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Things to Know About Refinancing Your Mortgage

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If you’re a homeowner, refinancing your mortgage is a tool that could save you thousands of dollars.

Mortgage refinancing is a financial transaction in which you replace your current mortgage with a new one to gain some kind of financial advantage — such as a lower interest rate or a change in the length of your payment terms.

In general, you might consider refinancing your mortgage if you fall into one of these categories:

  • You want a lower monthly payment. In this case, you might refinance into a loan term that’s equal to or slightly longer than your current term. But recognize that you’ll end up paying more interest over the life of the loan.
  • You want to get out of debt faster. Refinancing from a 30-year mortgage into a 15-year is a slam dunk for saving money long-term, but your payment will be higher each month.
  • You’re moving from an adjustable-rate to a fixed-rate mortgage to lock in a lower interest rate.
  • You want to pull cash out of the equity in your home with a cash-out refinance.

Interest rates are at historic lows. If you currently have a rate above 4%, this is a great time to take a look at a refi.


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But your decision shouldn’t depend only on the rate: It’s important to consider how long you plan to stay in your home. So you need to be sure you’ll stay in the house for at least two and a half more years to make up the cost of refinancing.

To get a sense of how much money you’ll save by refinancing your mortgage, you can turn to any of several online calculators.

As you type in your numbers, make sure to take a look at what your monthly payment would be if you refinance into a 15-year mortgage.

Rates on 15-year loans are lower than those on 30-year loans. That’s because they’re a lower risk to lenders since they’ll get their investment back in half the time. The trade-off is that you’ll have a higher monthly payment on a 15-year loan. But if you can swing it, a 15-year mortgage is an opportunity to get out of debt in half the time.

You should expect to pay anywhere between 2% to 6% of your loan amount in closing costs to refinance your mortgage, according to LendingTree.

While exact closing costs vary by state, the average for a single-family home was $5,749 including taxes ($3,339 excluding taxes) in 2019. That’s according to ClosingCorp, a leading provider of residential real estate closing cost data.

Closing costs include fees for a lot of things: a property appraisal and pulling your credit report — as well as fees for processing, underwriting, attorneys, notarizing the transaction and title insurance. Depending on where you live, there might be more.

It is possible to refinance without paying closing costs upfront, though you’ll pay a slightly higher interest rate. But you’ll save so much money in the long run if you reduce your loan term.

Points are another kind of fee you need to know about. A point represents 1% of the total amount of money borrowed. Keep in mind that not every lender charges points — credit unions often don’t — so if you can avoid paying points entirely, all the better.

As a result of the coronavirus crisis, many lenders are tightening standards for borrowers. That means you may need a higher credit score to refinance now than you would have last year.

In fact, MarketWatch reports some lenders are insisting on a minimum credit score of 700 to consider a cash-out refinance application.

But it isn’t necessary to have an 800+ credit score to get a really great offer. As long as you can hit 760, you’ll basically get the same kind of offers as people who have top-tier credit, according to Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report.

One of the most common questions we get about refinancing at our Consumer Action Center is, “Which companies are the best to refinance a mortgage?”

If you’re not already a member of a credit union, check out their websites to you can see what rates they’re quoting. Or you can call a few around town to figure out which one you might want to join.

The bottom line: You’ll likely save thousands of dollars on refinancing your mortgage if you shop around. But don’t fall into the trap of getting hung up on interest rate alone when comparison shopping. The interest rate is the bright, shiny object most people tend to focus on. But it’s only part of how you compare one loan offer to another. You’ve also got to consider points, if any, and closing costs.

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