In the first quarter of 2018, the refinance share of home loan applications in the U.S. fell to 40 percent, the lowest in 10 years. Higher mortgage rates had reduced demand for refinances.
Still, the refinance is not exactly dead.
If you have good credit, you may be considering refinancing yourself, for one or more reasons. Perhaps you want to shorten the term of your home loan. Maybe you have an adjustable-rate mortgage now and want to refinance into a fixed rate. Alternatively, you may want to tap into home equity or consolidate debt.
Whatever your reason(s), you must weigh two questions.
One, how long do you want to stay in your home?
Two, how much money will you save?
Refinances break down into three types: rate-and-term, cash-out, and cash-in.
Rate-and-term refinances simply adjust the term and the interest rate of your existing loan.
Even though interest rates are rising now, they still make up the bulk of refinances. The no-cash-out variety adds closing costs to the loan balance, relieving you from having to pay those costs out of pocket.
A cash-out refinance gives you an opportunity to tap home equity and pay off your existing mortgage. In a cash-out mortgage, the loan balance on the refinance is at least 5 percent more than the balance on the original loan.
As you owe the balance of your original loan to the lender, the overage is either paid out as cash at closing or routed to your creditors to help you whittle down other debts.
A cash-in refinance is the inverse of a cash-out refinance.
You bring cash to the closing to lower the outstanding principal of the loan, under a shorter loan term or a lower interest rate available at lower loan-to-values (LTVs).
You may be able to cancel mortgage insurance premium payments as part of the move (i.e., by reducing a conventional mortgage to 80 percent LTV or lower).
In ballpark terms, the answer is often $2,000-$10,000. In percentage terms, think 3 to 5 percent of the loan amount.
Certain closing costs may be negotiable, like app and processing fees.
If you are stretching the term of your loan out with a refinance, you will carry mortgage debt for years longer than you originally planned, complete with thousands more paid out in interest.
If you are using home equity to fund a remodel or upgrades, your home’s value may not rise as much as you anticipate from the work.
Then there are the little curveballs life throws at us, such as potential job changes and relocations.
If you sense you might have to move before you can recapture the closing costs of the refinance, is it even worth the trouble to try?
Hopefully, you will be able to lower the interest rate on your loan, shorten its term, or find a way to reduce your monthly payments through refinancing.
Online calculators and a conversation with a trusted mortgage professional may help you determine the potential break-even points for a refinance and find paths to a home loan more suitable to your needs.