Mortgage Refinance 101: when to refinance and why?

Mortgage Refinance Perspectives

Mortgage Refinance 101: when to refinance and why?

Refinancing a mortgage can potentially be a great financial strategy, especially when the original mortgage was purchased at relatively unfavorable terms.

However, there are definite costs associated with pursuing a refinance transaction, which is why its important to understand when to refinance and why. In this STEM Lending post, we cover why you should consider refinancing the mortgage and if so, when is a good time to refinance.

So lets cover the basics: what really is refinancing a mortgage? Refinancing refers to replacing an existing mortgage with another mortgage under different terms. In US, refinancing terms may vary based on economic factors, including projected risk and borrower’s credit worthiness. Usually refinancing is done for borrower’s primary residency mortgage.

Interest rates are currently close to all-time low (see figure below on Average US 30-year Fixed Mortgage rates), therefore mortgage refinancing remains a good option for many homeowners, especially if you bought your mortgage before the 2008 financial crisis:

Refinancing programs in United States

There are several mortgage refinance programs available in the United States, including:

  • Adjustable Rate Mortgage (ARM): You may chose to refinance to an adjustable rate mortgage if you project interest rates may go down in the future. As we highlighted earlier, current interest rates are already at historic lows so substantial future reduction in interest rates is unlikely.
  • Fixed Rate Mortgage: By refinancing to a fixed-rate mortgage can help you plan for monthly mortgage payments well in advance thereby helping you set a budget with predicable cash flows.
  • Cash Out Refinance: Using cash-out refinancing, you can convert part of your home equity into cash, which can be used for expenses such as home repairs
  • HARP: Federal Housing Finance Agency’s Home Affordable Refinance Program helping home-owners experiencing significant drop in their home values refinance with better mortgage terms.
  • FHA Streamline: refinancing existing FHA-insured mortgages requiring limited borrower credit documentation and underwriting.
  • USDA Streamlined Assist Program: available to existing USDA home loan borrowers, by US Department of Agriculture (USDA), providing more affordable refinance payment terms to borrowers with low or no equity.
  • VA Cash-Out Refinance Loans: providing qualified veterans an opportunity to withdraw cash for a near term need from their existing conventional or VA loan.

Two important factors to keep in mind regarding refinance are: (i) Refinancing resets the clock on your mortgage, so a fresh 30-year refinance on an existing 30-year mortgage will extend the mortgage duration to a fresh 30-year duration from the day of refinancing closure, although at a potentially lower interest rate and monthly payment. (ii) There are transaction costs associated with accomplishing a refinance, including a concept of points as we discuss below. Even with mortgage clock reset and transaction costs, refinancing can potentially be a valuable financial decision, for following reasons:

Motivation for refinance

Mortgages can be refinanced for multiple reasons:

  1. Reducing monthly payments by lowering the interest rate.
  2. Debt consolidation of multiple mortgages into one for a potentially different term based on prevailing interest rates.
  3. To reduce the risk of rate fluctuation, switching from an adjustable rate mortgage to a fixed-rate mortgage.
  4. To make cash accessible by altering the terms of mortgage (cash-out refinancing).

Also note that there can be potential tax benefits available with refinancing, particularly if the borrower doesn’t owe the Alternative Minimum Tax.

How do you proceed with refinancing? We recommend you to reach out to a licensed professional mortgage broker who can help discuss your mortgage options and guide you whether you will benefit from a mortgage refinance.

To explore your refinancing options with STEM Lending in more detail, we encourage you to reach out to contact@stemlending.com or contact us via stemlending.com/contact-us / +1-833-600-0490 (toll free), if you have any questions regarding refinancing. We offer free initial consultation to discuss your mortgage options. We also offer a number of handy mortgage calculators to help you compute the mortgage monthly payments and other analytics.

Mortgage Points

A fraction of the net mortgage value is often required to be paid upfront for refinancing. Usually, this fraction is expressed as percentage of  the mortgage amount and is referred to as points, i.e. 1 point equates to 1% of total mortgage amount. Larger upfront payments for refinance (i.e. larger number of points) often yield reduction in interest rates in the refinanced loan.

For further information, feel free to contact us:

  1. stemlending.com/contact-us
  2. Mortgage Calculators – Essential for financial planning

Wishing you a happy home buying experience!

– STEM Lending Team