How to Refinance . . . The Smart Way

by Washington Federal Team on April 7, 2011

Low interest rates might be tempting you to refinance your home. Perhaps you want to reduce your monthly mortgage payment. Or maybe you need access to money to consolidate credit card debt or finance a remodel. Refinancing can help you lower the amount of your payment each month, but be careful, because focusing on a lower payment isn’t necessarily the best strategy for everyone. Before you make a decision this big, make sure you’ve done your homework and have spoken to a trusted adviser to ensure that refinancing is the best option.

Why?  Because with any type of loan, the total amount of money you spend to buy something is dependent on several factors – most importantly the interest rate and the amount of time you take to fully repay the loan.  Often, people are so focused on the interest rate or a lower monthly payment that they forget to consider that when you refinance your home, you start over with a new loan. You’ll be setting the clock back to zero, and starting over for another 30 years of payments.

With any mortgage, the goal is to increase the equity in your home and ultimately, to own it free and clear. A refinance can work against this goal in two ways:  it can increase the amount of time it will take you to own your home and it can increase the total amount you’ll pay in mortgage interest over your lifetime.

So when should you refinance?  Conventional wisdom said that you should consider refinancing if you can drop your interest rate by about 20%.  With today’s rates floating around 5%, that means a 1% drop in the base rate.  But be sure to look at what you owe before you refinance and compare it to your loan balance after refinancing.  If you’re adding thousands to your mortgage balance, you may be negating any savings you would realize from a lower interest rate.

At Washington Federal, there’s really no reason refinance. That is, unless your loan is not already with us. We don’t sell our loans, unlike many banks. Why does that matter? Well, if rates fall in a few years, you might be able to lower the rate on your existing mortgage with us.  Or, if you need add to your balance to consolidate debt, pay off an equity line, or finance remodeling, an additional advance would allow you to tap into your equity by adding a lump sum to your existing first mortgage. Best of all? All of this can be done without refinancing.  So you don’t have to start over.  And you can build equity faster and pay off your home on schedule.

{ 2 comments… read them below or add one }

JGross August 16, 2011 at 6:37 pm

"Well, if rates fall in a few years, you might be able to lower the rate on your existing mortgage with us."
What is the process for this?

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Cathy Cooper, WaFed August 17, 2011 at 12:05 pm

Thanks for your question. Because Washington Federal keeps your loan, we can go back later and adjust the rate or terms without the need for a refinance. If you have your loan with us, and rates fall in the future, you can come back to your neighborhood branch and ask your local branch manager about modifying your interest rate. We offer several options for a Rate Modification, including a no-fee option. We may require an appraisal, depending on the equity in your home. The real benefit comes from not having to start over with a new loan like you would in a refinance, so you preserve more of your home’s equity and will own your home sooner.

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