With interest rates currently at historic lows, mortgage rates are also stable, making it a good time to consider refinancing—taking out a new loan to pay off your existing one. Before making a decision, it's important to examine several factors. Ultimately, the main question is: Will refinancing save you money? To determine this, consider asking yourself these three questions:

1. Are mortgage interest rates lower than when I originally obtained my home loan?
2. Has my credit score improved since I took out my current mortgage?
3. Is my home now worth more than when I secured my existing mortgage?

If you answered "yes" to any of these questions, it might be an opportune time to refinance!

Advantages of Refinancing

One advantage of refinancing is obtaining better loan terms than your current mortgage.

With a lower interest rate on the same loan amount, your monthly payments will decrease. Additionally, if you’ve paid down your mortgage and can refinance to a smaller loan with the same or lower interest rate, you can also reduce your monthly payments. An improved credit score can help you secure a better interest rate.

Another advantage of refinancing is accessing the equity in your home for cash.

If your home has appreciated in value since you got your current mortgage, you may be able to refinance for the same or a larger loan amount at today’s historically low-interest rates. A cash-out refinance lets you take out a new home loan and receive cash from your home equity at closing. This cash can be used to pay off high-interest debt, make home improvements, or cover a child’s tuition.

Key Loan Terms to Consider When Refinancing

Loan Duration

When refinancing, you have the option to adjust the loan duration, either shortening or extending the new term. Here are a few different types of home loans.

15 vs. 30 Year

A fixed-rate mortgage offers consistent monthly payments throughout the loan's duration. The length of the loan affects your monthly payments, total interest paid, time to build equity, and how long it takes to fully repay the loan.

Fifteen- and thirty-year mortgages are the most common fixed-rate mortgage terms:

• A 15-year mortgage involves higher monthly payments compared to a 30-year mortgage, but it comes with the advantage of paying less interest overall. This option allows you to build equity faster and pay off the loan sooner. For example, if you are in your peak earning years (late 40s to late 50s) and can afford higher payments, refinancing to a 15-year loan might make sense to have your home paid off before retirement.
• A 30-year mortgage features lower monthly payments since they are spread over a longer period. However, you will end up paying more interest, and it will take longer to build equity and pay off the loan. Many people choose a 30-year mortgage for its affordability and the sense of long-term financial stability it provides, allowing them to manage life's uncertainties without risking their home.

Adjustable-rate Mortgage

Home loans can also come with adjustable-rate mortgages (ARMs). These loans feature a fixed interest rate for an initial period – typically 1, 5, 7, or even 10 years – before adjusting to the current interest rates at the time.

An initial lower rate can enable borrowers to afford more expensive homes compared to a fixed-rate loan. However, if interest rates increase significantly, this type of loan can strain your budget and might necessitate refinancing when the rate adjusts.

Balloon Mortgage

A balloon mortgage, with its low monthly payments, may tempt borrowers to qualify for a larger loan and a more expensive house than anticipated. However, caution is advised.

A balloon mortgage has a shorter term than traditional mortgages and consists mostly of interest-only monthly payments. At the end of the term, the entire mortgage balance is due as a large "balloon payment." Since this loan doesn't amortize (pay off the principal over the loan's life), borrowers won't build much equity or reduce the loan balance significantly.

Typically, a balloon mortgage serves as a short-term solution. Due to the high risk involved, many borrowers need to refinance their balloon mortgage before it matures.

FHA Loan Refinancing

If you hold an FHA home loan, you can refinance to reduce your monthly payments. An FHA Streamline refinance simplifies the process of obtaining a new loan while maintaining the same FHA benefits and low-interest rates. However, the refinancing is subject to strict guidelines, and, like any new loan, there will be associated costs.

Factors to Consider When Refinancing

Typically, you must wait six months after obtaining a mortgage before refinancing. Additionally, interest rates are just one aspect to consider; refinancing also involves various costs. The refinancing process involves many of the same steps as when you first secured your mortgage, including fees and closing costs.

To determine if refinancing is worthwhile, you can use the following formula to evaluate the associated costs.

Break-even Point: When Costs Equal Savings

When considering refinancing to save money, it’s important to determine your break-even point—the moment when the costs of refinancing equal the savings you achieve. Once you surpass this point, you begin to save money.

To calculate this, use the formula: Loan Costs divided by Monthly Savings equals Number of Months to Break Even. For instance, if you refinance and save $150 each month on your mortgage payments, but incur $3,000 in fees and closing costs, it would take 20 months to break even (3000/150=20). Therefore, if you plan to stay in your home for at least 24 months, refinancing would be financially beneficial. Otherwise, it may not be the best option.

Every homebuyer's situation is unique, so it’s advisable to consult with an expert. If you’re considering refinancing, contact Capital Bank to discuss your options with a knowledgeable loan originator.

What Do I Need to Refinance?

If you're ready to refinance your mortgage, you'll need to provide several documents to your new lender:

• Proof of Income: This includes recent pay stubs, two years of tax returns, and W-2 or 1099 forms.
• Proof of Assets: Documentation of home ownership and current home value, bank account statements, and records of investments or retirement accounts.
• Credit Report: Your current credit report will be required.
• Statements of Debt: Provide statements for credit cards, student loans, auto loans, and any other outstanding debts.
• Current Mortgage Statement: Your current mortgage statement will also be needed.

Home Refinance FAQs

Is refinancing my mortgage a good idea?

Deciding whether to refinance depends on several factors. First, clarify your goals, such as reducing your monthly payment or altering your loan terms, and assess whether these goals are attainable. Review the advice provided in this blog and consult with a loan officer to assist you in navigating the mortgage refinancing process.

Does refinancing impact my credit?

Refinancing might temporarily decrease your credit score due to credit checks, multiple loan applications, and the closure of your old mortgage account. To minimize the impact, ensure all loan applications are made within a 45-day period so they are counted as a single credit inquiry. Your credit score should improve once you begin making regular, on-time payments on the new loan.

How do mortgage points work?

Lenders may offer the option to lower your interest rate by purchasing mortgage points, where each point costs 1% of the loan amount. Paying for points will increase your closing costs but could reduce your monthly payments and save you money over time. You can calculate the potential savings here.

What is a cash-out refinance?

A cash-out refinance involves obtaining a new, larger loan than your existing mortgage. The difference between the two loans is given to you as a cash payment.

What is a cash-in refinance?

A cash-in refinance occurs when you contribute additional money to reduce your current mortgage balance. This can help avoid mortgage insurance, secure a lower interest rate, or meet qualification requirements for the refinance.

Can I refinance a VA loan?

The U.S. Department of Veterans Affairs permits refinancing of VA-backed home loans to lower monthly payments or stabilize payments (e.g., switching from an adjustable-rate mortgage to a fixed-rate mortgage). Applicants must meet specific eligibility and loan requirements.

Note: Capital Bank, N.A. does not offer debt management, tax planning, financial planning, or credit counseling services. The information provided is for informational purposes only and should not be considered legal or financial advice. Consult with a professional accountant, financial advisor, or credit counselor for personalized advice.