When It's A Good Idea To Refinance Your Mortgage

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Homeowners who are considering refinancing their mortgages have one advantage to count on – interest rates remain low.

Refinancing from a 30-year or adjustable rate mortgage (ARM) to a lower rate can help consumers save money each month and cut the total amount that goes towards interest payments.

Here’s how to determine whether you will benefit by refinancing your mortgage. 

Here are the two major types of refinances:

1. Rate-and-term refinancing to save money. The majority of homeowners refinance the rest of the balance on their mortgage for a lower interest rate and an affordable loan term. (The loan term is the number of years it will take to repay the loan such as 15 or 30 years.)

2. Cash-out refinancing where you obtain a new mortgage for more than what you owe. The difference is often used to pay for renovations or to retire credit card debt.

Other reasons consumers refinance include to replace an adjustable-rate mortgage with a fixed-rate loan, eliminate FHA mortgage insurance or to settle a divorce.

Some consumers refinance to lower their monthly payment and have more money each month for bills, groceries or an auto loan.

“If a borrower is refinancing strictly to lower monthly mortgage payments and closing costs are $2,400, the borrower should expect to save at least this amount in interest payments for the duration they plan to have the loan,” says Richard Liu, a mortgage consultant for C2 Financial Corp., a San Diego-based mortgage brokerage.

Check today’s low rates on a mortgage refinance.

Determine how long it will take to break even

Mortgage closing costs add up to thousands of dollars. To decide whether a refinance makes sense, calculate the break-even point, which is the time it will take for the cost of the mortgage refinance to pay for itself.

“If you can shave one-half to three-quarters of a percentage point off your mortgage loan by refinancing, you should look into it,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Just be sure the cumulative savings on monthly payments is enough to offset the costs of refinancing. If you’re planning on moving in the next year or two, it might not.”

Break-even point example

Break-even point = Total closing costs ÷ monthly savings

Example:

30 months to break even = $3,000 in closing costs ÷ $100 a month in savings

If you plan to keep the house for less than the break-even time, you probably should stay in your current mortgage.

Mind the term in rate-and-term

The formula above doesn’t measure your total savings over the life of the new mortgage. A refinance can cost more money in the long run if you start your new loan with a 30-year term.

Example:

Kris has been paying $998 a month for 10 years. If Kris doesn’t refinance, the payments will total $239,520 over the next 20 years.

With a refinance, Kris could pay $697 a month to repay the new loan in 30 years, or $885 a month to pay it off in 20 years.

$697 x 360 months = $250,920

$885 x 240 months = $212,400

In the example above, Kris borrowed $186,000 at 5 percent. 10 years later, Kris had a remaining balance of $146,000, and refinanced at 4 percent.

Use Bankrate’s mortgage calculator to compare your own loan scenarios:

• See what happens when you input different mortgage terms (in years or months).
• Reveal the amortization schedule to see how much total interest you would pay.

Good credit can save you lots of money on your mortgage. Check your credit score for free at myBankrate.

Pros and cons of cash-out refinances

Cash-out refinances often are used to pay down debt. They have pros and cons.

Imagine that you use a cash-out refinance to pay off credit card debt. On the pro side, you’re reducing the interest rate on the credit card debt. On the con side, you may pay thousands more in interest because you’re taking up to 30 years to pay off the balance you transferred from your credit cards to your mortgage.

But the biggest risk in this scenario is in converting an unsecured debt into a secured debt. Miss your credit card payments, and you get nasty calls from debt collectors and a lower credit score.

Miss mortgage payments, and you can lose your home to foreclosure. Home equity debt that’s added to the refinanced mortgage always was secured debt.

5 Ways To Spot Student Loan Scams

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There is an estimated $1.5 trillion of outstanding student loan debt. The burden is taking a toll on Americans, from preventing homeownership to delaying other major life milestones, like marriage.

Still, it’s easy for Americans to want to eliminate that debt as soon as possible — and criminals are capitalizing on the growing desire to do so.

The Federal Trade Commission (FTC) has been cracking down on scammers in recent years, claiming they’ve have been charging illegal upfront fees and misleading consumers.

While it may be tempting to go after a quick fix to eliminate student loan debt, it can have numerous and costly consequences.

Here are five warning signs to watch for when looking for student debt relief.

1. The company asks you to pay upfront fees

Companies charging upfront fees to help with consolidation is illegal. According to the Federal Student Aid website, consumers should “never have to pay for help” with student loans.

In 2017, the Federal Trade Commission started a nationwide crackdown on student loan debt relief scams called “Operation Game of Loans.” The operation was a result of scammers taking over $95 million in illegal fees from consumers over a number of years.

If you call a relief company and they ask for money before helping you, the company is participating in illegal activity; hang up and file a complaint with the FTC.

2. Think twice before signing a power of attorney

Scam companies will ask consumers to sign over a power of attorney, which will give it power to make decisions on your behalf. Often, they will use the power to put your loans in forbearance, which is a major warning sign, writes Robert Farrington on The College Investor, a blog for student loan advice.

Here’s how it works: After you sign a power of attorney, the company will put your loans in forbearance, resulting in you not having monthly payments sent directly to your servicer. Instead, the company will ask you to pay it directly.

Instead of your money going toward your loans, the company will keep it for itself, instead of putting it toward your loans.

“The problem is, these scams usually involve the company taking your money, your student loans remain in forbearance for months or years, and the borrower finds out that the forbearance has expired and that nothing was done,” Farrington writes.

This strategy capitalizes on consumers who aren’t familiar with the many different repayment options for loans.

When a loan is in forbearance, payments temporarily stop or are lowered. Under forbearance, you are still responsible for any interest incurred while not making payments; under a deferment, you might not be.

According to the Federal Student Aid website, forbearance and deferment should be considered only as temporary or short-term solutions if you’re struggling to repay your loans. Long-term solutions to high payments are income-driven repayment plans, which determine your monthly payment based on your pay.

3. The provider offers ‘quick relief’

Most scams make false promises, such as fast loan forgiveness through dispute or programs that don’t exist. These scams often promise quick relief without having specific details of individual accounts and situations.

As of now, there is no quick fix to eliminate student debt. There are loan forgiveness programs available, such as public service loan forgiveness, but even those programs require years of payments before the balance being forgiven. Additionally, student loans cannot be discharged through bankruptcy.

There is no quick fix for eliminating student debt. Those struggling with payments and can’t get relief through payment plans can consider refinancing to a lower-interest loan to make payments more manageable.

4. Think twice before paying to get on a payment plan

While it’s legal for companies to offer services to help customers navigate the student loan repayment system, the FTC says it’s an unnecessary cost.

“Consumers can apply for loan deferments, forbearance, repayment and forgiveness or discharge programs directly through the U.S. Department of Education or their loan servicer at no cost,” the FTC writes on its Game of Loans website. “These programs do not require the assistance of a third-party company or payment of application fees.”

5. Do your research

Those who are feeling unsure about a debt-relief program should do their due diligence in research before committing to or paying for any services.

Use the Better Business Bureau (BBB) search tool to determine if the business is BBB accredited. This tool will also pull up any reviews and complaints made by other consumers.

What to do if you’ve fallen victim to a debt relief scam

If you’ve given away personal information, such as your FSA ID, or have paid a company that might not be legitimate, there are steps you can take before further damage is done.

The Federal Student Aid website lists the following steps you should take:

Change your FSA ID: If you provided your FSA ID to a company, you should log in and change your username and password.

Contact your loan servicer: Be sure to revoke any power of attorney you may have signed over to the party. Review any recent changes or actions that were taken on your loans.

Block all payments: Contact your bank and block any payments to the scam company.

File a complaint: Log on to the FTC website and file a complaint. After, file a report in the FSA feedback system.

5 expert strategies for paying off graduate school student loans

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Graduate school: It’s one of the biggest investments of your life. Not only does it extend your academic career, but it has the ability to make your student loan debt burden skyrocket.

If you go to graduate school, chances are you’re going to need help paying for its costs. Graduate student loan debt is proven to have higher borrowing rates and larger balances than undergraduate student loan debt, according to a 2018 report by the Urban Institute and AccessLex Institute. Those balances were more than three times the amount of undergrad balances during the 2015-2016 school year — and can seem like a daunting obligation to fulfill.

Just how much money are we talking? Research by New America finds one in four borrowers have a combined undergraduate and graduate student loan balance of nearly $100,000 — almost half of the national average mortgage debt in 2017.

Those considering graduate school shouldn’t be intimidated by the large balances, though. A graduate degree can double your earnings, according to the Urban Institute, making it an investment with the potential for generating a positive return.

Best ways to pay off graduate school loans

Bankrate asked a number of experts to share some of the best ways to pay off graduate student loans. Here’s what they recommend:

1. Find a repayment plan that matches your ability to pay

One of the hardest parts about having student loans is figuring out how to afford monthly payments. The higher the total balance, the more you’ll owe each month on a standard repayment plan, which spreads out an even number of payments over 10 years.

There are ways to lower monthly payments, though, which include putting yourself on a repayment plan. That includes some income-driven repayment plans, which cap payments at 10 percent of your discretionary income.

“I’m on an income-driven repayment plan, which means I can breathe a little bit knowing my payments won’t bankrupt me,” says Felicia Golden, a 30-year-old public relations specialist in London who had around $28,000 in student loans after graduate school. “But for me, it’s really important to pay as much as I can each month and not just the contractual minimum. Because then the interest just builds up until it’s unmanageable.”

Pros: Your monthly payment will likely be capped at 10 percent of your discretionary income, meaning they will be more affordable than payments on a standard repayment plan.

Cons: Some repayment plans stretch out payments for longer periods of time, meaning you might end of paying much more in interest than you would on a standard repayment plan.

Best for: Graduates with moderate-to-low incomes.

2. Consider refinancing to save on interest

If you took out private loans for graduate school, refinancing them can likely lower your interest rate. Plus, you can consolidate loans from multiple servicers, meaning you’ll likely only have one payment to make each month. This could also potentially lower your monthly payment, making it more manageable in your budget.

Before choosing a company to refinance with, it’s important to shop around for the best rate. Comparison tools like Bankrate’s help individuals look at refinancing options with multiple lenders in one easy place, allowing them to choose a loan with the best terms. (Compare student loan rates on Bankrate.)

Pros: Refinancing loans can save you thousands on interest and potentially lower your monthly payment.

Cons: Federal loans cannot be refinanced through government lenders, meaning if borrowers choose to refinance privately, they will forfeit their ability to use payment plans. Getting approved for private refinancing will depend on creditworthiness.

Best for: Individuals with fair-to-excellent credit scores who have private student loans.

(Check out Bankrate’s guide to refinancing student loans)

3. Figure out ways to earn more money

Earning extra money is quickly becoming a common way of life in America. A recent Bankrate survey found that nearly half of working Americans have a side gig outside of their primary job and use the money for a variety of purposes, such as spending, paying for regular living expenses or savings.

For someone with a large graduate loan debt balance, getting a side gig could be a great way to knock off that debt faster.

“I’m a firm believer that everyone can earn an extra $100 per month if they try to,” says Robert Farrington, founder of The College Investor. “That extra $100 per month can be applied to your student loan debt, eliminating $1,200 per year from your loan balance.”

Pros: Working a side gig can have multiple rewards, including creating your own schedule

Cons: Working more hours means not only giving up valuable personal time, but you run the risk of burnout. Be sure to get strategic with any side hustle, and keep in mind that gigs like driving for Uber won’t make you rich — they’ll just make a few extra dollars available toward paying back your loans. Additionally, many side-gig employees work on a freelance basis, and therefore are usually not eligible for standard employment benefits.

Best for: People willing to be flexible and put in extra effort for the extra cash.

4. Seek out state assistance

According to Farrington, 45 of the 50 U.S. states, as well as the District of Columbia, offer some type of student loan assistance. These programs are often used as incentives to retain or attract talent in certain fields of work.

For example, Kansas offers student loan forgiveness up to $15,000 over five years for residents living in certain parts of the state; California offers loan forgiveness for doctors, health professionals and dentists.

Pros: Thousands of dollars in assistance are available to put toward your loan balance.

Cons: Some of these programs require individuals to live in rural opportunity zones, meaning they could be far from big cities with advantages like public transportation or easy accessibility. Additionally, these programs aren’t intended to forgive your loans in full, but they will help pay a good chunk of them off.

Best for: Those willing to relocate and establish residency, or provide professional services for a continuous period of time.

5. Learn how to budget

Creating a budget may seem like an obvious tip for conquering student loan debt, but Golden says it’s the “biggest thing” that has helped her manage her student loan debt.

“Once I started to seriously budget (using a template spreadsheet my very practical uncle gave me), I was able to cut down on wasteful things and divert that towards my monthly loan payment,” Golden says. “I was also able to determine how much I could realistically pay each month.”

Creating a budget not only will help you stay on track with your plan to payoff the debt, but it will give you the opportunity to analyze where you’re overspending. When it comes to interest accumulating on your loan balance, every extra dollar you’re able to put toward it will help.

Need help creating a budget? Start by writing down your spending and expenses. After seeing it all in one place, it’ll be easier to determine what your discretionary spending should be after accounting for your fixed expenses.

(Ready to get started? Here are Bankrate’s 5 secrets to creating a budget)

Pros: You’ll have a clearer picture of where your money is going each month. Additionally, you’ll be able to find ways to cut spending and be able to funnel additional money to your student loans.

Cons: Some folks have a hard time sticking to a budget. Keep in mind that budgets can be flexible; if you happen to spend more in one category, adjust the allowance of others to make up for it. You can easily adjust a budget using apps like Mint or You Need a Budget (YNAB).

Best for: Everyone! A budget is an essential tool no matter your financial situation.

Read more:

7 ways to improve your credit score

The journey to improving your credit score is a marathon, not a sprint.

An excellent score can help you qualify for low-interest loans and premium rewards credit cards, but the process takes time.

You can get started by checking your credit score to see where you currently stand.

Once you have an idea of how much room you have to grow, use these tips to begin building better credit.

7 steps to raise your credit score

1. Stay on top of payments.
2. Keep tabs on your credit utilization rate.
3. Leave old debts on your report.
4. Take advantage of score-boosting programs.
5. Time your applications carefully.
6. Be patient.
7. Monitor your credit.

1. Stay on top of payments

Keep your debts in the green to show lenders you’re responsible with credit.

According to Experian, payment history is the most influential factor for both FICO and VantageScore, the most common scoring systems.

Your credit score is essentially a reflection of your ability to pay back debts effectively. From a lender’s perspective, an established history of timely payments is a good indicator you’ll handle future debts responsibly, too.

“You want to avoid things like late payments, defaults, repossessions, foreclosures and third party collections,” says John Ulzheimer, credit expert, formerly of FICO and Equifax. “And filing bankruptcy is a horrible idea. Anything that would indicate non-performance of a liability is going to harm your credit score.”

2. Keep tabs on your credit utilization rate

Weigh your balances relative to your credit limit to ensure you’re not using too much available credit, a practice which can indicate risk.

“The higher that ratio, the fewer points you’re going to earn in that category and your scores are absolutely going to suffer,” Ulzheimer says.

Credit utilization is one of the most influential categories that influence your score. Your ideal rate may vary depending on the scoring system used.

“In FICO’s systems, less than 10 percent is the optimal target,” Ulzheimer says. “In fact, people who have the highest average FICO scores have a utilization of 7 percent.” VantageScore, on the other hand, looks for a target utilization of 30 percent or below.

“I always default to 10 percent because that’s going to keep you in the good zone for both of the scoring platforms,” Ulzheimer says.

The date your revolving credit issuer reports your information to the credit bureaus may also impact your utilization rate.

According to Ulzheimer, FICO’s scoring systems don’t differentiate between those who pay in full each month and those who carry a balance; the utilization that appears when your issuer reports your account information is the rate scored. VantageScore, though, does consider whether you pay in full or carry your balance month to month.

If you struggle with high balances and mounting interest payments on your cards, consider consolidating with a zero percent introductory rate balance transfer credit card.

3. Leave old debts on your report

Once you finally get rid of student debt or pay off your auto loan, you may be impatient to get any trace of it wiped from your report.

But as long as your payments were timely and complete, those debt records may actually help your credit score. The same is true for you credit card accounts.

“An account that’s paid in full is a good thing; however, closing an account isn’t something that consumers should automatically do in the hopes that it will positively impact their credit score,” says Nancy Bistritz-Balkan, vice president of communications and consumer education at Equifax. “Having an account with a long history and solid track record of paying bills on time, every time, are the types of responsible habits lenders and creditors look for.”

Any bad debts that can impact your score negatively are automatically removed over time.

“Bankruptcies can stay on your report no longer than 10 years,” Ulzheimer says. “Late payments and similar delinquencies like collections, repossessions, foreclosures and settlements, those are capped at seven years.”

4. Take advantage of score-boosting programs

The number and average age of your accounts are both important factors in helping lenders determine how well you handle debt, which can leave those with a limited credit history at a disadvantage.

Experian Boost and UltraFICO are two programs that allow consumers to boost a thin credit profile with other financial information.

After opting into Experian Boost, you can connect your online banking data and allow the credit bureau add telecommunications and utility payment history to your report. UltraFICO allows you to give permission for your banking data, like checking and savings accounts, to be considered alongside your report when calculating your score.

5. Time your applications carefully

Every time you apply for a new line of credit, a hard inquiry is pulled on your report. This type of inquiry lowers your score temporarily.

“In general, the effects of a hard inquiry last anywhere from 6 to 12 months,” a TransUnion representative tells Bankrate. “And that inquiry is only on your credit report for up to 24 months.”

Research your likelihood of approval to ensure you’re a good candidate before applying for a new credit card. You don’t want to risk lowering your score for a denied application.

You should also refrain from applying for several credit cards within a short time frame or before taking out a large loan like a mortgage.

When you shop for a mortgage, auto or personal loan, you can keep hard inquiries to a minimum by making rate comparisons within a short time period.

Applications for the same type of loan within a designated time frame will only appear as a single hard inquiry. According to FICO, this span can vary from 14 to 45 days.

6. Be patient

You won’t raise your credit score overnight, which is why one of the best ways to achieve an excellent score is to develop good long-term credit habits.

According to Ulzheimer, two influential factors that go into your score are the average age of information and the oldest account on your report.

“You’re really going to need to have credit for a couple of decades before you max out those categories,” Ulzheimer says. “It takes a really, really long time to improve a bad score and it takes a really short amount of time to trash a good score.”

Establish good habits, like paying your balances on time, keeping a low utilization rate and applying for credit only when you need it, and you should see those practices reflected in your score over time.

7. Monitor your credit

When you view your own credit, a soft inquiry is pulled, which doesn’t affect your credit temporarily the way hard inquiries do.

“The information in the credit reports will not only enable you to see all of your financial accounts in one place, but reviewing them may also help you spot signs of identity theft,” Bisritz-Balkan says.

Monitoring your score’s fluctuations every few months can help you understand how well you’re managing your credit and whether you should make any changes.

According to Ulzheimer, “As long as you pay your bills on time and as long as you keep your credit card balances modest and as long as you only apply for credit when you need it, then you really have no choice but to have a good score.”

Home Equity Line of Credit Payoff Calculator

Refinancing your HELOC into a Home Equity Loan

HELOC payments tend to get more expensive over time. There are two reasons for this: adjustable rates and entering the repayment phase of the loan.

HELOCs are variable rate loans, which means your interest rate will adjust periodically. In a rising-rate environment, this could mean larger monthly payments.

Additionally, once the draw period ends borrowers are responsible for both the principal and interest. This steep rise in the monthly HELOC payment can be a shock to borrowers who were making interest-only payments for the first 10 or 15 years. Sometimes the new HELOC payment can double or even triple what the borrower was paying for the last decade.

To save money, borrowers can refinance their HELOC. Here we’ll take a look at two options and how they work.

Home equity loan

You can take out a home equity loan, which has a fixed rate, and use this new loan to pay off the HELOC. The advantage of doing this is that you could dodge those rate adjustments. The disadvantage is that you would be responsible for paying closing costs.

New HELOC

Apply for a new HELOC to replace the old one. This allows you to avoid that principal and interest payment while keeping your line of credit open. If you have improved your credit since you got the first HELOC, you might even qualify for a lower interest rate.

If you’re interested in refinancing with a HELOC or home equity loan, use Bankrate’s home equity loan rates table to see current rates.

Home equity loans vs. HELOCs

Home equity loans and home equity lines of credit, or HELOCs, are two types of loans that use the value of your house as collateral. They’re both considered second mortgages.

The main difference between them is that with home equity loans you get one lump sum of money whereas HELOCs are lines of credit which you can draw from as needed.

Paying off a home equity loan

The faster pay off your loan, the less interest you’ll pay. You might even be able to reduce your interest rate by refinancing your loan to a shorter term. Often, lenders will reward shorter terms with lower interest rates, so it’s worth investigating if you want to pay off your loan faster.

Before you get the loan, find out if there’s a penalty for paying it off early. If there is a penalty, factor that amount into your calculations.

You should also note any balloon payments that are included in your contract. These are large lump sums owed at the end of your home equity loan term. Some loans are not amortized, which means you could end up making interest-only monthly payments only to have the full principal balance due on a specific date.

This could mean trouble for homeowners who haven’t prepared. If your loan has a balloon payment, set aside enough money each month to make that payment when it comes due.

Paying off a HELOC

HELOCs are different from home equity loans in that they function more like a credit card. Your lender will extend credit, based on several factors including your credit history and the equity in your house. You only owe what you borrow. For example, if you’re extended $50,000 and use just $25,000, then you only owe $25,000.

Many HELOCs allow borrowers to make interest only payments during the draw period, which can vary. Normally, draw periods last between 10 and 15 years. When that period ends, you must make principal and interest payments.

HELOCs can become a drain on your finances if you put off making payments on the principal. If possible, make extra monthly payments on your principal. Like home equity loans, find out if there are prepayment penalties.