Before You Refinance Your Home Loan

When interest rates dip, millions of Americans consider refinancing their home loans to decrease their monthly payments and lock in a lower rate. However, refinancing isn’t for everyone, and in some cases, it’s better to stay with your current mortgage. There are several things to consider before deciding whether refinancing your home loan is right for you.

Not everyone gets the low interest rates on a home loan.

Advertised rates are often reserved for those who have the best credit scores. Before refinancing, check your credit score to see if it is high enough. In addition, advertised low rates are often only available for loans that are below the jumbo level, so make sure you know those limits.

There are other factors that may reduce your ability to get the lowest rate. For example, taking out a home loan for more than 80 percent of your home’s current value can increase your interest rate. This is especially a factor as some home values have recently declined below the price paid by their owners. If your home is in an area with significantly decreased values, it may be useful to get an appraisal before proceeding with a refinance.

Refinancing a home loan can be costly.

If you do get approved for a low interest mortgage, keep in mind that refinancing can be expensive, and closing costs can be high. While “no closing cost” loans may exist, they usually result in a slightly higher interest rate, and some fees may still be charged. It’s essential that you evaluate fees before agreeing to refinance.

Refinancing a home loan is not right for everyone.

If you have a prepayment penalty on your existing loan or have not been in your home long enough for the savings to outweigh the costs, refinancing may not be in your best interest. Also, keep in mind that if you are refinancing with a 30-year term, you are likely going to be pushing back the date that your mortgage is fully paid. If you’ve been in your home for a while, it may be beneficial for you to consider refinancing your 30-year mortgage to a 15-year mortgage. While your monthly payment may be higher, interest rates are even more attractive for shorter loans and the amount you save in overall interest payments can be substantial.

For those who do refinance, use your monthly savings wisely. Because you are accustomed to paying more on a monthly basis, you should see a decrease in your monthly expenses. Consider using this extra money to pay down debt or build a retirement fund.

Finally, don’t get caught at tax time. For many people, home mortgage interest is their largest deduction and lower interest equals a smaller deduction. Planning upfront can ensure that you don’t receive any surprises at tax time.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.