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Knowing when to refinance your mortgage

A refinance can lower your monthly payment and decrease the cost of the loan (interest) over the life of your mortgage.
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COLUMBUS, Ohio — Sponsored story by: KEMBA Financial Credit Union 

Your home is one of the largest investments you’ll make in your lifetime, which is why it’s important to treat it as an investment by growing and protecting its equity. One way you can maximize your investment is with a mortgage refinance, which is simply taking the current balance of your mortgage and resetting the terms with a more favorable interest rate. 

A refinance can lower your monthly payment and decrease the cost of the loan (interest) over the life of your mortgage.

Mortgage rates are low right now, which means borrowing money for your home has rarely been this affordable. At the current interest rates, now may be a good time to explore refinancing your current mortgage, but how do you know if a mortgage refinance is right for your situation? Here are a few scenarios where it may make sense to refinance, reduce your interest rate and grow the equity in your home.

High Interest Rate 

If your current mortgage has a high interest rate, a refinance may make sense. There are a number of factors that go into this scenario, but a good rule of thumb is if you are improving your interest rate by 1% or more and are planning to be in your home for longer than 3-5 years, a refinance may be a good move. The simple math for a smart refinance is to make sure the money you save each month offsets the costs associated with the refinance process. Common refinance costs include origination fees, a home appraisal, a home inspection, settlement fees and any filing fees.

According to NerdWallet, the average closing costs for a mortgage refinance is between 2-5% of the loan amount. If a refinance reduces your monthly payment by $100 a month, closing costs of $4,500 will take 45 months, or 3.75 years, to break even.

Maturing Adjustable-Rate Mortgage (ARM)

The benefit of an adjustable-rate mortgage (ARM) is a short-term lower interest rate, but with 3, 5, and 7-year ARM options, an ARM has an expiration date. At the end of the term, your loan will convert to current market interest rates (it’s important to review and know your mortgage lender’s terms).

Since an ARM is a variable-rate mortgage product, your rate will fluctuate with future interest rate hikes, which means your payment will go up as your rates increase. If you currently have an ARM, a refinance would lock your mortgage rate in at today’s low rates, potentially lower your monthly payment and give you peace of mind that your monthly payment will be steady for the rest of its term.

Shorten the Term of Your Mortgage

If you purchased your current home with a 30-year mortgage, a refinance can not only reduce your interest rate, but also shorten the length of your mortgage term. Refinancing to a 15 or 20-year term will shorten the amount of time you have left to pay on your mortgage and can reduce the amount of interest you pay.

For example, a $100,000 mortgage financed at 3% will cost over $51,000 in interest over the life of the loan. That same loan amount financed at 3% for 15 years will cost over $24,000. Combining a shorter term and a lower interest rate can cost you less, pay down your mortgage faster and help you build equity in your home more quickly.

Debt Consolidation or Cash-out

A mortgage refinance can also be used to ‘cash-out’ the equity that you own in your home, which puts cash in your hands at closing. You can use that money to consolidate debts such as paying off a second mortgage, a personal loan (i.e. student loan, medical loan), or cover unexpected expenses. There are a few things to consider with a cash-out refinance:

  • To qualify, you need to have enough equity in your home to receive the lump sum at closing. You can only cash out equity that does not exceed your lender’s Loan to Value (LTV) requirements.
  • A cash-out refinance may increase your monthly payment. You are financing a larger amount than you currently owe, which may result in a higher payment. Plus, depending on how much equity you pull out, you may be at risk for Private Mortgage Insurance (PMI), which will also increase your monthly payment.
  • Cashing out the equity of your home can have long-term financial impacts such as negative equity or foreclosure. If the housing market dips, and you’ve pulled your equity, you could find yourself under water.

Central Ohio Mortgage Refinance Experts

KEMBA has been helping Central Ohioans finance their homes for years. As a member, you can lower your monthly mortgage payment, enjoy peace of mind and grow equity in your home by locking in a lower rate. If your current mortgage rate (as of March 2021) is over 3.5%, call a mortgage loan officer at 800.282.6420, option 2 to learn about KEMBA’S mortgage refinance options and how we can help you improve your personal financial outlook.