Looking to reduce your monthly mortgage payments? Depending on your situation, refinancing could still be your best option for achieving this goal.
"Refinancing is a great way to lower your mortgage payment," says Bennie Waller, professor of finance and real estate at Longwood University in Farmville, Virginia.
And while rates are higher today than they were a couple years ago, for some homeowners, today's rates are still low enough for refinancing to make sense.
In fact, "refinancing is always smart if it meets the goals and needs of the consumer," said Robert Killinger, senior loan officer at Mortgage Network in Danvers, Massachusetts.
Keep reading to find out if refinancing is the right option for lowering your mortgage payments.
Why Should a Homeowner Refinance?
If you can't think of a reason to refinance a mortgage, here are three that make sense for you.
Lower Monthly Payments: "The most obvious reason to refinance would be to lower the interest rate," says Killinger. Mortgage payments consist of both a principal portion (based on the original amount borrowed) and an interest portion (based on the rate) spread out over the remaining length of the mortgage.
Reducing the rate results in a lower mortgage payment if the length of the mortgage remains the same or longer. "[This] allows the homeowner to increase his or her monthly cash flow," Killinger says.
Debt Consolidation Refinance: "When trying to decide whether a refinance makes sense, it's also important to review the outstanding debt," says Killinger. Homeowners with car loans, consumer loans, credit card debt or lines of credit at interest rates higher than current mortgages may save money by refinancing.
"By doing what's called a debt-consolidation refinance, a borrower may be able to significantly decrease their total obligations on a monthly basis," said Killinger. "For example, an individual may have an interest rate of 4.75 percent for a 30-year fixed-rate loan, but they may also be paying 18 percent or higher on revolving credit card debt that totals $25,000."
For someone in this position, Killinger suggests consolidating the credit card debt with the mortgage balance and taking advantage of today's historically low mortgage rates. "While it would be best to check with a certified financial planner on such matters, by combining one's mortgage and credit card debt, it is possible that a homeowner would see an increase in his or her monthly cash flow and may also create a greater tax deduction come year-end."
Pay off Mortgage Faster: In addition to getting a lower interest and lower mortgage payments, homeowners are also opting to refinance in order to reduce their mortgage term and pay off their mortgage faster.
For example, of the borrowers who refinanced during the fourth quarter of 2013, 39 percent opted to shorten the length of their mortgage term, according to Freddie Mac's 2013 Fourth Quarter Refinance Report released earlier this year.
"The difference between 30-year and 15-year fixed-rate loans averaged 0.87 percentage points during 2013," and as result, "many borrowers have taken advantage of this difference to shorten their loan term," notes the report.
By refinancing and shortening their term, homeowners are paying off their mortgage faster and saving in overall interest. In fact, as a whole, borrowers who refinanced in 2013 will save over $21 billion in interest payments in 2014 alone.
Does it Make Sense for Me to Refinance?
If you're trying to figure out whether or not refinancing is right for you, one thing to look at is whether the money saved is worth the cost of refinancing. Refinancing fees include items like application fees, loan origination fees, and appraisal costs that may come at a price tag of anywhere between 3 and 6 percent of your outstanding mortgage loan, according to the Federal Reserve Board's consumer refinance guide.
In addition, you'll also want to be sure that you plan on staying in your home long enough to recoup the costs of the refinance.
"Homeowners considering refinancing need to be reasonably sure that they are going to remain in their property for a considerable period of time, or they will not be able to recoup their closing costs that was incurred in the refinancing," says Waller. He says that if your family is planning a move in the near future, refinancing may not be the best option, because though it will reduce your payment until you sell the home, you won't recoup your upfront refinance costs within the shorter time frame.
"Homeowners that are considering selling their home in the next three to five years are probably not going to benefit or will benefit minimally relative to those that plan to remain in the home for a considerable amount of time," he adds.
How Much Money Can I Save by Refinancing?
Refinancing may not only lower your mortgage and/or debt payments, it may very well save you interest as well. Wondering how much? Our experts say that depending on the situation, your savings could be in the thousands.
"Even though rates are not in the 3 percent range [anymore], there is still a great opportunity to save money on a monthly basis by refinancing," said Killinger. "For example, at today's rates, a homeowner who is paying 5 percent on a 30-year fixed rate mortgage with a balance of $200,000 could refinance into a new loan at 4.25 percent and save about $89 a month," he said. Not impressed with the $89 monthly savings? Look at the long-term picture.
"That savings adds up to $32,000 over the life of the loan," Killinger said.
If your interest rate is higher than 5 percent, your savings could be even greater.
Beware of Resetting the Number of Years on Your Mortgage
For homeowners who do refinance in the pursuit of a lower mortgage payment, it's important to understand that unless otherwise stated, each refinance may reset the number of years left on your mortgage to the term of your new mortgage, like another 30 years, for example.
"Many lenders will encourage the homeowner to refinance for 30 years," cautions Waller. "This is not beneficial to the borrower."
That's because it can end up costing more in the long run as mortgage interest compounds and the longer you have a mortgage, the longer you'll be charged interest.
As a result, if you're going to refinance, one of your best options - if you can afford it - is to refinance to shorter-term mortgage, which will yield a lower interest rate and faster payoff date.