The idea behind refinancing a home mortgage is simple: You’re taking out a new loan to pay off and replace the current one. The goal is to lower your interest rate, reduce the loan term, switch a loan type, or to access the equity in your home.
One reason to refinance is to lower your interest rate, which would reduce your monthly mortgage payment, leaving you more money to cover other expenses or to boost your savings.
If you currently have a $200,000, 30-year loan at 6.5% interest, your monthly payment would be $1,264, but it would drop to $955 if you refinanced at a rate of 4%. That’s saves you more that $300 a month for other uses.
Another refinancing option would be to reduce the term of your loan – say from 30 years to 15. The advantage here is cutting the number of years it takes to pay off your home, saving you thousands in interest costs.
Over 30 years, the total cost to pay off your $200,000 mortgage at the 6.5% interest rate would cost you about $455,000. If you refinanced to 15 years at 4% your monthly payment would increase slightly to $1,479 but your total repayment cost would be only about $266,000 – which would save you about $189,000.
Another reason to refinance would be to switch from an adjustable rate mortgage to a fixed rate, which would protect you if the adjustable rate were to rise.
Refinancing to access the equity in your home is another option. If you were to refinance the full $200,000 but you only owe $160,000 on your home, you’d have $40,000 in equity that could be used for home improvements or to pay off debt. Just keep in mind that you still have a $200,000 loan that will need to be paid off.
Refinancing does come with some costs, which can run into the thousands of dollars. There will be a variety of fees and other expenses, such as points, that will need to be paid up front. If you have to pay 3 points on a $200,000 loan, for example, that would be $6,000.
If you’re considering refinancing, speak with your financial institution or lender about your options and costs before making a decision. They’ll also have a variety of questions about income, expenses and your credit score that can affect your loan and rate.
The ultimate goal is to make sure refinancing makes good financial sense for you.
With hundreds of millions of dollars in assets and over 60,000 members across Hawaii, Hawaiian Financial Federal Credit Union is one of the leading financial institutions in the state, with a reputation for combining personalized service with technologically advanced personal banking solutions. To learn more about our mortgage loans and other services, follow us online or on Facebook, Twitter, and Instagram for news and updates. You can also call (808) 832-8700 on Oahu or toll-free at (800) 272-5255 with your questions.