Should I Refinance My Mortgage?

As a homeowner, deciding whether to refinance your mortgage is one of the most significant financial decisions you can make. However, in today’s market, it’s essential to be aware of the factors driving many lenders to push refinancing aggressively. Over the past three and a half years, higher interest rates and reduced purchase and refinance activity have left many lenders with lowered loan origination volumes. In response, some loan officers are being coached to create a sense of urgency around refinancing, often using high-pressure scripts to persuade homeowners to act now.

Let’s break down what you need to know to make a wise and informed decision about refinancing your mortgage.

Beware of High-Pressure Tactics

You may encounter loan officers who highlight supposed benefits such as skipping one or two months of mortgage payments as a reason to refinance. While this can sound appealing, it’s rarely a compelling reason to refinance. In fact, it may not even result in real cost savings. For instance, in cases of streamline refinances, homeowners might need to bring cash to the closing table, negating any perceived advantage.

Tip: Always question claims that sound too good to be true. Remember, refinancing is not about short-term perks but about long-term financial benefits.

Legitimate Reasons to Refinance

Refinancing can be a smart financial move when approached for the right reasons. Here are some scenarios where refinancing might make sense:

1. Combining Multiple Mortgages: Simplify your finances by merging two or more loans into one with a potentially lower combined interest rate.
2. Consolidating a First Mortgage and Home Equity Line of Credit (“HELOC”): Transition from interest-only payments on a HELOC to paying down the principal, creating long-term savings.
3. Paying Off Mortgage Debt Faster: Shorten your loan term to pay off your debt early and save on overall interest.
4. Lowering Monthly Payments: Extend your loan term to reduce your monthly payment, improving cash flow.
5. Reducing Interest Rates: Take advantage of a lower rate to decrease the cost of your mortgage.
6. Consolidating Debt: Roll high-interest debts into your mortgage to save on overall interest, potentially reducing monthly expenses and long-term costs.
7. Switching Loan Types: Convert from an adjustable-rate mortgage to a fixed-rate mortgage for stability.
8. Eliminating Mortgage Insurance: Remove private mortgage insurance (PMI) on conventional loans if you have gained sufficient equity prior to the two-year mark enabling you to manually request PMI removal. Or eliminate mortgage insurance premiums (MIP) on government-backed loans.
9. Leveraging Equity for Major Expenses: Use home equity for higher education costs, high-return investments, or home improvements.

Calculating the Break-Even Point

Before refinancing, it’s crucial to understand the break-even point: the time it will take to recoup the costs of refinancing. A qualified and experienced loan officer can help you calculate this. Knowing your break-even point ensures you can evaluate whether refinancing aligns with your long-term financial goals, especially if you’re considering selling your home in the near future. If your loan officer cannot calculate a break-even point for you, it’s time to move on and find one who can.

Steps to Improve Overall Financial Health

If you decide to refinance, there are additional strategies to maximize financial benefits:

• Offset a Higher Loan Amount: Use the escrow balance reimbursed by your current lender to reduce your new loan’s principal balance.
• Apply “Missed” Payments to Principal: Instead of viewing skipped payments as savings, apply those funds toward the new loan’s principal to reduce future interest costs.

Consult a Qualified Loan Officer

Refinancing is not a one-size-fits-all solution. A trustworthy loan officer will help you weigh the pros and cons, ensuring you’re not lured into refinancing without a clear understanding of the financial implications. Look for an experienced professional who prioritizes your financial health over their sales quotas.

The Bottom Line

While there are legitimate reasons to refinance, it’s essential to approach the decision with caution and a clear understanding of your financial goals. Avoid being swayed by aggressive marketing tactics or short-term incentives. Instead, focus on long-term benefits, and partner with a knowledgeable loan officer who can guide you toward a sound decision.

Refinancing can be a powerful tool for improving your financial situation, but only when done for the right reasons and with the right guidance.

Jennifer Goldsby, NMLS #591226

VP, Renovation Lending

Diamond Residential Mortgage Corporation NMLS #186805

Equal Housing Opportunity

Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.