Facts About Mortgage Refinancing

Before refinancing your mortgage, consider these facts first

A young couple gets advice about refinancing their mortgage.
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Mortgage refinancing is what happens when you pay off an existing mortgage loan using funds from a new mortgage loan. Then, the new mortgage takes the place of the old one, and then you pay it off over time.

Some homeowners decide to refinance in order to take advantage of lower interest rates or to pay off their loan sooner. For example, as of Oct. 29, 2020, the average rate on a 30-year fixed-rate mortgage is 2.81%. Others refinance to access their home equity to pay for home improvements or other expenses. If you’re thinking about refinancing your mortgage due to the historically low interest rates in 2020, consider these key facts about the process before you jump in. 

How Long It Takes to Refinance

The refinancing process is just like the process you went through with your initial mortgage. You’ll fill out an application, submit your documentation, await underwriting and processing, and finally, close on your loan. The exact time the process takes depends on the lender you choose and the overall market demand. For example, a lender dealing with more applications or a sudden surge in demand may take longer to process a loan than one with less business.

In June 2020, the average time to close on a refinanced mortgage was 48 days, up from 44 days in May 2020.

The average time to close on a refinanced mortgage was 35 days in March 2020 (the lowest of the year thus far), before increasing to 39 days in April 2020.

How the Length of Your Loan Changes

Since refinancing replaces your old loan with a new one, it changes the length of your loan term as well. Depending on which new loan product you choose, that term could be longer or shorter than your old one.

Here are a few examples that may help:

  1. Say you have 20 years left on your home loan, but refinance into a new 30-year mortgage. In this case, your term gets longer. You’ll have another 30 years until the loan is paid off.
  2. Take that same 20-year scenario. This time, you refinance into a 15-year loan. This actually shortens the time it takes to pay off your loan, shrinking it down to just 15 years.

The difference will depend on your goals for refinancing. If you want to pay off your loan sooner or want to pay less in lifetime interest, financing into a shorter-term loan can help (though it may mean a larger monthly payment as a result). If you’re simply looking for a lower payment, choosing a longer-term loan is usually best.

It's important to consider the interest rates for both 30-year and 15-year mortgages. Both decreased to historic lows in October 2020.

Costs of Refinancing

Your refinancing costs will be very similar to what you paid when initially applying for your mortgage. You’ll need to pay for things like a credit check, title search and policy, appraisal fees, origination and underwriting fees, and more. According to Freddie Mac, the average cost to refinance is almost $5,000.

Once you apply for preapproval with a lender, they’ll give you a loan estimate detailing the expected costs for your specific refinance. 

You Can Get Cash From a Refinance

If you’re in need of cash—to pay for home renovations, medical bills, college tuition, or even to pay off high-interest debts—a refinance can be a good option there, too. Dubbed “cash-out refinances,” these allow you to take out a loan larger than the one you have now, keeping the difference in cash. 

The amount of cash you can take out will depend on your home’s value and how much equity you have in the property. 

Here’s an example: You made a $50,000 down payment on your home and have paid $20,000 toward your principal since buying it. You have $70,000 in total home equity. As long as your home hasn’t lost value, you could tap a large portion of that via a cash-out refinance. (You’d have to meet the lender’s other qualifying requirements, too.) 

The traditional type of refinance is called a rate-term refinance. You can’t get cash from these loans, but you can adjust your term (length of the loan), its interest rate, or both. 

When Refinancing Is or Isn’t Worth It

To understand if mortgage refinancing is worth it, you need to have a good grasp on your finances and your long-term goals. 

First, how long will you be in the home? You want to be in the home long enough to reach what’s called the “break-even” point—the point in time when the money you saved on the refinance outweigh the costs of refinancing. If you plan to move in the next five years, and it will take 10 years to realize the savings of your refinance, then it’s likely not the best move for your finances.

You also need to take into account your personal financial situation. If money is tight or your earnings have been cut, refinancing into a lower rate and longer loan term may be necessary to make your monthly payment more affordable. 

Banks and mortgage lenders of all stripes offer online calculators to help you decide whether a refinance is worthwhile. Here’s a basic mortgage refinance calculator unaffiliated with a lender, or try this more in-depth spreadsheet that can help you compare loans.

The Bottom Line

Regardless of what type of refinance you’re considering, it’s important to shop around when refinancing. Get estimates from several lenders, and compare the costs, mortgage rates, and other terms of each one you receive. These tend to vary significantly across lenders.

Article Sources

  1. Freddie Mac. "Mortgage Rates." Accessed Oct. 29, 2020.

  2. Ellie Mae. "June 2020 Origination Insight Report," Page 4. Accessed Oct. 29, 2020.

  3. Freddie Mac. "Is 2020 Your Year to Refinance?" Accessed Oct. 29, 2020.

  4. Freddie Mac. "Understanding Cash-Out Refinances." Accessed Oct. 29, 2020.