7 Refinancing Options You Need to Know About

Aug 27 2021

Refinancing can lower your monthly payment, save money over the life of your mortgage, and help you own your home free and clear sooner.

Even if you’re a new homeowner, it’s smart to get a handle on the basics so you’re ready when the time comes.

But there’s more to refinancing than getting a lower interest rate. Below are seven things to consider, depending on your situation, and what they might mean for you.

1. A lower interest rate

If you have some free time, take a good look at an online amortization calculator. It’s an eye-opening exercise. Watch as a lower interest rate drops your monthly payment and saves tens of thousands of dollars in interest over the life of the loan.

For example, on a 30-year, $200,000 loan, a single percentage point can save $40,000 in interest over the 30 years:

$200,000 @ 4.5% =
$1,013 monthly payment

$164,813 total interest paid over 30 years

$200,000 @ 3.5% =
$898 monthly payment

$123,312 total interest paid over 30 years

Interest saved: $40,000+ over 30 years

Pretty compelling!
Heads-up: The number-one refi mistake is refinancing at an interest rate that’s not low enough to make up for the closing costs.

Heads-up: The No. 1 refi mistake is refinancing at a rate that’s not low enough to make up for the closing costs.

2. No more MIP

Is your first mortgage an FHA-backed loan? Then you know that one of the trade-offs was mortgage insurance premium (MIP), which is usually required for the life of the loan.

The only way to get rid of that monthly burden is to refinance into a conventional mortgage, which can definitely be worth doing.

3. A shorter term

By refinancing to a shorter-term mortgage (like from a 30-year to a 20- or 15-year), you’ll build equity faster and pay off your mortgage sooner. You’ll also save a bunch of money on interest as lenders tend to offer lower rates for shorter-term mortgages.

First, let’s look at just a shorter-term on a $200,000 loan:

30-year term @ 4.5% =
$1,013 monthly payment
$164,813 total interest paid over 30 years

15-year term @ 4.5% =
$1,530 monthly payment
$75,398 total interest paid over 15 years

Interest saved: $89,000+ over 15 years

Now a shorter term plus a lower rate:

30-year term @ 4.5% =
$1,013 monthly payment
$164,813 total interest paid over 30 years

15-year term @ 3% =
$1,381 monthly payment
$48,609 total interest paid over 15 years

Interest saved: $116,000+ over 15 years

You can see how just a shorter term will save you a huge amount on interest, but at the cost of a higher monthly payment. Combine a shorter term and a lower interest rate, and you save even more, and with a more manageable payment.