Is It Time to Refinance Your Mortgage? Discover the Benefits and Savings

Mortgages aren’t cheap, but you can make them less expensive. We’re not talking about any questionable savings tricks or anything like that — we’re talking about the common step of refinancing your mortgage!

Refinancing is a way to lower your monthly mortgage payments or get the cash you need for home improvement projects. It’s also a way to shorten your loan term, which means you pay more per month but reach full equity in your home way sooner.

All this said, it’s only something we advise when the time is right. So, then how do you know when to refinance your mortgage? It’s not all about changes in national average interest rates, though that’s a big factor. We’ll walk you through the whole decision-making process below.

What is mortgage refinancing?

Mortgage refinancing is the process of paying off and replacing your old mortgage with a more financially favorable new loan. You can often snag superior loan terms when you refinance: lower interest rates, shorter repayment periods, the whole nine yards. Additionally, in some cases, you can convert the equity in your home (the amount you’ve paid in principal) into cash. Refinancing isn’t free — there are closing costs just as with your original mortgage. In many cases, though, the monthly savings you get with a refinanced loan justify the costs. Our mortgage experts here at UBank can compare your mortgage with current market rates and help you decide whether refinancing is right.

4 signs it’s time to refinance your mortgage

Wondering when to refinance your mortgage? Any of the below is a good occasion for a change.

• Interest rates have gone down. Often, when mortgage rates are universally lower, refinancing can lower your rate too. Namely, if you can get your interest rate down by 1% to 1.5%, the costs of refinancing are typically worth the benefits.
• Your credit score has improved. Banks offer the lowest mortgage rates and most favorable loan terms to borrowers with the highest credit scores. That typically means you need a personal FICO score of at least 720 for the best deal. If your credit score was lower than this when you obtained your mortgage but is higher now, refinancing can lead to more favorable terms.
• Your financial situation has changed. If your income has changed or your expenses have changed, it might be time to refinance your mortgage. The lower monthly mortgage payments on the other side of refinancing can help you free up more wiggle room in your budget.
• You need cash. Suppose you need cash to cover renovations or pay off a small mountain of credit card debt. A refinanced mortgage can be a way to dip into your equity in your home and get the cash you need.

When to refinance your mortgage: calculating potential savings

If you’re thinking about refinancing, we recommend that you calculate your break-even point. This is the exact point during the life of the loan when you recoup your refinancing costs through your lower monthly payments. If it comes before your mortgage ends or you plan to sell, then we advise refinancing. And to show you why, let’s do some math!

Let’s say your initial 30-year fixed-rate mortgage was for $500,000 with a 5% interest rate. The total cost of this loan would be $966,330 due to the $466,330 in interest. This would amount to you paying $2,684 per month before taxes and other additional costs. Halfway through the life of your loan, your remaining principal balance would be $340,712.78.

With a refinanced 15-year, 4.25% mortgage for the rest of your loan term, your monthly payment would fall to $2,563.11. That’s $120.89 less per month! When you plug your refinance numbers into a mortgage refinance calculator, you see that your refinancing costs would be $3,407.13. However, you’re saving $120.89 per month, so in $3,407.13/$120.89 = 28.18 months, you’ll break even. As such, if you plan to stay in your house for longer than two years and five months, refinancing definitely saves you money.

Exploring different mortgage refinancing options

Refinancing your mortgage isn’t a one-size-fits-all financial solution. Instead, there are three types of refinancing you can consider, each with its benefits and potential drawbacks. Get to know these refinancing options below, and come visit us for help deciding which is right for you — we love educating folks on this!

• Rate-and-term refinance. You might see this option referred to as a “regular refinance.” That’s because it’s exactly the type of refinancing we’ve discussed so far — you change your interest rate or your repayment period (or both). Its advantages are all the ones we’ve already discussed plus one more if you shorten your loan term. Although this leads to higher monthly payments, you’ll reach 100% equity in your home much sooner. Closing costs are the only real drawback, though they’re part of all refinancing options.
• Cash-out refinance. This type of refinancing hinges on the equity you currently have in your home. For example, let’s say you’ve already paid off $250,000 of your $300,000 mortgage. Let’s also say you’re eyeing some super exciting home renovations that would cost $25,000. With a cash-out refinanced mortgage of $275,000, you get $25,000: $275,000 minus your $250,000 equity. You can then use this $25,000 for your renovations. The main drawback is potentially higher closing costs as compared to rate and term refinance.
• Mortgage conversion. You can switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage when you refinance. This is a smart move if interest rates just keep on increasing, as they steadily did from June 2021 to June 2023. It could backfire, though, if — as is typically the case — interest rates decrease in the long run.

The mortgage refinancing process

Ready to refinance? Here are the steps to take (they’re all pretty easy)!

• Set your financial goals. Go into the process fully certain about why you want lower mortgage payments. This can be as simple as just that lower payments are good or as specific as accessing cash for renovations.
• Review your finances. You’ll get better refinancing offers with a better credit score, debt-to-income ratio (DTI), and more equity in your home.
• Calculate your potential new payment. Use what you’ve put together so far to plug your numbers into a mortgage refinance calculator. If the new monthly payments and break-even point your calculator shows you fit your budget and future plans, you’re all good to move forward.
• Compare several banks’ refinancing options. Reviewing a few different options can help you pinpoint the one likeliest to suit your financial situation. Plus, when you find a great rate, you can lock it in before you close the deal. This way, interest rate hikes don’t affect your refinancing offers.
• Gather your documents. Your financial institution will need to verify your income through pay stubs, tax returns and, sometimes, bank statements when you apply for refinancing. That’s a lot of paperwork — and you’re best off gathering it well before closing.
• Arrange for a home appraisal. Lenders need to know your home’s current market value before preparing your refinancing offers, and they determine this through an appraisal. Once you have decided on a loan program the lender can order the appraisal for you. Your appraisal might yield a higher value if you fill the appraiser in on how, if at all, you’ve renovated or upgraded your home.
• Close the loan. You will get a Loan Estimate at the beginning of the loan process and then a Preliminary Closing Disclosure a few business days prior to your closing date. You should confirm the accuracy of the interest rate and closing costs in these documents. There will be a three day Right of Recission after closing. These three days can be used to decide whether to refinance after all. If you move forward, then congrats — you’ve successfully refinanced your mortgage!

Get the rates and terms you need with UBank

Easing the financial burden of your home loan can be as easy as visiting a local bank branch and talking with someone who cares. At UBank, we offer refinancing that truly checks all your boxes, and we walk you through the process from start to finish.

Plus, you can apply for a UBank mortgage right now by using our online application tool. If you’d rather talk with our mortgage team before applying, we’d love for you to visit the nearest UBank location to get started. You can also give us a call at (936)639-5566. The home of your dreams is right around the corner!