The Refinance Dance
What is mortgage refinancing, and when is the right time?
It’s late-2019, do you know where your mortgage rate is? It’s worth checking because you might be able to save a significant amount of money by refinancing your home loan.
Regardless of where interest rates are today, refinancing your mortgage comes with a lot of considerations and questions that you should ask before committing to a new home loan.
First things first: What does ‘refinancing’ mean?
Committing to a new mortgage is essentially what you are doing when you refinance your home loan. Refinancing a mortgage means paying off the remainder of what you owe on your existing home loan and then replacing it with a new one.
Why would you refinance?
There are several possible reasons you might want to refinance your mortgage, but two of the most popular are:
- To get a lower interest rate
- To shorten the term of your mortgage
Lowering that interest rate
The most common reason to refinance is to get a lower interest rate. Reducing your interest rate helps you save money, and it helps you build equity in your home sooner. Plus, it can mean lower monthly payments.
“For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 4.5% reduces your payment to $506.69,” explains investopedia.com. 
Shortening the duration of your loan
Refinancing is also a way to shorten the term of your loan. With a lower interest rate, you can keep making a monthly mortgage payment that is about the same as what you are currently paying. But instead of taking, say 30 years to pay off, with a lower interest rate it could be paid off in a significantly shorter time.
For example, “for a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 4.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $804.62 to $817.08.” 
Other reasons to refinance your home loan include going from an adjustable-rate mortgage to a fixed-rate mortgage when mortgage rates are on the rise. When interest rates are going down, it’s vice versa: If you have a fixed-rate mortgage and the interest rates are going down, you might consider switching to an adjustable-rate mortgage so your home loan’s rate can be lowered along with the market rates.
Another reason to refinance is to “cash-out.” When your home is worth more than you owe, you can take out a new mortgage that is larger than what you previously owed on your original mortgage and then keep the difference to pay for things like a major home improvement project, pay down high-interest credit card debt, pay medical bills, etc.
BOTTOM LINE: Ask your lender questions – lots of them
“We can offer examples of how refinancing works and use sample numbers and circumstances, but everyone’s situation is unique,” says Alan LaFollette, Managing Director, National Mortgage Sales at First National Bank of Omaha.
“To get a better and more accurate idea of where you stand, and whether or not refinancing your mortgage is a good idea for you, begin by talking with your lender.”
Refinancing should get just as much consideration as your original mortgage since you are effectively taking out a new one. Meeting with a lender is the best place to start, and when you do, go into the conversation with questions, like:
- What are the costs? What fees do you charge? Do you charge lender fees or commission fees?
- Should I go with an adjustable-rate mortgage or a fixed-rate mortgage?
- How long will it take to earn my money back? (Ask your lender to perform a break-even analysis.)
- What will my new interest rate and annual percentage rate be?
- Do you offer rates at no-cost refinancing?
- Am I eligible for any mortgage discounts?
- Do you have a price match program on rates?
“There are a lot of questions to ask, and rightfully so,” says LaFollette. “Buying a home is the biggest purchase most people will make in their lifetime, and so is refinancing on a home.
“That’s why it’s so important to start the process by meeting with a lender – that’s why we’re here: To answer every possible question you might have.”
Got Questions? Stop by your local First National Bank branch today and visit with a mortgage loan expert.Read More Insights