Always check when rates are low
Whenever rates are low, many borrowers will find that refinancing their first mortgages makes sense.
When you refinance, you are getting a new first mortgage that pays off and replaces the old one. The move can lower your monthly payments and/or your overall interest bill.
That’s because you’re replacing an older, higher-rate loan with a new, lower-rate one. Someone who is a year into a 30-year fixed rate mortgage for $150,000 at 8.5 percent can refinance into a new 30-year loan at 7 percent, for example. Doing so cuts the monthly payment by $155 to $998 and the overall interest bill by almost $42,200 to $223,000. (
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More reasons for refinancing
Refinancing also makes sense for other reasons. You should consider refinancing if:
- You have high-rate debt.
- You need to tap your equity for a big expense.
- You want to shorten your loan term and shave your interest costs.
Some borrowers can refinance both first mortgages and second mortgages into new, lower-rate first mortgages. They do this by going through a cash-out refinancing, or a refinancing in which the new first mortgage is larger than the old one. Borrowers get the difference between the old loan balance and the new one at closing to spend as they see fit.
Rather than get a separate equity loan, some borrowers choose to just refinance their first mortgages and take cash out at closing to pay for home improvement projects or other things. The move can make sense for people who need large sums of money and don’t think they’ll be able to pay their balances off quickly. That’s because first mortgages generally have lower interest rates than second mortgage loans.
You may not have been able to afford the payments on a 15-year loan when rates were much higher, so you opted for a 30-year one. But now, rates have fallen enough that the payments on a 15-year loan would be manageable. By refinancing your current 30-year loan into a 15-year one, you can build equity more quickly and slash your total interest bill.
It’s not for everyone, though. Refinancing doesn’t always make sense, though. You may not want to refinance if the following apply:
- You’re a number of years into your loan already.
- Your credit is worse now than when you originally borrowed.
- Equity loans and lines of credit cost less.
Someone who is 10 years into a 30-year mortgage may not want to refinance into a new 30-year loan because that leaves them paying off their homes for a whopping 40 years! Keeping a mortgage on the books for that long boosts the overall interest bill for a home.
If you’ve made late mortgage, credit card or auto payments since you bought your home, your credit score will have fallen. You may not qualify for the best rates anymore, so refinancing could actually boost your payments and interest bill rather than lower them.
Depending on conditions in the interest rate market, equity loan and line of credit rates can be lower than first mortgage rates. This can happen when the prime rate is exceptionally low, as it is now. For borrowers who don’t need much money and don’t plan to have their loans outstanding for long, the no-closing-cost lure of a second mortgage can be a powerful one indeed.