How to refinance your mortgage
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Mortgage rates, on the whole, have been dropping lately for a few reasons that we won't get into too deeply here, but it has to do in part with the bond market and also with the Federal Reserve, the U.S.'s central bank, cutting interest rates.

Just a refresher here, a mortgage is a loan you get to buy a house. And that loan comes with certain terms, right? Like the mortgage rate. That determines how much interest you have to pay on top of the cost of the house itself. When you take out a mortgage, whatever rates and terms you've agreed to are generally locked in. But there is a maneuver that allows you to get in on this falling interest rate action and possibly save a lot of money in interest. And that's called refinancing.

People refinance their mortgages for different reasons. Sometimes it is to take advantage of lower interest rates. Sometimes it's to borrow more money so they can renovate their house, for instance. On this episode of Life Kit, I talk to NPR personal finance correspondent Laurel Wamsley about what refinancing entails, how much money you might save, how to decide if you should do it, and whether you should wait for rates to drop even more. ♪

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Okay, Laurel, what does it mean to refinance a mortgage? So this is only for folks who already own a home and already have a mortgage. It's basically just paying off the mortgage you already have and getting a new mortgage at a lower rate. It's kind of unique, actually, to the American system that you're able to do this. It's baked into the interest rate that you got when you took out your mortgage is the ability to refinance. And so when rates drop, a lot of people start thinking about doing it.

So basically you're borrowing money to pay off the full amount that you owe on your mortgage. What I would say it is, is you're finding a new bank, a new lender who wants to pay off your old mortgage for you. And you're taking out a new loan from this other bank.

at that new lower rate. They want your loan on their books. They have the capital to pay off your old loan, so they do that on your behalf, and you pay the closing costs associated with your new loan, which you take out with this new bank at the new lower rate. Okay, that makes a lot of sense.

So where would you start if you wanted to refinance? Basically, you want to figure out whether the cost of refinancing, which is generally a few thousand dollars, outweighs the amount of savings that you can possibly get. You're doing a math problem to find what's called the break-even point. How long you'll have to own this home before what you're saving each month adds up to more than what you'll pay in costs.

You might not want to refinance if you're planning on selling your home in the near future. How much could you potentially save if you wanted to refinance? Well, it depends on how large your mortgage is, right? How expensive your house is, how much you still owe on it. But you can potentially save a lot.

So a lot of people already refinanced during the pandemic at super low rates. So this will mostly apply to folks who bought their house, say, 2023 or this year, 2024. If you bought your house at some 7.25 interest rate earlier this year and now rates are down to just above 6%,

then that's going to lower your monthly payment. I spoke to Benjamin Balzer. He's a senior loan officer at Potomac Trust Mortgage Company in Alexandria, Virginia. And this is what he told me. You might want to start with, say, a quick Google search to get a sense of the average mortgage rates in your area.

And then you might check out an online refinance calculator, and that'll let you plug in your zip code and how much you owe on your mortgage. And it'll basically spit out a number showing you roughly what your new payment would be with this new lower rate. So for instance, if you owe $500,000 on your mortgage and you are currently at 7%, but you can now get a rate of 6%, you would save about $329 a month on your monthly payment.

All right, takeaway one. The decision about whether to refinance your mortgage comes down to one simple math problem. Could your potential savings outweigh the costs? Start by turning to the internet, use an online calculator, work out what your new monthly payment might be, and figure out how long it'll take to break even on the fees that come with your new hypothetical mortgage. Refinancing can save you hundreds of dollars a month, but it might not make sense if you plan to sell soon.

What would be the next step after that if it looks like you're going to save some money? What would you do then? I would say the next step is to start reaching out to some mortgage brokers and mortgage bankers. I refinanced my house during the pandemic and I basically just reached out to some friends who had used different lenders for their mortgages. I said, oh, do you have someone you recommend? And they said, yeah, I do.

And then I started reaching out. But you can also use the internet for this, right? There are also these mortgage brokers who can offer rates from a whole bunch of banks and find the one that is best for you. So this is definitely a situation where you want to shop around for a rate. I spoke to Sam Kater. He's the chief economist at Freddie Mac. And he said that...

It's partly a numbers game. You want to reach out to a lot of different lenders and see where you get the best rate. Actually, the Federal Reserve has done some really interesting research on this that shows that even for identical borrowers that are applying on the same day with the same lender,

will often get different rates. And it's hard to figure out why. So I think with some of these, I think you just have to make sure you get enough quotes because at some point, one of them may just come in that's lower. But I think ultimately, the more shots you take, the better shot that you will have at getting a lower rate.

Whoa, that's good to know. Yeah, he said this is just like a super competitive space and that all these lenders are competing on price. So you want to reach out and see the best deal you can find. Takeaway two, your next step is to do some market research for a new mortgage rate. Call up a bunch of banks, talk to some mortgage brokers, get offers on the table. Think of it as looking around for the best deal. As your mom always said, you better shop around.

You talked about doing a cost-benefit analysis. Like, let's say you're going to save $400 a month for the rest of your mortgage. That probably would add up to more than you're going to pay. But how do you actually know what the closing costs would be? Right. This really depends on where you live. Benjamin Balzer, this mortgage broker in Virginia, told me there was a pretty wide array of what you would pay in closing costs that varied whether you were in D.C., Virginia, or Maryland, just for instance. And he said, you know,

So he was saying that in Washington, D.C., your closing costs probably started around $2,000, where in Virginia, they started more like $3,000 or $4,000. So it has to do largely with the fees and regulations that are required in your local state. Right.

But basically, you should assume that the refinance is going to cost you a few thousand dollars. Benjamin, the mortgage broker I spoke with, also told me that there are ways of structuring this differently. So you could potentially work with your lender and have them roll those closing costs into...

that rate so that you're actually doing what they call like a no fee refinance if you don't want to outlay the cash right now. Okay, that's good to know. And just one other thing I'll note here, Benjamin noted that a lot of the people he's hearing from right now are also doing what's called a cash out refinance. So that's a way that people tap into the equity they have in their home by refinancing.

Would that mean that you're getting the cash that your house is worth? Yes. For a cash-out refinance, you take out a larger amount on this new loan than you actually owe on the house.

A lot of times people do this for renovation projects. So, you know, maybe they have $300,000 left on their mortgage, but they refinance and they take out a loan for $400,000. And they actually take that cash, that $100,000 out.

And use that to renovate their kitchen and bathroom, something like that. So it's a way of tapping into the value of their home. A lot of people's homes have gained in value, but it's hard to get at that value until you actually sell the house. Interesting. Yeah. And it makes sense to do that at a time when mortgage rates have dropped. Yeah.

Sure, but it's important to say that you don't want to give up a super low rate that you might have to do a cash-out refinance. If you have one of those 3% interest rates, do not give it up. We may never see rates that low again. If you need the $100,000 to put in that new kitchen and you are sitting on a low interest rate, look instead at

what's called a home equity loan, which is a second mortgage. Don't give up the amazing rate you have just to pull some equity out of your home. Also be aware that cash out refinances do add some risk for the borrower. You're now taking out a bigger loan and you're reducing the amount of equity that you have in your home.

I should also mention that when you refinance, you're resetting the length of your loan. So let's say you're 10 years into a 30-year mortgage and you take out a new 30-year loan. Well, refinancing sets you back at year one of that loan. That can be honestly sort of a bummer. So it's worth asking the lenders you reach out to about getting a shorter-term loan. Say your financial situation has improved and you could now swing, say, a 15-, 20-, or 25-year loan.

And that would mean paying less interest and also paying off the mortgage sooner. Got it. So how do you know if you should refinance now or if you should wait in case rates drop more?

This, I think, is a very good question. And it's one that was sort of near to my heart because I refinanced during the pandemic and I feel like I refinanced a little too early. I hear about my friends having these low rates and, you know, mine is good, but not as good as a lot of people I know because I did it pretty early on in the pandemic before rates really hit bottom. And so when I was reaching out to some experts, I expected them to give me advice about, you know, here's our forecast and here's when you should do it.

thinking that with further rate cuts expected from the Fed through the end of this year and into next, that they might counsel people to wait. But that's not what happened. You know, I posed that question to Sam Kater. He's the chief economist at Freddie Mac. And he said it's really hard to time the market. And he would just go for it if the numbers make sense now.

I would take the money and run while you can because you never know what may happen to rates, right? I mean, forecasting rates is very difficult and there's a lot of turbulence both in the financial markets and in geopolitics that could drive rates higher. All right, so let's talk logistics.

Can you refinance with your current mortgage lender? So you can. I would just say that, you know, as we talked about earlier, this is something where you want to shop around. So of course, it makes sense to reach out to your current lender and see if they've dropped rates in this current environment and what they can offer you. I will say from my personal experience, I found that when I was shopping around, I was able to get better rates elsewhere. And it seemed like

other lenders were more motivated to take over my loan. I mean, it kind of makes sense that your current lender has you at this higher rate. They don't really want to give you a lower rate. And so finding a different lender might make sense. So, you know, if you like your current one, certainly check in with them and see what they're offering.

It's also possible that your current lender might be able to do something called a reset on your mortgage, which would allow you to not do the whole refinance process. So this reset isn't going to be possible on all mortgages. But basically what it is, is that your lender resets your rate,

Yeah, I guess you could also go back to them and be like, well, I'm getting this rate from this other bank, but I'd like to stay with you. Can you match it? Absolutely. It's sort of like, you know, negotiating for a raise. It helps to have that outside offer sometimes.

Okay, takeaway three, there are other options beyond a basic refinance. You could roll the closing costs into your monthly payments if you don't have the cash right now. You could do a cash out refinance and take out a bigger loan and then put that money toward increasing the value of your home, doing renovations, that sort of thing. Or you could do a reset instead of a full refinance, which might be a cheaper, quicker process. Is there a certain amount that you should wait for the rate to drop before you refinance?

Well, it's a good question. I think I have heard and maybe a lot of other people have heard that you're kind of waiting for mortgage rates to drop, say, a full percent from your current rate before you refinance. But I asked that same question to Benjamin Balzer, the mortgage broker, and he said that rule of thumb doesn't really make sense. It all kind of depends on your situation.

and particularly around the size of the loan that you have. - You know, if you've got a high loan amount, like 500K or 800K or 1.2 million or something like that, you might not need to wait until you're 1% lower, 'cause even a half point or a quarter point might save you hundreds of dollars a month. I would say if the savings outweighs the cost, then it makes sense to me, right? But you also have to look at like how long you anticipate on keeping the property for. - What happens if you do refinance and then rates drop way lower?

Could you refinance again? You could. I will say right now rates aren't expected to drop way lower in the next year. In fact, rates have actually just ticked up a little bit. Some forecasts expect that rates will stay around 6% for the next year, while others expect them to move closer to 5.5%, say.

But it's the future. Nobody really knows. So if you do refinance now and rates do drop further, you can refinance again. You're just going to have to pay those closing costs again, though there are ways that lenders can roll those costs into your loan. Any reason not to do this?

Well, if the numbers make sense, and they might not, say you're planning on selling in the near future, or your current rate is 6.5% and you're not going to save enough with a 6% rate to make it worth the closing costs. But if the numbers do make sense and you're going to be saving money and you can cover those closing costs, there's really not any reason not to do this.

But Sam at Freddie Mac told me that some people don't refinance for whatever reason. Maybe they just don't know it's an option or they're wary of the closing costs. They tend to be a higher percent low to moderate income homeowners who are the ones that should be pulling the trigger and refinancing, but they don't. And they end up with structurally higher rates, not because they came in with higher rates to begin with, but because they didn't use the refinance option. So there is sort of a financial education part of this to pay attention to rates because

you could leave money on the table by not refinancing. You know, it reminds me of when people are like, they're your sick days. They're your vacation days. They're part of your salary package. Use them.

Yeah. Like you're literally paying for this. So, you know, take advantage. And like, obviously it is, it takes some work, right? You have to do this research. You have to call around, you have to run some numbers, but it is a way to take advantage of, of lower rates. And if you think you are going to be holding onto your property for several years, it's definitely something worth looking into. All right, Laurel, thank you so much for looking into this for us. You're welcome. Great talking with you, Marielle.

Okay, it's time for a recap. Takeaway one, work out this math problem. Will your savings outweigh your costs? There are lots of calculators online that can help you with that. Takeaway two, do your research. Call up some banks, talk to some mortgage brokers, see what offers you can get. And takeaway three, know that there are other options outside of the traditional refinance, like a cash out refinance or a reset.

For more Life Kit, check out our other episodes. We've got one on how to buy a house and another on how to find the right mortgage. You can find those at npr.org slash life kit. And if you love Life Kit and you want even more, subscribe to our newsletter at npr.org slash life kit newsletter. Also, we love hearing from you. So if you have episode ideas or feedback you want to share, email us at lifekit at npr.org.

This episode of Life Kit was produced by Margaret Serino. Our visuals editor is Beck Harlan, and our digital editor is Malika Gharib. Megan Cain is our supervising editor, and Beth Donovan is our executive producer. Our production team also includes Andy Tagle, Claire Marie Schneider, and Sylvie Douglas. Engineering support comes from David Greenberg and Tiffany Vera Castro. I'm Mariel Segarra. Thanks for listening. ♪

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