How a mortgage refinance affects your net worth

A mortgage refinance could affect your net worth, but it could help your finances long-term. (iStock)

Refinancing a mortgage loan accomplishes multiple things. For many, the idea of saving on the total cost of their loan or reducing their monthly expense is the primary reason for choosing a refinance. With mortgage rates sitting at record lows, now may be the best time to refinance.

However, refinancing has other repercussions you may want to consider. While a refinance can save you money every month and over the life of your loan, refinances aren't free. Most lenders charge about 1% of the total loan cost. Additionally, a new adverse market fee went into effect on Dec. 1, which may add an extra 0.5% fee to the total cost of your refinance.

Since your liabilities and available cash balances affect your net worth, opting for a refinance could temporarily reduce your net worth. If you're considering a refinance, you can visit Credible to get prequalified rates without impacting your credit score.

How much does a refinance affect your net worth?

A mortgage refinance could increase or decrease your net worth.

If you refinance into a new loan with a higher balance (cash-out refinance or you wrapped the refinance cost into your new loan), your net worth would decrease because your liabilities increased. Your net worth would also decrease if you paid for the loan expenses out of pocket because your available cash decreased. However, you could recoup those expenses and increases your net worth with savings from a lower monthly payment.

It is possible to do a cash-out refinance to pay off high-interest debt. If you only take out exactly what you need to pay off the other debt, your net worth would only decrease by the refinance cost. However, if you opt to take out additional funds, your net worth would go down further.

Curious about a cash-out refinance?  Visit an online marketplace like Credible to view refinance rates and get cash out to pay off high-interest debt.


How refinancing your mortgage can save you money

There are several ways that a mortgage refinance can save you money. First, you could lower your monthly payment by taking advantage of low-interest rates. Additionally, a lower interest rate or refinancing into a shorter-term loan could save you money on your loan's total cost.

For example, consider a $250,000 loan.

  • Loan A has an APR of 5% and a 30-year repayment term. This loan has a monthly payment of $1,342 and costs $233,139 in interest (loan total of $483,139).
  • Loan B has an APR of 3% and a 30-year repayment term. This loan has a monthly payment of $1,054 and costs $129,443 in interest (loan total of $379,443).
  • Loan C has an APR of 3% and a 15-year repayment term. This loan has a monthly payment of $1,726 and costs $60,761 in interest (loan total $310,761).

Changing your repayment terms or interest rate could have substantial savings. If you want to see your numbers, use an online mortgage refinance calculator to determine your potential new monthly payment savings. You can also use Credible to crunch the numbers by inserting some of your personal information into their free online tools.

Note: If you refinance into a longer-term loan, you may end up paying more in interest, even if you score a lower interest rate.

To fully understand whether you'll save money on a refinance, compare the amortization schedule from your current loan with an amortization schedule from a potential new loan.


How is net worth determined?

First, to figure out your net worth, make a list of all your liabilities and add up the total. Liabilities include:

  • Car loans
  • Student loans
  • Credit card debt
  • Personal loan debt
  • Mortgage debt
  • Other debts (back taxes, etc.)

Next, make a list of all your assets and total them up. Assets include:

  • Real estate (that you own or that earns you income)
  • Vehicles you own outright
  • Household items and personal property (jewelry, electronics, etc.)
  • Savings bonds or CDs
  • Stocks and bonds
  • Retirement accounts (401(k), IRA, etc.)
  • Money in checking or savings accounts
  • Cash on hand

Subtract the total of your assets from your liabilities. That number is your net worth. You can have a negative net worth (if your liabilities exceed your assets). It's also normal for your net worth to fluctuate.


How do I begin the mortgage refinance process?

Preparation is key to any loan process. When you refinance your home, you replace your current loan with a new one. That means your lender will review your credit score, credit history, income, and property value. You'll want to check your credit score and make any needed improvements before applying to score the best rates.

Once you're ready to apply, collect all your paperwork and visit Credible to get in touch with experienced loan officers and get their mortgage questions answered.