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Your mortgage can be a very powerful financial tool that can help you in a variety of situations. The major way you take advantage of the built-up equity and other financial power is by refinancing your home. But when should you do it? Are there any downsides?

The answers to these questions really depend on your goals and what you hope to get out of the refinance. In this post, we’ll go over several scenarios where you might refinance and how to determine if it’s right for you.

Why Should I Refinance My Mortgage?

There are a lot of reasons you might consider for refinancing your home. However, when we look at these transactions, they can really all be bucketed into four categories: lowering your rate, changing your term, changing the loan type or cashing out equity.

Lowering Your Rate

If you can get a lower rate, it’s always worth looking into refinancing your mortgage, particularly if your term is the same (e.g. going from a 15-year to another 15-year mortgage). The reason for this is that since everything else is remaining constant, if your rate goes down, your base monthly payment (not including taxes and homeowners insurance) will go down.

In many cases, this is a good deal that you should jump on, but before signing on the dotted line, there are at least a few things to consider.

Always be sure to look at the annual percentage rate (APR). This is generally listed to the right of the base interest rate and takes into account the base rate plus closing costs and other fees. The bigger the difference between the base rate and APR, the higher your costs will be to close this loan.

You should also be sure to factor in mortgage insurance costs. If these apply to your loan, you have to factor them in to your monthly payment. Of course, you could also refinance to get rid of mortgage insurance, but we’ll talk about that more below.

Changing Your Term

Another reason you might look at redoing your home financing is to change your term. You can go in either direction, a 30-year term to a 15-year term and vice versa. Let’s take a look at reasons you might go one way or another.

By going from a longer-term to a shorter-term mortgage, you’re going to see a lower interest rate. This is because mortgage investors don’t have to project inflation as far into the future, so you can get a better deal. You save on interest payments over the life of the loan. On the payments you do make, more money goes directly toward paying off principal, so you gain equity faster.

The flip side to this is that your monthly payment may be higher because you’re giving yourself less time to pay off the loan. This may or may not be the case for you. It all depends on how much you’re saving in interest and how many years are being removed from the term.

If you go from a shorter term to a longer one, you’ll get a slightly higher interest rate because investors have to take inflation into account over a longer term. However, you’ll have a lower payment than you would if you went with a shorter term.

Lengthening your term isn’t for everyone because it means you’re taking longer to pay off your mortgage and paying more interest over time, but if you’re in the right situation, it does mean freeing up money for other things that aren’t your mortgage payment.

For the sake of simplicity, we’ve talked about going between 15- and 30-year terms in this post, but with a YOURgageSM, you can choose any term you want between 8 and 30 years for a fixed-rate conventional loan. You can also choose between several term lengths for FHA and VA loans.

Changing Your Loan Type

Mortgage insurance is something that gets a lot of bad press. It’s a fee no one likes to pay on a monthly basis. At the same time, it enables mortgage investors to give you a loan with a lower down payment by giving them some protection in the event you default.

FHA loans have their benefits, allowing you to get into a home with as little as 3.5% down and FICO scores as low as 580.

The downside of FHA loans is upfront and monthly mortgage insurance premiums. These stick around for the life of the loan if you make the minimum down payment. If your credit is in good shape (620 or higher FICO) and you have 20% or more equity, you can lose these mortgage payments by refinancing into a conventional loan.

If you don’t have 20% equity, the insurance comes off once you reach that point if you’re current on your loan. You can also avoid monthly mortgage insurance payments on conventional loans altogether by opting for a lender-paid mortgage insurance (LPMI) option like PMI Advantage.

Cashing Out Equity

A house has a roof, walls, rooms and furniture. Beyond that, though, it has real monetary value and for most people may be their most valuable single asset. Anyone who’s bought a house knows just how much money was put into that transaction. Still, a sale isn’t the only situation in which the cash value of your home is realized.

Each time you make your monthly payment, you gain a little bit more equity as you come closer to paying off your home. You can use this arrangement to your advantage by cashing out some of the existing equity in your home and putting it toward other items.

One common cash-out refinance scenario is a debt consolidation. Let’s say you have a couple of credit cards you’d like to pay off. Current variable credit card interest rates are above 16%. By taking cash out of your home to pay off these balances, you’re paying off the debt at a rate just over 4% in the current interest rate environment. It’s a much better financial position to be in.

You could also take cash out to make home repairs or finance a renovation. Alternatively, you might choose to give your retirement fund a boost or give your child’s college fund one last lift before they leave for school. It’s completely up to you.

The important thing to consider with a cash-out refinance is whether you have enough equity to accomplish what you want to get done by taking cash out. This is especially important because mortgage investors do require that you leave a minimum amount of equity in the home.

With conventional and FHA loans, you need to leave at least 20% equity in your home on a cash-out refinance. VA loans allow you to cash out all of the equity in the home conforming loans, but only eligible active-duty service members, veterans and their surviving spouses with 680 meeting FICO scores qualify to borrow the full appraised value.

How Much Money Will I Save by Refinancing?

Another key question most people have when choosing whether to refinance is how much money they’ll save. While it’s impossible to answer that question in a blog post because everyone’s situation is different, you can use our refinance calculator to get an idea of whether it makes sense for you.

If you like what the calculator shows you, you can get started by applying online with Rocket Mortgage® by Quicken Loans. If you’re more inclined to get started on the phone, one of our Home Loan Experts would be very happy to take your call at (800) 785-4788. If you have questions for us, you can leave them in the comments below.

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This Post Has 13 Comments

  1. Why is the mortgage industry so convoluted? For example, with the refinancing or home equity loan process; why is there so much redundant effort and research when a buyer already has a loan in place and is trying for a more economical situation? All the fees and costs and extra work, and often redundant to already existing circumstances. If, for example, a house was bought just two years ago, but the interst rate has dropped significantly, why is there an assumption that the house has undergone major detriment? It’s still the same house! The buyer is just trying to improve their ability to pay!

    If I am understanding correctly that points can be used to adjust interest rate, why can’t a person just buy x# of points on an existing loan if they’re able, and adjust the loan rate? This greed and redundancy greatly affect the ability of not-high income buyers, etc.

    This is a serious question from someone new to all this. Please don’t criticize.

    1. Hi Taylor:

      I’m going to address the second paragraph first because it’s the easiest place to start. Points are offered to buy down your rate, but you only get a chance to buy these when you first take out a loan. The reasoning for this is that mortgage investors by the loans after they close. They expect to get a certain rate of interest when they buy your loan and unless it’s set up to be an adjustable rate mortgage, the rate isn’t expected to change.

      We would be lying if we said getting a mortgage wasn’t a little bit complex, but there are reasons for all the things you brought up. In a refinance, property value is verified because property values do change based on recent sales in your area of similar homes. As with any market, they go up or down. The income and assets you have also change over time. Any investor wants to make sure they’re making a good investment in your loan. There’s not an assumption that anything has gone wrong, but the lender has to verify certain things. I hope this helps!

  2. Hello –
    We bought our house on Oct 2017., This year our taxes doubled and my Mortgage payment is so high that we don’t know if we can even afford it. Do I have any options?

    1. Hi Gabby:

      I have a couple of suggestions, but since property values have been on the rise for the last several years, you should know that your assessed value may keep going up over time.

      The first thing I would make sure you do is check and see if you’re claiming every exemption you can get. Secondly, if you’re having trouble affording your mortgage payment, I would certainly talk to your servicer (that’s whoever you make the payment to) about any possible options to help with your monthly payment. You can also look into your options to refinance with Rocket Mortgage®. You can also speak with one of our Home Loan Experts at (888) 980-6716. However, depending on your current rate and term, there’s no guarantee the payment would be cheaper. We can certainly look into it with you. Good luck!

    2. You should contest your property taxes. You can do it yourself. You shouldn’t jump I don’t worry you’ll get a decrease how much depends on what the amount is in the area

  3. My wife and I are heavily deep in credit card debt.(around 45 to 50 thousand) We need some help with what would be the best way to get out of this. Refinance the house. We are currently 6 and a half years into a 30 year FHA loan. We have a 3.75 interest rate. Or do we take out a home equity loan? I don’t think the home equity would be enough to pay of the credit card debt. What do you think would be in our best interest?

    1. Hi Keith:

      Given the amount of credit card debt you have, depending on the amount of equity, it might make sense to do a cash-out refinance at the lowest possible rate you can get taking as much equity as you’re comfortable with and can. Then you could combine that with a personal loan. The rate might still be lower than what you would pay on the credit cards themselves. I’m going to recommend you get started by talking to one of our Home Loan Experts (888) 980-6716. They can take a deeper dive into your financial situation.

  4. We are in the pre-signing stages of a refinance. However, we are a little worried about the appraisal and closing costs. What (ALL) is considered/looked during the appraisal process? Is it necessary to fix minor issues such as painting and a few misplaced floor tiles, etc., or do they really mark the value a lot if not remedied? What would be considered major issues that would affect the property value? Do local home sales really help (our neighbors home is due to sell close to 200,000) and what is typical amount of closing costs in a refinance. They are offering an FHA loan. Just wanting to check because we think we might have a chance at better rates/closing costs if we wait and paint and do some minor repairs. Is this accurate? What do you suggest?

    Also, we have an 80/20 home loan 2 separate mortgages both with an ARM that just went up in rate in June. (only the larger one went up currently) How often can they adjust this and if we never refinance what would 14.50% be on $114,000 total mortgage end up being as a monthly payment. I cant find any correct calculators to give me a monthly cost. Just wanting to know all of our options and what our mortgage could eventually go to if it maxed out at the 14.50% ARM.


    1. Hi Renee’:

      So the misplaced floor tiles, you might want to fix. In general, you don’t want to be able to see the baseboards. There’s some more information here. The painting is an easier fix. What might happen though, is that they can say this is the value assuming all of these things are corrected. But the appraiser has to come back and verify that, so it can cost you more.

      In terms of that ARM, if it goes all the way up, and I would hope you refinanced into a fixed-rate before it got to this point because no one needs to be paying 14.5% interest, but your monthly payment would be $1,395.99. That’s on the assumption that it’s a 30-year term (most ARMs are). That could vary depending on what state you’re in because they have different regulations as well. You can use our amortization calculator. In terms of how often it can adjust, it should say in your mortgage documents. Most of them are just once per year, but it can be twice a year. I recommend you speak with one of our Home Loan Experts at (888) 980-6716 to more fully go over your situation.

  5. I am very behind on my big mortgage mainly because of my separation from my husband and right now I’m working with a company that are working to get my payment at an affordable payment, but my mortgage company told me they’re not really doing there job and I shouldn’t be paying money for a company to help me. So to be honest I don’t know really what to do to save my home, I keep getting contacted to refinance but I talk to a company before and was told they couldn’t help me 🙁
    Can you please email me and let me know if you know what is the best strategy I should follow because right now I’m very lost, SAD AND confused. Thank you Vanessa Laro-Conway.

    1. Hi Vanessa:

      First, take a deep breath. There are steps you can take to better your situation and hope you get back on track.

      If you’re behind on your mortgage, you likely won’t qualify to refinance your mortgage. At the same time, your mortgage company is right that you shouldn’t have to pay someone to help you.

      Here’s what I would do. I would contact your mortgage servicer. That’s whoever you make your monthly payments to. It may or may not be your lender. Anyway, you’re going to ask them what they can do to help you get a mortgage modification. Your credit takes a hit by doing this, but it’s not as big as it would be with the foreclosure. You also get to stay in your home and that could help you get back on track.

      That would be how I would start. I hope this helps!


  6. Looking to refinance to consolidate 1st & 2nd mortgage called ( hero loan added property taxes into my monthly mortgages
    As of this date I’m on a 3.625 %interest

    1. Hi Cecilia:

      I’m going to recommend you speak with one of our Home Loan Experts about this. We would need to pay off your HERO loan at or before close in order to work with you, but we can certainly look into your options. You can reach us at (888) 980-6716.

      Kevin Graham

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