Is it time to refinance?

Refinancing may help you accomplish your financial goals — see if it’s the right time for you

Couple talking to a mortgage consultant

When you refinance your existing mortgage, you’re essentially applying for a new loan to replace your existing loan. Your new mortgage then pays off the old one, and you could benefit by having a lower monthly payment, reducing the term of your loan, or taking out cash to make home improvements. However, refinancing may not be right for everyone.

Let’s take a closer look at why people refinance their mortgage, and whether or not it’s appropriate for your financial situation.

You may want to refinance your mortgage when:

  • You want to reduce your rate to reduce the interest you’re paying. Refinancing your mortgage to a lower interest rate may lower your monthly payment and potentially give you extra cash each month to save, invest, or spend in other ways. Use this calculator to see if refinancing makes sense for you. Then, meet with a home mortgage consultant to discuss your options and whether the timing is right for your circumstances.
  • You want to remove mortgage insurance. If you put less than 20% down when you purchased your home, you may be paying Private Mortgage Insurance (PMI) or a Mortgage Insurance Premium (MIP) on your loan. As your loan approaches 80% of your home’s value, you may have options available to remove your mortgage insurance, including refinancing. Talk to a home mortgage consultant to discuss your particular circumstances. Learn more about removing your mortgage insurance here.
  • You want to take advantage of improved credit. Usually, a higher credit score translates to a lower interest rate. So, if your credit score has improved since you initially took out your mortgage, it may be worth your time (and money) to refinance.
  • You want to tap into your home’s equity. If the value of your home has increased and/or you’ve paid down a large portion of your loan, you may be eligible for a cash-out refinance. Using this type of refinance, you apply for a new loan for more than what you owe on your existing mortgage (based on its appraised value) and receive the additional funds at closing. You can use these funds however you wish — such as improving your home or financing large purchases. Calculate the available equity in your home here.
  • You want to reduce the interest paid by paying off your mortgage sooner. Because mortgage interest adds up over the entire term of your loan, if you qualify to refinance to a shorter term than your original loan or the remaining term of your loan and can manage the larger payments, you’ll make fewer loan payments and may reduce the amount of interest you pay. However, be aware that shortening your mortgage term will likely increase your monthly payment. If you’re looking to reduce your monthly payments, you may be able to refinance your loan into your current remaining term. Additionally, you can pay off your mortgage faster by making additional payments and/or principal-only payments on your mortgage without refinancing. Talk to your home mortgage consultant about which option is right for you.
  • You want a predictable monthly mortgage payment. If you currently have an adjustable-rate mortgage and are facing an upcoming interest rate change, you may choose to convert to a fixed-rate mortgage, so your payments (principal and interest) and rates don’t change over time. Depending on the current interest rates, this may increase your monthly payment, but you’ll have peace of mind knowing your rate and the new monthly payment will remain the same for the remainder of your loan term.

If you’re considering refinancing, here are a few topics to discuss with a home mortgage consultant before you make your decision:

  • Should I refinance to a longer-term loan? While extending your mortgage term will reduce your monthly payment, you’ll likely pay more interest over the life of the loan.

    For example, if you have 20 years left on a 30-year fixed-rate mortgage and you refinance it into another 30-year loan, you’ve added 10 years of loan payments — and that means you’ll likely pay hundreds or even thousands more in interest over that additional period. However, extending the loan term may make sense if you need more funds available each month to help manage your budget.
  • What will it cost to refinance? Mortgage closing costs can add up. To determine whether refinancing makes sense, calculate your breakeven point, or the time it will take for the refinance to pay for itself. You can do this by dividing your total closing costs by your monthly savings.

    For example, if you pay $2,000 in closing costs and your new loan payment is $100 less, you’ll need to be in your home at least 20 months to break even. If you plan to stay in your home that long, refinancing may be a good option for you. Use this calculator to help you find your breakeven point.

Getting started.

If you’re ready to refinance your mortgage, talk to a home mortgage consultant. We’ll help you determine whether refinancing is right for you and find the best options for your financial situation.

Explore mortgage refinance options at Wells Fargo here or call 1-866-208-6471 to get started. We’re ready to help.