Mortgage Daily

Published On: December 20, 2022

Refinancing a house loan can be risky even when mortgage rates decline. It may be advantageous to refinance if:

As a no-closing-cost loan, you can refinance your fixed-rate mortgage into a cheaper fixed-rate mortgage rate.

Refinancing is financially advantageous due to a change in market conditions (such as reduced mortgage rates or increased house prices).

A cash-out refinancing can consolidate debt, make property upgrades, or satisfy a legal obligation.

Is It Smart to Refinance?

Uncertain about whether to refinance? You and everyone else, then. Refinancing a house loan can be risky even when mortgage rates decline.

The issue is that the shortcuts we are taught – the “rules of thumb” on when to refinance and when to pass — do not work.

Consequently, homeowners frequently refinance when they shouldn’t and don’t when they should. Annually, consumers pay billions of dollars more in mortgage interest due to their refusal to refinance.

Currently, millions of U.S. homeowners may be eligible for refinancing. Perhaps you are one of them. What is preventing you from progressing?

What Exactly Is a Refinance?

Refinance of a mortgage is exchanging an existing mortgage debt for a new one. With a refinance, the previous loan’s principal balance is repaid in full with the new loan’s balance.

Upon completion of the refinance, your old mortgage loan is retired and replaced by a new mortgage loan with new mortgage conditions.

There are several reasons why a homeowner could want to refinance.

A homeowner may refinance to take advantage of a shift in market conditions, such as a decline in current mortgage rates or an increase in local house prices. A new mortgage might provide the homeowner with cheaper mortgage rates or payments and eliminate private mortgage insurance (PMI) costs.

A homeowner may also refinance to obtain “cash out” for a home repair project or to satisfy legal responsibilities, such as removing an ex-spouse from a mortgage debt.

There are several reasons why a homeowner could want to refinance. However, the two most popular reasons are to reduce the loan’s interest rate and monthly payments.

Define your objective before considering refinancing; what are you attempting to achieve? Consider then all of your possibilities for mortgage refinancing.

Suppose your current loan is an FHA loan, for instance. In that case, you can refinance under the FHA Streamline Refinance program, which does not need verification of your income, assets, or credit, nor an appraisal of the property.

Or, consider refinancing into a conventional mortgage, which could allow you to cancel FHA MIP permanently.

In many instances, canceling your FHA MIP is preferable. Nonetheless, you would only know that once you considered all your possibilities.

Comparing a cash-out refinance versus getting a second mortgage home equity line of credit yields the same results (HELOC). The HELOC may first be your best alternative. Over a decade, however, this may be different.

The Method of “Break-Even” Has Its Downsides

Financial experts frequently advise using the break-even technique when considering whether to refinance.

In refinancing, the “break-even” technique involves calculating the months required to recuperate the refinance expenses and choosing whether you will keep your mortgage for longer or less than that period.

If your current mortgage payment is $1,500, your new mortgage payment will be $1,400, and your closing expenses are $1,000, you may calculate your break-even point as follows:

  • Refinance fees equal $1,000
  • $100 monthly savings Equals
  • Break-even = 10 months

Refinancing is likely beneficial if the loan’s break-even threshold is ten months and you intend to maintain your mortgage for at least a year.

However, the break-even calculation becomes flawed if you’ve held your existing mortgage for an extended period. The issue is associated with your new beginning balance, which is less than the beginning amount of your loan several years ago.

Your loan’s “restart” decreases your monthly payment because your new beginning amount is less than the previous one, and your mortgage payments are constant month-to-month.

Follow these steps on a mortgage calculator to better understand this idea.

Enter a house worth $250,000, an interest rate of 5%, a loan term of 30 years, and a down payment of $50,000.

Select “View Complete Report” The monthly principle and interest payment will be $1,074 instantly.

Now, scroll down the report to Year 5. The remaining mortgage debt will be $183,658. If you opted to refinance after five years, this amount would be the new loan’s initial principal balance.

Re-enter the same loan into the calculator, but use $183,658 as the mortgage balance this time.

Now consider the payment. You will notice it has decreased to $986 per month. However, there are no actual savings here. You have just rescheduled your debt for a new 30-year term, which will cost you more in the long run.

Less efficient is the break-even strategy the longer you wait to refinance. Thankfully, there is a superior option.

The No-Closing-Cost Refinancing Is a “No-Brainer”

Therefore, we must rely on something other than the break-even technique to determine if refinancing is wise. We want more justifications for refinancing.

Refinancing makes sense, for instance, if you can refinance your fixed-rate mortgage into a cheaper fixed-rate mortgage rate while incurring no closing costs.

A mortgage with zero closing costs is one in which the lender covers all of the borrower’s closing fees, typically in exchange for a minor increase in the mortgage rate.

Refinancing with no closing costs means you won’t receive the absolute lowest mortgage rate, but that’s fine. The objective is not to obtain the lowest feasible mortgage rate but to save money without incurring any costs.

Then, if extending your mortgage by a few more years makes you uneasy, remember that you have the option to pay as much as you want toward your mortgage each month.

If you refinance with a zero-closing-cost mortgage while continuing to make your “old” monthly mortgage payment, your new loan will be paid off faster than if you had not refinanced.

You will pay less interest, own your house sooner, and incur no cost to accomplish this.

Refinance loans with no closing costs might be a no-brainer. Ask your lender for zero-cost rate estimates.

What Are the Mortgage Rates Today?

Refinancing is a personal choice that might be challenging at times. Nevertheless, there are techniques to decide if refinancing is your best option.

Follow the link to receive assistance with the decision, or immediately begin your application.


Tools for Your Next Big Decision.

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