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MORTGAGE KNOWLEDGE CENTER

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REFINANCE LOANS

Rates starting at % (APR %)¹

 

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1. Discover you’re eligible to become a PenFed member

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  1. Home
  2. Mortgage Knowledge Center
  3. 10 Reasons Why You Should Refinance

MORTGAGE

10 Reasons Why You Should Refinance

What you'll learn: What the best reasons are to consider refinancing your mortgage

EXPECTED READ TIME: 5 MINUTES

December 11, 2020

Every financing situation is different, and as life continues to change, there are reasons why the home loan you have today may not be the best option for you tomorrow. Life can make refinancing your mortgage necessary, or perhaps just advantageous. Here are some of the best reasons to consider refinancing your home.

  1. Reduce your interest rate. One of the primary reasons people consider refinancing is to lower the interest rate of their home loan. In 1981 the average mortgage interest rate was over 16%. It’s hard to imagine a home loan rate like that when 2020 home loan rates are hovering around 4%. If you were to compare the principal and interest costs alone of a $300,000 home loan from 1981-2020, there is a tremendous difference.

    Imagine a $300,000 home loan principal and interest with a 30-year loan in:

    • 1981 with an interest rate of 16%. You would pay:

      • $4,034 per month
      • $1,452,338 total payments
    • 2020 with an interest rate of 4%. You would pay:

      • $1,432 per month
      • $515,609 total payments

    While that may be an extreme example, it provides insight into why refinancing pays off as rates lower. Let’s take a look at a more realistic example comparing rates from 10 years ago — 2010-2020.

    Imagine a $300,000 home loan principal and interest with a 30-year loan in:

    • 2010 with an interest rate of 4.69%.

      • $1,554 per month
      • $559,480 total payments
    • 2020 with an interest rate of 4%.

      • $1,432 per month
      • $515,609 total payments

    With a rate change of only .69%, you can see a monthly reduction in your principal and interest of around $120 per month, and savings over the life of the loan of around $44,000. Using this example, if you were to estimate refinancing fees at approximately $3,500, it would take you around 2 years to break even and make refinancing worthwhile for you. This quick calculation can help you determine if refinancing for a lower rate is right for you.
  1. Switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage. An adjustable rate mortgage has an interest rate that can vary throughout the life of the loan. This means that when you first get the loan, the rate you are paying is temporary and can go up or down over the life of the loan. The rate at which the ARM can go up or down follows an index and margin rate. For example, if the index rate is 1.3% and the margin rate is three points, you add them together to determine what your interest rate would be for that time period — 4.3%.

    • When does it make sense to switch from an ARM to a fixed rate? If rates were low when you obtained your ARM, but rates appear as if they are going to climb or are already beginning to climb, you may want to consider avoiding any potential increase in rates over time. There is the scary factor of the unknown with an ARM because you don’t know how high — or low — rates might actually go. A fixed rate mortgage is fixed or locked in for the life of the loan. That provides a sense of financial security knowing you are locked in at your current rate and you can budget your finances accordingly.
  2. Use the equity in your home. This is another popular reason people consider refinancing their home loan. There are two main ways you may have gained equity in your home.

    • Pay Down Principle. There are a few ways you can pay down principal, which is the amount you owe excluding interest. The first way to reduce the principal is to continue making your monthly payments over time. The second way is to make additional payments and apply them to principle, as opposed to making a pre-payment.
    • Home Value Increased.  In some areas of the country, in good economic times, home values have been rapidly increasing. For example, in California, home values have soared over the last few decades. When you apply for refinancing, your home is appraised for its current value. If home values have increased, you have more equity in your home to pull from.

    There are many ways in which you can use the equity in your home — building an addition, putting in a pool or outdoor kitchen, remodeling parts of your home, and even getting a cash-out refinance.
  1. Consolidate debt. Another key reason why many people consider refinancing is to consolidate debt. That debt may come in the form of student loans or high interest credit cards you’d like to pay off. Overall, home loan interest rates are typically lower than other types of interest rates; therefore, you can leverage equity in your home to consolidate your debt and reduce your total monthly expenses. It’s important to understand the costs of refinancing and take those into consideration when calculating the advantages of debt consolidation.
  2. Reduce the term of your loan. As interest rates change, some look to a lower interest rate as an opportunity to reduce the term (or length) of their home loan. For example, if interest rates have recently lowered, or perhaps your financial situation has improved, you might want to lower the term of your home loan to save money over time and pay off the loan quicker.
  3. Eliminate mortgage insurance. If you have a VA loan, you don’t have mortgage insurance. If you don’t have a VA loan and didn’t have enough for a 20% down payment, you’re likely to have some type of mortgage insurance, whether it’s private mortgage insurance (PMI) or mortgage insurance premium (MIP). If you have built up more than 20% equity based on the current appraisal of your home, you can use refinancing as a tool to eliminate that monthly mortgage insurance fee.
  4. Your financial situation has changed. If your financial situation has changed over time, you might want to consider refinancing to either reduce your monthly payment, lower your term, reduce mortgage insurance, or for some other reason. Refinancing can be beneficial if your financial situation has improved or if it has become more challenging.
  5. Consolidate two mortgages into one. If you have two mortgages, refinancing can consolidate both into one — assuming you meet the criteria necessary with equity, value, credit, and more. The advantage to consolidating is that a second mortgage typically has a higher rate than your first mortgage. Consolidating two into one can reduce your overall mortgage payments.
  6. Your life situation has changed. There are many reasons you may want to refinance based on your current life situation. For example, a divorce might mean that you want to remove another person from the loan, or even buy someone else out of their share if it were a financial partnership. Consider what is going on currently in your life and how it may affect your mortgage payments.
  7. There are other reasons to refinance your mortgage. There are many other reasons you may consider refinancing. Since every individual’s financial situations are different, the best way to find out if refinancing is right for you is to speak with a loan officer and explore your options, needs, and goals.

To learn more about PenFed home loans and refinancing options that are right for you:

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

What Is Home Equity?

What is home equity? PenFed Credit Union explains how to build home equity, calculate the equity in your home, and take advantage of your home’s equity.
Loan officer discussing home equity.

When Is the Best Time to Refinance?

It’s tough to know the best time to refinance. PenFed Credit Union explains when the best time to refinance might be based on different financial situations.
Woman researching about refinancing.

Can I Refinance a VA Loan?

A VA loan can improve your financial situation, especially when it’s time to refinance your home. PenFed explains how to approach the VA refinance process and your best options.
Service member discussing refinancing a mortgage.

Paying for College with Home Equity

Using home equity to pay for college or education costs can be difficult to grasp. PenFed Credit Union provides a breakdown of how it works and if it makes sense for you financially.
College student working.
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REFINANCE LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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