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Refinancing 101: Why It's Time to Consider Refinancing

Reading time: 5 Minutes

February 19th, 2021

Refinancing a mortgage offers a myriad of benefits, from saving money to getting out of debt faster. And on top of that, 2021 may be one of the best years ever to consider a home refinance. Interest rates have been hitting historic lows, and by refinancing a mortgage now, homeowners can lock in these low rates and have peace of mind for years to come.

Does a mortgage refinance make sense for you? Here are a few of the top reasons you should be considering one:

You Could Save Money Every Month

By refinancing your current mortgage, you can lower your monthly payment. You can do this in two ways:

  1. Get an interest rate that's lower than your current one. Dropping your rate from 4.5 percent to 3.5 percent, for example, would lower your principal and interest payment for a $500,000 loan with a 30-year term from $2,533 to $2,245, a savings of $288 per month.
  2. Extend the term of your loan, which will spread out the balance over more payment periods, reducing your monthly amount. Say you have 20 years left on your mortgage, with a balance of $300,000. Taking out a new 30 year loan—even at the same interest rate—would reduce your monthly payment by $387. Keep in mind that you'll need to pay between 3 percent to 5 percent of your total mortgage in closing costs, so you'll have to factor that in when calculating your overall savings.

You Could Cut the Total Cost of Your Mortgage

If you're comfortable with your current monthly payment, refinancing your mortgage with a lower interest rate and a shorter term can potentially save you a significant amount of money in interest payments. This can be an attractive option if your financial situation has improved since you first bought your home—the more you're able to pay each month now, the larger the savings you'll see once your mortgage is paid off.

You Could Pay for a Home Renovation or other Project

If you've been paying your mortgage for a few years or more, you've likely built up a fair amount of equity in your home, especially given Hawaii's rock-solid housing market, which rarely, if ever, declines in value.

You can leverage this equity by taking out a new mortgage that's larger than your current mortgage balance, paying off that balance, and using the remaining cash for whatever you like.

Home renovations are a common way to use a cash out refinance, for example, because they can further build the value of your housing investment, with an interest rate that's typically lower than other options such as personal loans or credit cards.

You Could Pay off Debt Faster

Speaking of personal loans and credit cards—if you're carrying balances on these kinds of unsecured debt, you can likely reduce the amount of interest you're paying with debt consolidation. In this case, you'd refinance your mortgage for more than its current balance—called a cash out refinance—and use the extra cash to pay down your high-interest-rate debt.

Imagine the savings of going from an interest rate of 17 percent or more on your credit card balance to a mortgage rate that's in the low single digits. One note of caution: Debt consolidation makes sense only if you're confident you won't continue to add new charges to your credit card debt.

You Could Lock in a Low Fixed Rate for Peace of Mind

In the years when mortgage interest rates were higher, adjustable rate mortgages (ARMs) were a popular option for many people, because they often came with lower interest rates compared with fixed-rate mortgages (FRM). However, ARMs also come with an element of uncertainty, because your interest rate could go up in the future.

Now that we're seeing historically low interest rates, it may be the perfect time to refinance your ARM into a FRM, locking in a low fixed rate so your rate and payment will never change as long as you're paying off your mortgage. A FRM can give you peace of mind with no prepayment penalty or balloon payment.

You Could Accommodate Big Life Changes

Life is a journey, and you may find that your situation has changed over the years since you bought your home. What happens, for example, if you're only halfway through your mortgage term and need to split the value of the home as part of the division of assets that occurs during a divorce? Depending on the goals of the divorcing couple, refinancing could be a way to avoid selling the house outright.

Or maybe you're approaching retirement and want to prepare for a lower level of income for living expenses. Refinancing can either lower your monthly payment to a more manageable amount, or give you some of the cash value of the equity built up in your home, so you can use it to pay for other needs.

Have questions? Speak with one of our lending experts.

Refinancing—An Investment that can Really Pay off

While there are upfront costs to refinancing, it's a move that can save you a lot of money in the long run, and give you the ability to achieve your goals in the short term.

If you've been thinking about refinancing, and want to learn more about your options, we can help. Talk with one of our experts about your goals and we can help you make the best choice for your needs.

Now that you know why you should consider refinancing your mortgage, you might be curious about whether it's the right time for one. Check out our next blog, "Does it Make Sense to Refinance in 2021?" for more on why now may the best time for refinancing, and what we're expecting from the housing market for the rest of the year.

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