When is it a Good Idea to Refinance Your Mortgage?

Mortgage rates fluctuate all the time. And of course, the higher your mortgage interest rate, the more money you lose when paying back your loan. After a few years, some people are in a position to refinance their homes. 

Throughout the financial world, the advice differs on whether or not refinancing is a good idea. In reality, it depends on your situation and the current mortgage rates in Tennessee. Continue reading to learn how to tell if refinancing your mortgage with F&M Bank is right for you.

Just to make sure we’re all on the same page, refinancing is when a homeowner pays off an existing loan to replace it with a newer and better loan. Typically, homeowners refinance their mortgage loans to gain the following benefits:

• Reduce their interest rates
• Lower monthly payments
• Change to fixed interest payments
• Reduce the length of their loan

Paying off your loan means you’ll have to pay closing costs. These costs will likely be similar to when you first bought your house. Because you’re essentially paying for the same product again.

Closing costs usually include property evaluations, title insurance, origination fees, application fees, taxes, insurance premiums, mortgage insurance, and realtor commissions. Normally, your closing costs will be about 2 to 5 percent of your home’s price. Therefore, closing costs can sometimes be thousands of dollars.

Unfortunately for people who have a 30-year mortgage, likely, refinancing is not a good option for you. Because when you get a new loan, you’re still committed to paying for every year in that new 30-year loan. However, if you have a shorter 15-year loan, refinancing could be a better option.

If your goal is to pay off your mortgage sooner by switching to a shorter plan, you’ll need to be ready to pay larger monthly mortgage payments. To reduce the life of the loan, you’ll have to be more aggressive in your payments. 

You may or may not be ready for these increased payments. If you’re not ready, then refinancing may not be the right option for you.

When you buy a mortgage you have the option to have either a fixed rate or an adjustable rate interest plan. Fixed rates will stay the same for the lifetime of the loan. Adjustable rates will change from time to time.

Usually, ARMs start lower than fixed rates but can climb higher or fall lower. So, with an ARM you can either save money or risk paying more money in the long term.

On the other hand, because fixed rates stay the same, you have the security of always paying the same amount. However, you also lose the potential benefit of saving money if your interest rate falls.

Considering which type of mortgage rate you prefer is an essential step when considering refinancing.

To answer this question, you need to ask yourself if you can recover the closing costs of buying a new mortgage. If you can save one percent of your current rate annually by refinancing then refinancing will be a good option for you.

Another thing to note is how long you plan to stay in the house. If you’re planning on moving out in the next three years, it may not be worth the costs of refinancing. But, if you plan to stay in the home for more than a few years, then refinancing may give you more benefits.

It depends on what you want to do. Usually, it’s not a good idea to refinance a 30-year mortgage if you’ve already been making payments for a few years. When you buy a new 30-year mortgage, what you’ve paid off does not carry over. For example, if you’ve already made payments for 5 years, then buy a new mortgage, you’ll still have to make all the payments for the next 30 years.

However, if you’re looking to refinance and get a 15-year mortgage in Tennessee, the mortgage rates as of September 2020 are among the lowest we’ve seen in the past few years. 15 year fixed mortgage rates also tend to have more favorable rates.

For the most part, it’s usually a good idea to try to refinance with your current lender. Because you’re already an established client, you might be able to avoid paying higher closing costs. 

However, there can always be better deals out there, so don’t be afraid to explore your options.

There are several ways to refinance, but which option to go with will depend on why you’re refinancing your credit score and your borrowing strategy.

This is the simplest form of refinancing. If your lender allows you to, you can adjust either the rate of your mortgage, the term length or both. The amount you’ll have to pay does not change, but you’ll be able to pay off your mortgage faster and with less interest.

Cash-out refinancing plans involve getting a new mortgage that’s higher than your old mortgage. Buying a plan with a larger loan amount allows you to take the excess mortgage amount out in cash. If you’re considering refinancing, you should discuss a cash-out refinance carefully with a financial advisor.

Good reasons for this type of refinance program include:

• Lower interest rates
• Increase the value of your home with home improvements
• Consolidating debt
• Paying college tuition
• Reach financial goals
• Pay off credit card debt

Alternatively, if you just want to focus on paying down your mortgage at a lower interest rate, you can opt for a cash-in refinance. With this type of refinance program, you would have to pay down a significant portion of your mortgage in order to qualify for a new interest rate.

A better name for this refinance plan is “no closing cost refinance.” In fact, this is the main draw of these mortgage plans. However, you’ll still have costs that will be applied to your total mortgage amount. So, if you’re looking for plans with lower interest rates or fixed rates, then you should consider refinancing with a different type of mortgage plan.

As Tennessee’s premier locally-owned bank, our lenders and originators are experts in local markets and are committed to finding the best deals to help you refinance your home. If you’re not already a part of the F&M Bank family, we encourage you to come and meet with our financial advisors.