With historic-low mortgage rates, many homeowners are considering refinancing their loans. While the purpose of refinancing is to save money, there are instances when it ends up costing money. Keep reading to learn when refinancing is a smart option. 

Refinancing Options

Refinancing a mortgage occurs when you replace an existing loan with a new one. The reasons for doing so are varied and depend significantly on the terms of the current loan. Below are some reasons homeowners choose to refinance. 

• Lower interest rates. Since interest rates have dropped this year, this is the biggest reason people are currently refinancing. If you are able to obtain a lower interest rate for your mortgage, you could end up saving hundreds of dollars each month, depending on your new rate. 

• Change the type of loan. If you started with an adjustable-rate mortgage (ARM), chances are you had a low rate for your introductory period. You can choose to refinance to a fixed-rate mortgage to secure a stable rate for the remainder of your loan. 

• Shorten the term. You can also change the length of your loan from 30-years to 15-years (or vice versa). 

• Access cash. Cash-out refinancing allows you to refinance a loan for more than your existing loan amount. The difference between the two mortgages is withdrawn as cash and is often used to remodel, consolidate debt, or finance another large purchase. 

Things to Consider Before Refinancing

Before you refinance, consider these things:

• Closing costs. Refinancing is essentially starting the loan process all over, as you will be getting a new loan with new terms. The new loan will come with closing costs, so it’s important to determine how much you will need to pay upfront. 

• Credit score. Even though mortgage rates have dropped, that doesn’t mean everyone will get a low rate. If your credit score has dropped or you are currently unemployed, you may not be eligible for a lower rate. 

• Home Equity. If you have less than 20% equity in your home when you refinance, you will be required to pay private mortgage insurance (PMI). 

• Break-Even Point. After speaking with a mortgage lender to determine what you may qualify for, determine your break-even point. In other words, at what point will your monthly savings catch up to your upfront fee of closing costs? If you are planning to move before you break even, refinancing may not make sense. 

If you are considering refinancing, talk with your mortgage lender! They will be able to provide you with all the information you need to determine if it makes sense for your situation.