When Is It Worth It To Refinance?

Mortgage refinancing entails repaying an old loan and replacing it with a new one. Homeowners remortgage for a variety of reasons: 
  •     To get a lower rate of interest
  •     To reduce the duration of their mortgage
  •     To convert a variable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), or vice versa.
  •     To borrow against your home’s equity in order to cover a financial emergency, finance a big purchase, or consolidate debt. 
Because refinancing may cost between 3% and 6% of the principal on a loan and, like an initial mortgage, involves an appraisal, title search, and application fee, it’s critical for a homeowner to evaluate if refinancing is a prudent financial move.  

Refinancing to Obtain a Lower Interest Rate 

One of the greatest reasons to refinance is to reduce your current loan’s interest rate. Historically, the rule of thumb has been that refinancing is a good idea if the interest rate can be reduced by at least 2%. However, many lenders believe that 1% savings are a sufficient incentive to refinance.  Reduced interest rates not only help save money, but they also accelerate the pace at which you develop equity in a house and may help reduce monthly payment costs.  

Refinancing to Reduce the Term of the Loan

When interest rates decrease, homeowners may have the option to refinance an existing loan for a loan with a substantially shorter term while maintaining the same monthly payment.  You can use a simple mortgage refinance calculator to figure out the logistics.  

Refinancing to Convert to an Adjustable Rate Mortgage (ARM) or a Fixed-Rate Mortgage 

While ARMs often begin with lower mortgage refinance rates, most likely lower than a fixed-rate mortgage, some adjustments may result in rate rises that exceed the rate offered by a fixed-rate mortgage. When this happens, switching to a fixed-rate mortgage results in a cheaper interest rate and removes the risk of future rate increases. On the other hand, switching from a fixed-rate loan to an ARM — which typically has a lower monthly payment than a fixed-term mortgage — may be a prudent financial move when interest rates are dropping, particularly for homeowners who do not intend to remain in their houses for more than a few years.  These homeowners can lower their interest rate and monthly payment on their loan, but they won’t have to worry about how rates rise 30 years from now. If interest rates continue to decrease, the periodic rate adjustments on an ARM result in lower rates and lower monthly mortgage payments, obviating the need to renew each time rates decrease. On the other hand, this would be an imprudent approach when mortgage interest rates increase.  

Refinancing to Consolidate Debt or Access Equity 

While the reasons for refinancing are all financially sound, mortgage refinancing may lead to an endless cycle of debt.  Homeowners often borrow against their equity to pay large expenditures, such as a home renovation or a child’s college tuition. These homeowners may explain the refinancing by stating that renovation increases the value of the property or that the interest rate on the mortgage loan is lower than the interest rate on a loan from another source.  Refinancing may be an excellent financial decision if it lowers your monthly mortgage payment, shortens the duration of the loan, or accelerates the accumulation of equity. When utilized properly, it may also be an effective instrument for resolving debt. Prior to considering refinancing, carefully examine your financial position and ask: How long do I want to remain in this house? How much money would refinancing save me?

A Lending Hand for Financing Home Mortgages

Spire Financial (A Division of V.I.P. Mortgage, Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.



V.I.P. Mortgage, Inc. DBA Spire Financial does Business in Accordance with Federal Fair Lending Laws. NMLS ID 145502. For state specific licensing, visit www.vipmtginc.com/national-licenses/. V.I.P. Mortgage, Inc. is not acting on behalf of or at the direction of the FHA/HUD or the Federal Government. This product or service has not been approved or endorsed by any governmental agency, and this offer is not being made by any agency of the government. V.I.P. Mortgage, Inc. is approved to participate in FHA programs but the products and services performed by V.I.P. Mortgage, Inc. are not coming directly from HUD or FHA. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions may apply. This is not an offer to enter into an agreement. Not all customers will qualify.

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