Refinance Your Mortgage: When It Makes Sense and How to Do It

What Is Mortgage Refinancing?

Mortgage refinancing is the process of taking out a new loan to pay off and replace your existing mortgage. The refinance definition under the Home Mortgage Disclosure Act (Regulation C) describes it as a new debt obligation that satisfies and replaces an existing debt obligation.

Homeowners refinance for various reasons: to lower their interest rate, reduce monthly payments, shorten the loan term, eliminate private mortgage insurance (PMI), or access home equity as cash. According to Union Home Mortgage (UHM), refinancing can help achieve these goals.

In 2019, refinance loans accounted for a notable share of mortgage originations, with both non-cash-out and cash-out refinances representing significant portions, according to CFPB data.

• Refinancing replaces your current mortgage with a new one.
• Common goals: lower monthly payment, reduce rate, change loan term, cash out equity, or eliminate PMI.
• A cash-out refinance reduces your equity and can increase the risk of future default because you owe more on the home.

Sources: Consumer Financial Protection Bureau, Union Home Mortgage

Types of Refinance Loans

There are several refinance types, each designed for different needs. The main categories are rate-and-term, cash-out, cash-in, and streamline refinances. Understanding the differences helps you choose the right one.

• Rate-and-term refinance is the most common type, changing the rate or term without accessing extra cash.
• Cash-out refinance lets you borrow more than you owe and receive the difference in cash. It often has higher closing costs and carries higher risk.
• Cash-in refinance involves making a lump-sum payment to lower your mortgage balance, which can improve your loan-to-value ratio and potentially help you qualify for a lower rate or remove PMI.
• Streamline refinance is available for FHA, VA, or USDA loans and involves minimal documentation, often skipping appraisals or income verification.

Sources: Bankrate, LendingTree, Consumer Financial Protection Bureau, U.S. Department of Housing and Urban Development

When to Refinance: Key Considerations

Refinancing isn’t always the right move. You’ll want to weigh the potential savings against the costs. Key factors include your current interest rate, how long you plan to stay in your home, and your financial goals.

A rate-and-term refinance makes sense if you can secure a lower interest rate that reduces your monthly payment or allows you to pay off your mortgage faster by shortening the term. A cash-out refinance can be useful if you need to access home equity for a large expense, but be aware that it increases your debt and reduces your ownership stake.

Before deciding, calculate your break-even point—the time it takes for your monthly savings to cover the refinance costs. If you plan to move before breaking even, refinancing may not be worth it.

• Compare current rates with your existing rate to estimate potential savings.
• Determine your break-even point: divide total closing costs by monthly savings to see how many months it will take to recoup costs.
• Consider how long you’ll stay in the home; the longer you stay, the more you benefit from ongoing savings.
• Cash-out refinances can be riskier because they reduce your equity and increase the chance of default if you hit financial trouble.
• Shorter-term loans (e.g., 15-year) have higher monthly payments but save on total interest; longer terms (e.g., 30-year) offer lower payments but higher total interest.

Sources: Union Home Mortgage, Consumer Financial Protection Bureau, LendingTree

The Refinance Process with Union Home Mortgage

Union Home Mortgage (UHM) offers refinancing options to help you lower your payments, pay off your mortgage faster, finance closing costs, or convert home equity into cash. Their process follows industry standard steps.

The refinance process typically involves a credit check, submitting financial documents (such as income and asset statements), and often a home appraisal. Underwriting then reviews your file, and the entire process typically takes 30 to 45 days.

Here are the typical steps when refinancing through Union Home Mortgage:

1. Step 1: Determine your goal—lower rate, shorter term, or cash out equity.
2. Step 2: Shop around or work with a UHM loan officer to get a rate quote and estimate closing costs.
3. Step 3: Submit a formal application and provide required documents, including proof of income, assets, and identification.
4. Step 4: The lender orders a home appraisal (may not be required for all refinance types, such as an FHA Streamline).
5. Step 5: Underwriting reviews your creditworthiness and the property value.
6. Step 6: You receive a Loan Estimate and later a Closing Disclosure, which outline final terms and costs.
7. Step 7: Attend closing to sign the new mortgage documents; your old loan is paid off.
8. Step 8: Start making payments on the new loan, typically within 30 to 45 days from application.

Sources: Union Home Mortgage

Costs and Fees of Refinancing

Refinancing isn’t free. You’ll pay closing costs, which include various fees such as application fees, origination fees, appraisal fees, and title search fees.

Some lenders offer “no-cost” refinances, but this typically means they charge a higher interest rate in exchange for paying the closing costs. This can be beneficial if you plan to stay in the home long enough to recoup the higher rate through savings.

• Cash-out refinances tend to cost more than rate-and-term refinances.
• You can sometimes finance closing costs into the loan, but this increases your mortgage amount.
• Compare offers from multiple lenders on the same day because rates change daily.
• If you choose a 'no-cost' refinance, you'll pay a higher interest rate, which can be beneficial only if you keep the loan long enough to recoup the costs.

Sources: Union Home Mortgage, Consumer Financial Protection Bureau, U.S. Department of Housing and Urban Development, LendingTree

Refinance Checklist

Before you start the refinance process, use this checklist to prepare. It covers the key steps and documents you'll likely need.

• Check your credit score and review your credit report for errors.
• Gather financial documents: recent pay stubs, W-2s or tax returns, bank statements, and asset statements.
• Know your home’s current value; you may need an appraisal.
• Determine your goal: lower rate, shorter term, or cash out.
• Compare refinance offers from at least three lenders on the same day.
• Calculate your break-even point.
• Understand the types of refinancing and which fits your situation.
• Have a copy of your current mortgage statement and loan balance.

Sources: Union Home Mortgage, LendingTree, Consumer Financial Protection Bureau

Decision Criteria Matrix

When choosing, consider your financial stability, future plans, and how long you’ll stay in the home. A rate-and-term refinance might be ideal if you’re seeking lower payments or a shorter term without extra cash. A cash-out refinance can provide funds but carries higher risk and costs. Streamline refinances are an excellent choice if you qualify, but they are only available for certain government-backed loans. A cash-in refinance is useful for improving your loan-to-value ratio and potentially eliminating PMI if you have extra cash.

Sources: Bankrate, LendingTree, U.S. Department of Housing and Urban Development, Consumer Financial Protection Bureau