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How Mortgage Refinancing Can Help Save Money

  • 4 min read

Refinancing your existing mortgage can result in substantial savings. Refinancing involves getting a new mortgage to pay off the existing mortgage. You will be obtaining a new mortgage loan so you’ll need to meet eligibility requirements just as you did when first purchasing your home.

There are several reasons to consider mortgage refinancing, all of which can save you money! Some are obvious like a lower interest rate, but there are also hidden savings that you may not be aware of. We’ve put together the list below of some of the most common ways people save when refinancing.

1. Lower your interest rate.

One of the most common reasons people refinance their mortgage is to obtain a lower interest rate. It makes sense since this alone can result in tens of thousands in savings. For example, if you currently have a 30 year fixed rate mortgage of $200,000 with a 5% interest rate, you’ll pay approximately $187,000 in interest alone over the life of the loan.

If you were to refinance in year 5 to a loan with the exact same terms, but a 3% interest rate, you will save over $43,000 in interest over the life of loan. That’s huge savings in itself, but just imagine if this money was invested and earning compound interest for you instead of the bank!

2. Lower your monthly payments.

This is the second most common reason to refinance. Regardless of whether you’re having cash flow problems or just want more flexibility with your finances, a lower monthly mortgage payment could make all the difference. 

The lower mortgage payment can be achieved via refinancing in a couple different ways. As discussed previously, you may qualify for a lower interest rate with the new mortgage. This alone would equate to lower payments if all other terms remained the same. 

You also have options with regards to the length of the loan. By refinancing for the same or longer term, you would have lower payments even if the interest rate remained the same. For example, if you refinance 5 years into a 30 year mortgage and obtain a new 30 year mortgage, you’ve just extended the length of your mortgage by 5 years. The principle balance will be lower with the new loan since you’ve already been paying for 5 years. This lower balance gets spread over a new 30 year period, equaling lower monthly payments for you!

3. Reduce the length of the mortgage so you pay less interest overall.

Like the first way to save, this also saves on interest costs. It doesn’t involve obtaining a lower interest rate, however. It simply reduces the length of the loan, which also reduces amount of time that you’ll be paying interest. 

For example, if you’re 5 years into a 30 year mortgage, you have 25 years remaining on the loan. If you refinance to a 15 year mortgage instead, you’ve just knocked 10 years off the length of the loan. That equals 10 years of interest savings!

Note that you’ll likely face a higher monthly payment due to the shorter term of the loan. If you can afford the increased payment, then eliminating several years of interest is a no brainer since it’ll result in substantial savings in the long run.

4. Reduce risk by refinancing an adjustable rate mortgage.

Adjustable rate mortgages (ARM) often provide lower interest rates and reduced monthly payments during the fixed-rate phase of the loan. This makes them an attractive option for homebuyers. ARMs can be risky, however, since the fixed-rate is only temporary.

For example, if you have a 5 year ARM, your rate is locked in for the first 5 years only. At that point, the rate becomes adjustable. This means that the rate and monthly payments could increase substantially at any point from then on out. In this scenario, it would make sense to refinance 5 years into the loan (or earlier) to a fixed-rate mortgage. 

This allows you to save in the first few years with the favorable ARM terms, but then reduce the risk of rate increases in the future, thereby ensuring you pay the least interest possible over the life of the loan.

5. Cash out the equity in your home.

When refinancing, you’ll have the option to borrow up to the current value of your home. If you’ve paid down your principal balance or the home has increased in value since first purchasing, you will have accumulated equity in the home. 

You can access this equity in the form of cash during a refinance. For example, your home may now be worth $200k, but you only owe $150k on the existing mortgage. You’ll be able to access $50k in cash when obtaining a new mortgage for the full $200k value. This money can then be invested to earn interest or used to pay off other debts. 

6. Eliminate FHA Mortgage Insurance.

FHA mortgage loans are popular with homebuyers since very little collateral is required to qualify. When buying a home with an FHA loan, however, it comes with mandatory mortgage insurance. In addition to your principal and interest payments each month, you’ll also be on the hook for mortgage insurance premiums (MIP) for the life of the loan. 

The only way to stop these insurance premiums is to refinance the FHA loan with a traditional mortgage that doesn’t require them. Once you’ve accumulated equity in the home, it often makes sense to refinance so you no longer have to pay the monthly mortgage insurance premiums. Even if you refinance for the same rate and the same term, eliminating the MIP alone could result in substantial savings.



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