To Refi Or Not To Refi?

To Refi Or Not To Refi?

You’ve heard the buzz…  mortgage rates are falling to record lows.  So does this mean you should refinance your home today?  While securing a lower interest rate might be the obvious reason to refinance, it’s not the only factor to consider when making this important decision.  As you explore your options, keep in mind there are costs to this financial benefit.

A lower interest rate on your mortgage allows you to save money with a lower monthly payment, while increasing how quickly you gain equity in your home.  In general, lenders suggest refinancing if you can lower your interest rate by 1%-2%.

You might want to refinance your mortgage to shorten the term of your existing loan.  By locking in a lower rate, homeowners are able to reduce the duration of the loan, sometimes significantly depending on the % spread, without a significant change in monthly payment. You might be able to own your home outright a lot sooner than you thought!

Converting your mortgage from an adjustable-rate to a fixed-rate is yet another reason to refinance.  ARMs usually begin with a lower rate than fixed-rate mortgages.  But as the rate adjusts over time, it can rise above fixed rates.  By refinancing from an adjustable to a fixed, homeowners can safeguard themselves against future rate hikes.  If, however, rates are on the decline, converting from a fixed to an adjustable would be beneficial as each rate adjustment will result in a lower monthly payment.

Refinancing to use equity for other expenditures or consolidate debt has its benefits, but can also lead to some less than prudent financial decisions.  Using the equity in your home through a refi to remodel your kitchen or pay for college tuition might make sense as you add value to your home or save on the interest rate you would have paid on a tuition loan.  But this also has its drawbacks.  Decreased equity in the home, additional years of interest payments on the new mortgage, and of course the closing fees are all costs incurred when you refinance for this purpose.  Consolidating existing credit card debt, car loans and other large expenditures under a new mortgage with a lower rate comes with an additional risk.  Racking up new debt with the now available credit will leave you with all the refi costs mentioned previously, in addition to new debt at the higher interest rate.  Overspending on credit cards and the like must stop for this to be effective, and old habits might be hard to break!

Refinancing a mortgage doesn’t come cheap.  In general, a refi can cost between 3% and 6% of a loan’s principal and still requires an appraisal, title search and application fees.  As with any major decision, the benefits must outweigh the costs.  For added reassurance, consult a financial advisor to guide you through the pro’s and con’s specific to your financial situation.

Once you’ve decided refinancing is the right option for you, visit us at to find out how Champion can guide you through a smooth and stress-free closing.