The basics of home mortgage refinancing

Refinancing should be a happy moment in anyone's life, but deciding when the time is right can be tough to decide. When trying to decide when to refinance you have to think through tons of financial details which can be daunting and cumbersome. Don't worry I'll walk you through the basics of home mortgage refinancing and how to ensure the timing is just right for you. Before we step into the details I want to remind you that if you are keeping an eye on your personal finances and they are in good shape, then refinancing and getting the lowest rate is something you have earned. Don't be afraid to shop around and get the best rate and when you do find an outstanding rate ask if they can offer you more, like a lower closing cost. The more you ask for the more likely you are to get some type of additional savings.

What is home mortgage refinancing?

Before we get too far into the basics we should first define home mortgage refinancing. At its simplest, you can say that refinancing is asking for and getting a different rate on your home mortgage. Typically, if you are looking to refinance then you are trying to get a lower rate. Getting a lower rate has the potential to save you thousands of dollars over the course of your mortgage, so it is absolutely worth the effort to refinance.

Why should you refinance your mortgage?

How are you supposed to know if you should refinance today or wait it out? That question is impossible to answer. For me, when I see that rates are .25% or lower than my current rate I reach out to our mortgage company and double-check to make sure I can get the rate I want. That small of a change in rate is enough to make it worth our time and money. For a typical 30-year loan in the amount of $325,000 that will save around $16,000 over the life of the loan, well worth the time spent. Let's take a look at the common benefits of refinancing and the basics you should consider if one of these applies to you.

What are the benefits and basics of mortgage refinancing:

1. Lowering your interest rate

2. Lowering your monthly payment

3. Shorten the length of your mortgage

4. Switch from ARM to FRM

Lowering your interest rate

As I mentioned above and in a previous article about the top 5 ways to impact net worth you will save a ton of money if you can refinance at a lower rate. The first thing to consider here is whether or not you are actually getting the best rate. Please, take some time to shop around. Call as many local financial institutions as you can. Call national institutions as well, I have personally had success with CIT Bank. The more companies you call the more likely you are to get the best possible rate. That is the only thing that matters if you are in this boat, get the best rate, and be business-like about it. Your personal affiliation should not matter here. Once you have found the lowest rate, take it. Don't wait for the markets to shift, or wait to see if rates go lower. If you are ready to refinance and start saving the sooner the better. If rates go down more you can always refinance again, there is no harm in that, but if rates start to go up you lose any savings you could have locked in.

Lowering your monthly payment

The ability to lower your monthly payments can provide a ton of additional financial flexibility. You can save more money for retirement, emergency savings, a 529 college savings plan, buy a nicer car, pay off your mortgage faster, or basically anything else you want to do with that money. Again, what matters is locking in a lower rate and then basking in the glory of money savings!

Shorten the length of your mortgage

The ability to shorten the term of your mortgage can be amazing. Most people carry a mortgage until nearly the time they retire and for some, they carry this into retirement as well. Our plan is to own our home before our firstborn is in college. The extra money we have every month can then be spent on so many different things. We can put a little more into savings, we can help pay for extra college expenses, we can travel, buy cars, you name it. My wife and I set ambitious goals and the ability to refinance and shorten the term of our loan is something we plan to take advantage of whenever possible.

Switch from ARM to FRM

ARM = Adjustable rate mortgage

FRM = Fixed rate mortgage

FRM > ARM

ARM's typically start with a low rate in the beginning and later raise a mortgage rate and in turn raise your monthly payment. For most, an ARM is a means to an end. You want a house, your credit might not be so great, but you are going to take a chance to live the dream of homeownership. The opportunity to switch to an FRM can be hugely beneficial to building long term net worth that really has an impact on your life. For those of you that don't know the ARM type loan actually helped to create a portion of the 2008 financial crisis. As rates adjusted upward folks were unable to make the larger payments and then would default on their loans. This was happening at a very fast rate in certain parts of the county. Happening so fast that the banks which held these loans got themselves in trouble because they couldn't collect enough money to pay their own bills. Something similar to what is happening with the COVID pandemic as individuals and businesses don't pay rent, the companies that own those homes/malls can't pay their bills and they are put in jeopardy causing tons of economic damage in the process.

Will refinancing save you money

Home mortgage refinancing is complicated and to try and make it easier for you I've built this little how-to guide for calculating your savings vs. the cost of refinancing.

Things you need to know: In this example, I'm assuming a 30-year mortgage today and after refinancing

What you pay today aka what is your mortgage payment today = let's label this "A"

What your mortgage payment will be after you refinance = let's label this "B"

What your closing costs are = let's label this "C"

If you pay $1,000 today and after you refinance you will pay $950 and your closing costs are $2,000, then the formula works this way.

[(A-B)*360] - C

For our example above it looks like this:

[(1,000-950)*360] - 2000

1,000 - 950 = 50

50 * 360 = 18,000

18,000 - 2,000 = 16,000 (this is how much you are going to save if you refinance at a lower rate that brings your payments down to $950/month vs $1,000 per month prior.

Bonus: A quick script to get the refinance process going

As mentioned above when looking to refinance you should call as many institutions as you can to get the best rate. In an effort to make this part of the process easier on you here is a quick script for you.

Call the financial institution of your choosing.

Customer Service: Hello, thanks for calling XXX Company. How may I help you?

You: I'm looking to refinance my home loan, will you connect me with someone who can help?

Customer Service: No problem, one second.

Loan Officer: Hello, I'm XXX, how may I help you?

You: I'm looking to refinance my home loan, what is the best rate you can offer me?

Loan Officer: Great, let me ask you a few quick questions. First, XXXX

From there you will answer a few basic questions, they will run some numbers and either call you or email you back with the rate they offer. Keep in mind, asking for a better loan rate than you have gotten before isn't unusual. Either you have built up good credit and deserve a better rate, or the Federal Government is offering the financial institution a better rate that they want to pass on to you. So go out there and see what rate you can find. Feel free to share your rate in the comments. I'm sure there folks out there that would love to see what low rates they can get right now.

Summary

If you are interested in refinancing I suggest you start at CIT Bank if you looking for a national lending partner. After that, find your local bank and credit unions to see what rates they can offer you. I'd love to hear more about your success in refinancing. Please log in, join our community, and leave a comment below. You can also find our private Facebook Group and drop your comments/thoughts there.

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