Saving money on your mortgage

Navigating Your Financial Journey: Refinancing a Home

By Dave DeCubellis

There are plenty of good reasons to refinance. Navigant Credit Union can help.

Unless you’re the rare person who buys their house in cash, buying a house is a long-term investment. Average homebuyers typically take out loans that will be paid off over 15 or 30 years, and some loans are spread out over as many as 40 years. Especially if you opt into a fixed-rate mortgage, that’s a long time to be locked into the same deal.

It goes without saying: A lot can change over the course of three or four decades. In a fluctuating market, property values, interest rates and many other factors can rise and fall at any moment. Plus, think about how quickly your personal financial life can change. You could get married, have a child (or another), or decide that you finally want to invest in that finished basement you’ve always wanted.

Even if a particular mortgage agreement was absolutely perfect for you and your family at the time of signing, it’s very possible that it may not remain ideal throughout the duration of the loan. That’s where refinancing options can come into play.

Refinancing is a very common practice by which homeowners replace their existing mortgage with a new agreement under different terms. As a homeowner, you may decide to go down this route for a myriad of reasons.

A few common motivating factors for refinancing include:

  • Lowering your monthly payments by locking yourself into a lower fixed interest rate. This factor has been particularly common over the last few years, as average interest rates reached historic lows.
  • Building equity in your home faster by shortening the term of your loan. This could be a responsible strategy if you are financially stable enough to increase your monthly payments in exchange for the benefit of paying less interest over time.
  • Freeing up cash by opting for what’s known as cash-out refinancing. A common practice for homeowners looking to invest in home improvements, cash-out refinancing refers to replacing your current mortgage with a new loan worth more than the remaining payments you owe on the house.
  • Adjusting to unexpected life events such as a divorce or a death in the family.

Indeed, for many homeowners, refinancing can be a responsible, long-term fiscal benefit. But the process also comes with associated costs and risks that homeowners need to think about.

The costs of refinancing

Remember all of those pesky closing costs that came up when you signed your original mortgage agreement? Those will likely resurface during the refinancing process.

Homeowners looking to refinance should expect to pay, among other costs, for application, title and loan origination fees and the costs associated with their home’s appraisal and inspection.  All together, closing costs on a refinanced mortgage will typically come to 3-6 percent of the total loan.

The risks of refinancing

Just like any major decision you make along your financial journey, refinancing can also come with risks. If you’re not careful, or if you rush through the process without thinking about the long-term consequences of your new agreement, you could find yourself stuck in less favorable agreement than your original mortgage.

Refinancing may not be a good idea for you if:

  • You have a poor credit score: Even though borrowing rates are lower today than they were 10 years ago, those low rates may not be offered to you if your credit score isn’t in good enough shape. If possible, consider holding off on the refinancing process and focusing on paying down your existing debt. 
  • Your current mortgage has early-termination penalties: Many lenders will build hefty opt-out penalties into their long-term loan agreement. In some cases, incurring those penalties may wash out the long-term benefits you’re hoping to secure through your refinancing strategy. Work with your advisors to ensure that your refinancing plan will be worthwhile.

If you’re ready to start thinking about refinancing, Navigant Credit Union can help. Learn more by visiting our online Mortgage Center, or set up an appointment by calling 401.233.4700.