The most common reason for a mortgage refinance is to lower a mortgage loan rate. While each homeowner has their own reasons for refinancing, it is typically to save money. When a rate reduction is your goal, a good rule of thumb for a mortgage refinance, is to lower your existing interest rate by 1% or more. While a mortgage refinance is worth considering when you see this 1%+ reduction, there are other factors that need to be considered as well. 

When refinancing your mortgage to lower your rate and save money, you must also calculate the length of time it will take to recoup your closing costs. Be sure you plan on staying in the house long enough to recover those costs. That amount of time is your breakeven period. Simply put, your closing costs divided by your monthly savings will provide you with your breakeven point. Your overall mortgage objectives and any future plans to move will always come into play when considering refinancing. If you see a new home in your near future, you may not benefit from refinancing.

Mortgage refinance considerations 

In addition to the interest rate and years you plan spending in your existing home, you will also need to consider any changes in your financial health. Is your credit score better or worse? Has your income increased or decreased? How much equity do you have in your home? These factors will all come into play when determining whether or not you qualify for a mortgage refinance. Your credit union loan officer can help you better determine if it’s the right financial move for you. 

1st Lien home equity loans in lieu of mortgage refinance

Closing costs for a mortgage refinance can run anywhere between 3 percent and 6 percent of the amount borrowed. Typical costs include the appraisal fee, credit report, application fee, and more.  If right off the bat, you realize the closing costs will offset the benefit, you may want to consider a low rate 1st lien home equity loan. Spirit Financial Credit Union currently offers a Smart Equity Home Refinance product that features low fixed rates, flexible terms, and no closing costs.  This could be the perfect answer if your closing costs are outweighing the benefits of refinancing.

More reasons to refinance your mortgage

Besides getting a lower interest rate, historic low mortgage rates are moving many homeowners from adjustable to fixed-rate loan options when refinancing. Refinancing from an adjustable to a fixed-rate mortgage can lock in your rate and your monthly payment. Others may be looking to shorten the repayment term of the loan, lower their monthly payment, or convert a portion of their home’s equity into cash with a cash-out refinance. A cash out refinance could come in handy when paying college tuition, for home improvement projects, or paying off higher-interest debt. Shortening your mortgage term will enable you to pay off your mortgage faster. All great reasons for refinancing.

A word of warning, don’t extend your term to save money unless it’s a last resort. If you’ve been paying on your 30-year mortgage for a number of years, it really doesn’t make sense to refinance your home into another 30-year loan. While it might lower your monthly payment, it may actually end up costing you more in the long term. It also restarts your mortgage clock from day one. It’s better to choose a term that matches the number of years left on your existing mortgage. You may even be able to drop a few years off if the rate is low enough. 

Learn more about mortgage refinance

Don’t let the thought of mortgage refinance intimidate you. You should always have a clear objective when refinancing. Although a 1% rate reduction is a good rule of thumb when considering a mortgage refinance to lower your rate, it’s always best evaluated on an individual basis. Learn more about mortgage refinance on the Spirit Financial Credit Union website. From here you will be able to view rates and details of mortgage refinance, as well as schedule an in-branch appointment or zoom video conference or call a loan officer.  Feel free to contact us today to discuss if refinance is for you.