Refinancing your mortgage could be a good idea if it will save you money or makes paying your monthly bills easier.

When you refinance, you get a new mortgage to pay off your existing mortgage. Refinancing works just like getting a mortgage to buy a house. You’ll be free from the stress of home buying and moving, though, and there’s less pressure to close by a certain date.

Refinancing your mortgage comes with closing costs, like with any other closed loan. Typically between 2 to 5 % of the (new) loan amount. Click here for a breakdown of these costs.

Why would you refinance your mortgage?

  • When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both.

    Be aware of the Break-Even-Point, where your savings from a lower interest rate exceed your closing costs. You typically pay 2-5 % of the loan amount on closing costs.

  • Better terms could include:

    • Switching from FHA to Conventional loans and get rid of the FHA Mortgage Insurance Premium (PMI)

    • Switch too a shorter term. Yes, this will likely increase your monthly payments, but it will save you a lot of interest to pay.

    • Switch from an adjustable-rate to a fixed-rate or vice versa.

  • While cash-out refinance rates can be a bit higher than rate-and-term refinance rates, there still may be no cheaper way to borrow money.

    You can access your home equity through a cash-out refinance if you will have at least 20% equity remaining after the transaction.

    For example, you have been paying your monthly mortgage over the years and your home just got appraised for a higher value. You now have $100,000 of home equity. This allows you to take out $80,000 (20% needs to remain after transaction) of the equity.

  • Your FICO score is one of the most determining factors for the hight of your interest rate. The higher your FICO score (or credit score) the lower the interest rate the lender will offer you.

    So even if interest rates haven’t dropped significantly since you bought your home, if your FICO has increased significantly, it would be wise to get a free quote from your loan officer and see what your new monthly payment would be.