Dear Money Mentor: What are some reasons to refinance?

August 11, 2023

Deciding to refinance a mortgage can be confusing and difficult. Here’s a look at some of the reasons refinancing could be right for you.

Dear Money Mentor is designed to answer common consumer banking questions and offer guidance to improve financial wellbeing. Read on for tips and advice from Garret Carter, U.S. Bank production manager for the consumer direct mortgage call center, and Misty Thorne, U.S. Bank refinance sales manager for the consumer direct mortgage call center.

 

Whether you’ve owned your home for five months or 25 years, you’ve probably heard the term “refinance” and you may have some questions:

  • What is refinancing? 
  • How does refinancing work? 
  • Does refinancing make sense for your financial situation? 
  • What is the cost of refinancing your mortgage?

Simply put, refinancing is the process of replacing your existing mortgage with a new mortgage that has more favorable terms. It puts you, the homeowner, in a better financial situation. There are many reasons why you may want to refinance, but generally, the decision to move forward with a new mortgage comes down to:

  1. Saving money
  2. Paying off your loan quicker
  3. Pulling cash out

Let’s examine each of these reasons to refinance in detail.

 

1. Saving money

Keep an eye out on interest rates. By refinancing when interest rates are lower – even by a quarter of a percentage point – you could reduce your monthly payments and cut interest rate costs by thousands over the life of your loan. But reacting to a lower rate may not always be the right move for your situation. Reach out to your mortgage loan officer to see if refinancing when the rates are lower make sense for you.

 

2. Paying off your loan quicker

Maybe you were set up with a longer term when you first purchased your home. Now, a couple of years later, your financial situation has changed, and you can afford to make higher mortgage payments. By refinancing to a shorter term, you could pay off the loan quicker, decreasing the amount of interest you’re charged over time.

 

3. Pulling cash out

Beyond saving money, refinancing allows you to tap into equity you’ve built to fund other areas of your life. (Think your child’s college tuition or wedding, home improvements, a dream vacation or wiping out credit card debt.) For example, let’s say you owe $180,000 on your $300,000 home, and you refinance with a $220,000 mortgage. Doing so leaves you with $40,000 to cash out and use however you’d like.

 

How to determine if refinancing is right for you

All are valid reasons, but you need to evaluate if refinancing makes sense for your personal and financial situation. Start by contacting your bank or mortgage company – or someone you’re ideally already meeting with for an annual mortgage review. They’ll be able to walk through the current interest rate environment and suggest the best products to fit your needs.

A key advantage for consumers: The mortgage lending industry is heavily regulated. Lenders are obligated to be transparent about costs, rates and fees – essentially the information that will affect your monthly payments. This enables you to shop around with confidence. Since interest rates can change daily, you should try to compare the numbers from lenders in a 24-hour period. That way you’re getting the most accurate cost estimates across the board.

Though refinancing may save you money, it’s important to remember that the process isn’t free. As with any mortgage, there are costs associated with the transaction, which can sometimes be wrapped into the new mortgage. Sometimes these costs are paid out-of-pocket at closing. It’s up to you and your personal banker to determine if those costs are balanced by the benefits of refinancing. Let’s say you’re expected to pay $2,000 in closing costs, but your monthly mortgage payment will be lowered by $200. You’ll recoup the closing costs in only 10 months – in that case, refinancing is worth considering.

If you decide to refinance, the steps will probably feel similar to when you originally closed on your home. Using our self-serve Loan Portal, you can fill out much of the application online and upload paystubs, bank statements and W2s. You can also complete the application over the phone or in any bank branch. After an appraisal determines the home’s value, underwriters will review – and hopefully approve – the loan before a closing date is set1.

In all, refinancing is not as intimidating as it seems. And after an average of 30 to 45 days, your money could be working harder and smarter for you. Here’s to lower monthly mortgage payments, a shorter loan term and/or some cash equity for that dream trip.

 

Watch this video for more tips on this topic.

Learn more about your refinancing options.

Related content

These small home improvement projects offer big returns on investment

Common questions about electric vehicles (EVs)

Webinar: Mortgage basics: Finding the right home loan for you

How to get started creating your business plan

The lowdown on 6 myths about buying a home

ABL mythbusters: The truth about asset-based lending

10 ways to increase your home’s curb appeal

Checklist: financial recovery after a natural disaster

Checklist: 10 questions to ask your home inspector

Closing on a house checklist for buyers

What’s the difference between Fannie Mae and Freddie Mac?

Changes in credit reporting and what it means for homebuyers

3 signs it’s time for your business to switch banks

Common small business banking questions, answered

3 tips for saving money when moving to a new home

5 ways to maximize your garage sale profits 

Pros and cons of a personal line credit

For today's homebuyers, time and money are everything

Why other lenders may be reaching out to your employees

6 essential credit report terms to know

Avoiding the pitfalls of warehouse lending

A checklist for starting a mobility program review

High-cost housing and down payment options in relocation

Buying or leasing? Questions to ask before signing a contract

Finance or operating lease? Deciphering the legalese of equipment finance

Common pitfalls to avoid in the equipment financing process

Housing market trends and relocation impact

Unexpected expenses: 5 small business costs to know and how to finance them

Healthcare marketing: How to promote your medical practice

Streamline operations with all-in-one small business financial support

Small business growth: 6 strategies for scaling your business

How to expand your business: Does a new location make sense?

Is raising backyard chickens a good idea financially?

7 steps to prepare for the high cost of child care

What are conforming loan limits and why are they increasing

How to save for a wedding

How I did it: Turned my side hustle into a full-time job

Multiple accounts can make it easier to follow a monthly budget

For today's relocating home buyers, time and money are everything

Crypto + Relo: Mobility industry impacts

Don’t underestimate the importance of balancing your checking account

What types of credit scores qualify for a mortgage?

Test your loan savvy

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

How do I prequalify for a mortgage?

Can you take advantage of the dead equity in your home?

Home equity: Small ways to improve the value of your home

Webinar: Mortgage basics: How much house can you afford?

8 steps to take before you buy a home

Is a home equity line of credit (HELOC) right for you?

Webinar: Mortgage basics: 3 Key steps in the homebuying process

Webinar: Mortgage basics: Buying or renting – What’s right for you?

How to use your home equity to finance home improvements

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Should you get a home equity loan or a home equity line of credit?

5 things to avoid that can devalue your home

6 questions to ask before buying a new home

What is refinancing a mortgage?

What is an escrow account? Do I have one?

Quiz: How prepared are you to buy a home?

10 questions to ask when hiring a contractor

What to know when buying a home with your significant other

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

What is a home equity line of credit (HELOC) and what can it be used for?

Dear Money Mentor: When should I refinance a mortgage?

Building a dream home that fits your life

Are professional movers worth the cost?

First-time homebuyer’s guide to getting a mortgage

Beyond the mortgage: Other costs for homeowners

How I did it: Bought my dream home using equity

Get more home for your money with these tips

Saving for a down payment: Where should I keep my money?

4 ways to free up your budget (and your life) with a smaller home

How I did it: Built living spaces to support my family

Managing the impacts of appraisal gaps in a hot housing market

Is it the right time to refinance your mortgage?

Spring cleaning checklist for your home: 5 budget-boosting tasks

Overcoming high interest rates: Getting your homeownership goals back on track

Money Moments: How to finance a home addition

Home buying myths: Realities of owning a home

House Hacks: How buying an investment property worked as my first home

Should you buy a house that’s still under construction?

10 uses for a home equity loan

Know your debt-to-income ratio

Your guide to breaking the rental cycle

Which is better: Combining bank accounts before marriage — or after?

Save time and money with automatic bill pay

Is it time to get a shared bank account with your partner?

It's possible: 7 tips for breaking the spending cycle

Here’s how to create a budget for yourself

9 simple ways to save

Do you and your fiancé have compatible financial goals?

Is online banking safe?

Recognize. React. Report. Caregivers can help protect against financial exploitation

Addressing financial uncertainty in international business

Webinar: Uncover the cost: Building a home

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Adulting 101: How to make a budget plan

You can take these 18 budgeting tips straight to the bank

How I did it: Learned to budget as a single mom

Leveraging the ASC-842 rule changes in equipment lease accounting

How you can take advantage of low mortgage rates

Buying a home Q&A: What made three homeowners fall in love with their new home

What you need to know about renting

Car shopping: Buying versus leasing your next vehicle

What you need to know before buying a new or used car

How to choose the best car loan for you

Personal finance for teens can empower your child

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Money Moments: Tips for selling your home

How I did it: My house remodel

How I did it: Bought a home without a 20 percent down payment

Crypto + Homebuying: Impacts on the real estate market

Your quick guide to loans and obtaining credit

Webinar: Uncover the cost: Home renovation

4 questions to ask before you buy an investment property

Preparing for homeownership: A guide for LGBTQ+ homebuyers

Checklist: 6 to-dos for after a move

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.