These are uncertain times and many Americans are wondering how the housing and mortgage markets will be affected. With interest rates at historic lows, there’s a lot of buzz around refinancing. If you’re thinking about refinancing your mortgage but are unsure whether to do so in today’s climate, this article will break down the pros and cons of refinancing and the key factors to consider when making these decisions.

What Does it Mean to Refinance Your Mortgage?

When a mortgage is refinanced the existing loan is paid off and replaced with a new loan. Refinancing is a strategy used by homeowners to achieve individual financial goals. These include lowering the interest rate (which is the most common reason), reducing the monthly payment, or shortening/changing the terms of the loan. Should you obtain ‘cash’ when you refinance, you can use those funds for debt consolidation, making a large purchase, or for an emergency. Let’s break down each scenario.

Lower the Interest Rate

With interest rates as low as they are right now, this is the perfect time to refinance your existing mortgage to a lower rate. Lowering your interest rate will generally reduce your monthly payment. This monthly savings can be used to build your savings account, put towards other financial needs, or can be used to paydown your mortgage principal balance.

For example:
*Existing mortgage terms:$350,000 mortgage / 30 year fixed @ 5.5% interest rate=$1,987 monthly principal and interest payment
Mortgage refinanced to lower interest rate:$350,000 / 30 year fixed
@ 3.75% interest rate
=$1,621 monthly principal and interest payment
A monthly savings of $366

Shorten the Term of the Loan

When interest rates are low, homeowners may have an opportunity to refinance their existing mortgage to a shorter term. A shorter term will reduce the interest paid for the life of the loan and you will pay off your mortgage faster. The monthly payment may change depending on your individual circumstances.

For example:
*Existing mortgage terms:$350,000 mortgage / 30 year fixed
@ 3.75% interest rate
=$1,621 monthly payment

Total interest over the life of the loan: $233,525.65

Refinance to shorter terms at lower interest rate:$350,000 / 15 year fixed
@ 3.25% interest rate
=$2,459 monthly payment

Total interest over the life of the loan: $92,681.32

Lifetime interest savings of $140,844.33

Change the Terms of the Loan

ARM to Fixed:

If you already have an adjustable rate mortgage or "ARM", your interest rate may be lower in the short-term but could increase after the initial fixed rate period ends and the rate resets. When fixed mortgage interest rates are low, refinancing to a fixed rate mortgage could be a great opportunity to save money and lock in the rate for the life of the loan. The change in your monthly payment will not vary and you will not have to worry about rising interest rates in the future.

For example:
*Existing ARM:$350,000 / 7/1 ARM
@ 3.5% interest rate
=$1,571 monthly payment
Refinance to fixed mortgage terms:$350,000 mortgage / 30 year fixed
@ 3.75% interest rate
=$1,621 monthly payment

Fixed to ARM:

Perhaps you have a fixed rate mortgage at a higher rate. Often adjustable rate hybrid mortgage (ARM) loan products will be lower than your fixed rate mortgage. Products called 5/1, 7/1 and 10/1 ARMs have a fixed rate for that initial term (5,7, 10 years), then become a variable rate for the remaining years. During those remaining years, your rate can remain the same, increase, or decrease depending on market conditions at that time. This approach would work for homeowners who plan to move or sell their home in a specific period of time in the future, as it reduce would reduce their monthly cash outlays for mortgage payments for the initial period of the loan. The potential rate change after the initial fixed period should be considered when considering this option. The monthly savings you create could be used to paydown your principal faster.

For example:
*Existing fixed mortgage terms:$350,000 mortgage / 30 year fixed
@ 5.5% interest rate
=$1,987 monthly payment
Refinance to ARM:$350,000 / 7/1 ARM
@ 3.5% interest rate
=$1,571 monthly payment
Monthly savings of $416

Furthermore, by applying the $416 saving each month during the first 84 months of your 7/1 ARM you would reduce the principal balanced owed at month 85 by $52,168. Your principal balance would drop from $310,293 to $258,124. So in the event you wanted to refinance away from an ARM at that time your starting balance would be significantly lower.

Utilize Your Home's Equity

Generally, the equity in your home grows over time. Reasons for this are value appreciation and/or a reduction in the principal balance owed on your mortgage loan. When you apply for a refinance, the lender will have an independent third party appraise your property to determine the current market value. Most borrowers will be able to obtain a mortgage for up to 80% of their current market value. The difference between what you currently owe and the market value of your home is your equity position. You may borrow some of those ‘equity’ funds for any purpose.

For example:
Current Market Value=$500,000
Current Mortgage Balance=$300,000
Current Loan to Value=60%

Current Mortgage Balance ($300,000)
/ Current Market Value ($500,000)
= 60%


Current Market Value ($500,000)
x 80%
= $400,000

- Current Mortgage Balance ($300,000)
= $100,000

Your situation may not allow you to borrow up to 80% of your home’s current market value. Be sure to discuss your specific situation with your lender representative. The funds you obtain can fulfill short and long-term needs. When rates are at their lowest, taking advantage of the increased value in your home could provide liquidity to pay down high interest rate credit card debt, make a purchase, pay for college, or manage an emergency situation.

The process to refinance a mortgage is the same as when the existing loan was obtained. Applications need to be approved, appraisals completed, employment and income verified, and credit histories and scores checked. There may be application fees and closing costs, so you’ll want to make sure the benefits and savings you anticipate, outweigh the associated costs.

It’s Easy to Apply!

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*Examples are provided are for illustration purposes to help you estimate your mortgage needs. Results shown are estimates only. All loan types, rates, and terms are based on an applicant's credit history and are subject to change without notice. Not all applicants may be approved.

Mortgage Loan Originators at Jovia Financial and their unique identifier numbers (NMLS ID#) can be found here.

NMLS ID#: 543667