Refinance Strategy Guide

Written by:  Stacey Christiansen | March 13, 2019

Refinancing could save you thousands. Learn when to make a smart refinance decision and when to stick with your current loan.

Editor Update 3/23/2019: Fed signals rate drop – great news for those who missed out on low rates in 2017 and 2018.

Refinancing Overview

Refinancing your home means shopping for a new loan with better terms than the loan you already have. If and when you’re approved for the new loan, your old loan will be paid off completely, and your future payments will be made to your new lender.

Refinancing a mortgage can potentially save a home owner thousands on a home loan, but it’s not always that simple. Interest rates, closing costs, how long you plan to stay in your home, and why you’d like to refinance are all important considerations that we’ll discuss below before listing our top refinancing partner picks for 2019.

Five Reasons to Consider Refinancing

1. Lower Your Monthly Payment

If current interest rates are lower than the rate you are paying on your mortgage, refinancing could lower your monthly payment. For example, if you have $150,000 remaining on your mortgage at 7% for 30 years, your monthly payment (principal and interest) would be around $998. But, if you refinanced to a 5% loan for 30 years, you would pay $808 and save nearly $100 per month over the course of your loan.

However, there are closing costs involved with a new loan. So be sure to factor those into the your equation. If it costs $1000 to finance the loan above, it would only make sense to refinance if you plan on staying in your home for more than 11 months, because 10 months of saving nearly $100 per month would pay off the closing costs involved with setting up the new loan.

2. Switch to a Short-term Loan

It might also make sense to switch from a 30 year to a 15 year mortgage. This would substantially lower most interest rates, thought the payment would likely be higher.

3. Change from an Adjustable-rate to a Fixed-rate Mortgage

Adjustable-rate mortgages (ARMs) are great for minimizing your monthly mortgage payment in the early years of owning a home. But when interest rates start to rise, so do the monthly payments on an ARM. To avoid the increasing payments, you can switch to a fixed-rate mortgage. While the monthly payments on a fixed-rate mortgage may initially be higher than the payment on your ARM, you will have peace of mind knowing your payment will remain the same, even if interest rates continue to rise.

4. Change from a Fixed-rate to an Adjustable-rate Mortgage

Sometimes it makes sense to switch from a 30-year loan to a one with a shorter term. For example, if you know you will be selling your house in the next few years, switching to an adjustable-rate mortgage could lower your rate and your monthly payment until you sell your house. Another example is when short-term rates are lower than long-term rates, and refinancing into an ARM would save you money at least during the fixed-rate period.

5. Take Cash Out of Your Home Equity

When you have equity in your home, cash out refinancing allows you to turn that equity into cash. There are several providers of cash out refinancing that our team recommends.

Is Now the Right Time?

Many finance specialists will tell you that refinancing makes sense if the interest rate drops by .5%. But that’s not necessarily true for everyone. If your closing costs are high, or you plan on moving sometime soon before you can recoup the closing costs, you may need to wait for a bigger drop in the interest rate, or a deal with lower closing costs, before refinancing makes good financial sense.

If you need cash now for one or more of the following reasons, you may consider a home equity loan or a cash out refinance.

✓ Making home improvements

✓ Purchasing an investment property

✓ Paying for a child’s education

✓ Paying off credit cards, medical bills or other higher interest debt

Check out our guide to home equity loans to get quick access to cash for major purchases or expensive debt payments.

How to Shop

You’ll need to make sure you have your financial life in order. Have the following information on hand and begin collecting quotes and additional information.

1. Check your Credit

Read our guide to credit score management or skip right to checking your credit score, because the higher your score the better the rate you will get.

2. Understand your Current Loan

Make sure you have a complete understanding of your current loan: terms, payoff amounts, equity, interest rate, etc.

3. Get Free Quotes and Information

Collect quotes from reputable lenders. If you don’t have any in mind, our readers have used the following tools to get connected with credible lenders.