Financial Wellness

Important Considerations for a Home Loan Refinance

Mortgage lending experienced exponential growth during the pandemic. Many homeowners refinanced existing mortgages to seize the opportunity of lower rates while cashing out new found equity. For many, this was and continues to be a great opportunity, but homeowners should consider several key factors before refinancing.

What are my Goals?

If the goal of refinancing is to lower your monthly payment, reducing a home loan interest rate may be a good decision; however, this runs the risk of increased interest paid over the life of the loan. If your goal is to become mortgage-free several years sooner, shortening the term of your loan may be a wise decision. By shortening a 30-year loan to a 15-year loan, you could save substantially on total interest; but an important consideration is that monthly payments will go up given the compressed time frame. For borrowers with an adjustable-rate mortgage, refinancing to a fixed interest rate eliminates the uncertainty that comes with interest rate fluctuation as your payment amount will remain the same over the life of the loan.

Example:

In 2022, Member Tony purchased a home with a 30-year fixed mortgage of $550,000 at 5.875%. Two years later, he has paid $95,108 in interest and $22,017 in principal. What are his refinance options for his existing loan of $528,000? To lower his payment, he can refinance at a lower rate. To remodel his house, he can refinance and cash out a portion of his equity. Or, to pay off his mortgage sooner, he can refinance for a shorter-term loan.

Consider and Compare the Cost of Refinancing

Even though some lenders advertise a no-cost mortgage, anticipate closing costs to run from 2% to 4% of total loan value including appraisal, underwriting, and title. If closing costs total $5,600 and you can save $400 a month by refinancing, you’ll recoup your costs in 14 months ($5,600 ÷ $400 = 14). But if your savings are more modest, just $100 a month, then recouping costs will take closer to 5 years.

Of course, there are several ways to absorb closing costs. One way is to pay costs upfront. Another is to roll costs into your loan by slightly increasing your loan amount. A third option is to pay down your rate with a discount point. In a no-cost mortgage, the lender covers the loan settlement costs in exchange for charging the borrower a higher interest rate on their loan.

Or, consider a Home Equity Line of Credit if your goal is to remodel and minimize costs. CEFCU has two exceptional Home Equity Lines of Credit to choose from — Traditional and 10-Year Interest Only. Both feature among the lowest variable rates in the nation and are fee-free.

Think About Your Loan Balance and Loan Life

With the escalation of home values, most homeowners have sizable equity available. A cash-out refi allows homeowners to refinance the remaining mortgage balance in addition to “cashing out” part of the home’s equity. If you’re using the money to expand or remodel, you’ll potentially increase the value of your home. However, in cashing out your equity, you are taking on more debt and paying higher monthly payments.

Also, remember that refinancing adds more years to your loan. A 30-year mortgage could quickly turn into a 40- or 45-year loan through refinancing. Due to the way amortization schedules work, the bulk of a mortgage’s interest is paid at the beginning of a loan. Starting the clock again means you’ll spend years paying off interest before making serious impact on the principal.

You’ll Love the CEFCU Difference

Understanding your goals is an important step in choosing a home loan partner. At CEFCU, our real estate lending products are exclusively customized for our member/owners. From a purchase or refinance, to a conforming or jumbo home loan, we bring you value in the form of superior rates and lower fees. Our difference really shines when you compare our products to other lenders.

We do not engage in risk-based pricing (interest rate based on credit score) and there are no loan-level price adjustments (add-ons) for such loan considerations as occupancy, property type, loan-to-value, and loan purpose. Upon qualification, all members receive the featured rate and term. Plus, CEFCU recently added another member advantage to lower rates even further by offering members a three-tiered discount point option.

It’s always the right time to learn more about your home loan options. Get started today on our Real Estate Loan Center or call 800/592-3328 ext. 404.

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View our current Real Estate loan rates. Real estate loans are available for residential properties in the state of California. Certain exceptions may apply for jumbo loans or property types. Property insurance is required. Rate is locked upon a completed application or upon receipt of a fully executed purchase contract. All loans subject to credit approval. Rates and terms are subject to change without notice. CEFCU is an Equal Housing Lender.