-rate mortgage. If you are among those who are considering this move, here are some points to be aware of:
  • Potential benefit of a fixed-rate loan

    The main benefit is stability. While an adjustable-rate loan’s monthly payments can fluctuate, the monthly payment of principal layer and interest layer on a fixed-rate loan will stay the same throughout the life of the loan. This can make it easier to set your monthly budget, and can also provide peace of mind. With a fixed-rate loan, even if market interest rates go up, your principal and interest payments won’t. Fixed-rate loan considerations Fixed-rate loans tend to have higher interest rates than adjustable-rate loans, especially compared to the first years of an adjustable-rate loan when often times the interest is fixed for a specified period of time (typically 5, 7, or 10 years at the maximum). In addition, if you have a fixed-rate loan and interest rates fall, your principal and interest payments won’t decrease.
  • Refinancing costs

    Any time you refinance, you’ll be responsible for paying closing costs layer. In addition, if you extend the term layer of your home loan (for example, by taking out another 30-year mortgage after you’ve already owned your home and made mortgage payments for 5 years), you may pay more in total interest expenses over the life of the new refinance loan compared to your existing mortgage. You may be able to avoid this situation by making monthly payments towards the new, lower fixed rate loan in an amount equal to or greater than what you previously paid towards the original loan. It’s important to discuss your situation with your lender to ensure that you’re comfortable with how these costs will impact your overall financial picture.
  • Accomplishing your other goals

    If you choose to refinance to a fixed-rate loan, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to lower your monthly payments, shorten your loan term, or borrow from a portion of your available home equity layer. Talk to your lender about what you’d like to accomplish and see what’s achievable for your situation.
     
    Lowering your monthly mortgage payment by refinancing to a lower rate or extending your loan term can make it easier to pay your mortgage on time every month, while also possibly covering your other debts and expenses. And if you are concerned about your ability to make your current mortgage payments in the future, lowering your payments now can help relieve that pressure.
  • Your break-even point

    The breakeven point layer is how long it takes for a reduction in your monthly payments to equal the costs of refinancing. If you plan to sell your home before the breakeven point is reached, you probably would not recover these closing costs.

    For example: $5,000 in closing costs ÷ $200 in monthly payment savings = 25 months to break even
  • Accomplishing your other goals

    If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage layer or borrow from a portion of your available home equity. Talk to your lender about what you’d like to accomplish and see what’s achievable for your situation.
  • Loan terms

    Cash-out refinance: pays off your existing first mortgage layer and allows you to take out some of your home equity in a lump-sum cash payment at closing. This results in a new mortgage loan which may have different Glossary Term:terms layer than your original loan (meaning you may have a different type of loan, a different Glossary Term:interest rate layer as well as a longer or shorter time period for paying off your loan). It will result in a new payment Glossary Term:amortization layer schedule, which shows the monthly payments you'd need to make in order to pay off the mortgage Glossary Term:principal layer and interest by the end of the loan term.
     
    Cash-out refinance: you receive a lump sum when you close your refinance. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and Glossary Term:prepaids layer, and any remaining funds are yours to use.
  • Notes:

    1. Refinancing may increase the total number of monthly payments and/or the total amount paid when compared to your current situation.
    2. If you refinance into a longer term loan, although your refinanced monthly payment may be lower, you should carefully consider the potential increase in interest charges you will pay and the additional years needed to pay off your loan by refinancing into a longer term.