by The Ascent Staff | Sept. 15, 2020
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Mortgage refinance loans make sense for many different reasons. Just look at why three different mortgage experts with The Ascent all recently refinanced.
Mortgage refinance loans are up 200% compared with last year, and with good reason. Refinancing can help borrowers accomplish key financial goals and today's record low mortgage rates make it an especially great time to take advantage of this option.
And while the most obvious reason for refinancing is to reduce your interest rate and monthly payment, there could be other motivations as well. In fact, at The Ascent when two of my colleagues and I recently refinanced, but we all took different approaches because we had different goals.
Here are the three key reasons why we, as mortgage experts, all decided now was the time to take action.
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Maurie Backman: Once it became clear that mortgage interest rates were falling to historic lows, I knew that it made sense to refinance my home loan. But the thing was, I didn't want to reset the clock on my repayment schedule by refinancing to a 30-year mortgage, since I was already eight years into my existing 30-year loan. I therefore decided to refinance to a 15-year mortgage. I didn't lower my monthly payment in doing so -- I actually raised it by about $300. However, I now stand to save about $84,000 in interest over the life of my repayment period.
I'm also excited about the idea of paying off my home in less time. Once I no longer have a mortgage, I expect to have more flexibility in my budget to travel or do other things I enjoy.
Homeowners are often motivated to refinance because they want to spend less on a mortgage each month. But I definitely think it's smart to look at the big picture too. In my case, I may not notice my savings right away, but over time, it will make a big difference.
Christy Bieber: When I refinanced, I was able to drop my interest rate a little bit, but that wasn't my main motivation. Instead, I had two big goals. The first was to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, and the second was to consolidate debt.
Adjustable-rate mortgages are an alternative to fixed-rate loans. They often have lower introductory rates, which are fixed for an initial period of time. But their rates are tied to a financial index and can go up over time. We initially chose an ARM because it allowed us to save on interest and we planned to refinance before rates began to adjust. With mortgage rates so low, this was a perfect time to refinance and make sure we locked in a low rate for the life of the loan.
Consolidating debt was my other motivation. We had paid down some of our mortgage and had equity in our home, which meant we were able to do a cash-out refinance. This increased the size of our new mortgage loan but provided me with money to pay off other debt. Cash-out refinance loans can be a great option for debt consolidation because the interest rate is often lower than with other kinds of credit.
In most cases, the big downside is that you convert unsecured debt, such as credit card debt, to a secured loan which could put your home at risk if you can't keep up with your payments. That's why a personal loan can often be a better bet for debt consolidation. But in my case, the other debt I was paying off was a loan on another home, so the debt was secured anyway.
If you have high-interest debt and equity in your home and you're 100% confident you can pay it off, a cash-out refi may be a good move. It could lower your interest costs, simplify your life, and help you better manage repayment as it has for me.
Matt Frankel: Like Maurie, I was able to obtain a significantly lower interest rate by refinancing my mortgage. However, I didn't reduce the term of the loan -- I obtained a new 30-year mortgage.
Why didn't I get a 15-year loan term like Maurie? There's certainly nothing wrong with wanting to repay your mortgage faster, and after obtaining a few rate quotes, I definitely could have afforded the higher monthly payment of a 15-year loan.
However, there wasn't a big enough difference in the interest rates to motivate me to commit to the shorter term. For most of the past few decades, the rates on a 15-year mortgage were significantly lower than the corresponding 30-year rates. For example, when I obtained my first mortgage in 2012, I was offered a 4.25% interest rate on a 30-year loan and a 3.5% rate on a 15-year. That's a significant difference. This time around, the difference between the longer and shorter term was just 0.125%. I'll likely choose to pay additional principal on the new 30-year loan, but this way, I also retain the flexibility to pay it slower if I want or need to.
Finally, I was only about five years into my current mortgage, and even if I take the full 30 years to pay, I'll still save money on interest. The total I pay in interest by taking five additional years to pay off my home will still be over $12,000 less than if I had kept my current loan. So while I certainly plan to pay the mortgage down quicker than I'm required to, it's nice to know that I'm saving money regardless.
Whether you're interested in dropping your payment, saving money on interest, consolidating debt, or accomplishing other goals, refinancing may help you accomplish your objective.
To determine if securing a new mortgage loan makes sense in your situation, get quotes from several different mortgage lenders for refinancing (look for those who will offer pre-qualification without affecting your credit score). Armed with information about what your new loan might look like, you can make an informed choice about what a refinance loan could do for you.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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