What Is Mortgage Refinancing and When Does It Make Sense for San Diego Homeowners?

What Is Mortgage Refinancing?

Refinancing means replacing your existing mortgage with a new loan — typically to get a lower interest rate, reduce your monthly payment, shorten your loan term, eliminate mortgage insurance, or access your home equity through a cash-out refinance. In San Diego's high-appreciation market, refinancing decisions come up frequently.

Types of Refinances

• Rate-and-term refinance: Changes the rate and/or term of your loan without taking cash out — the most common type
• Cash-out refinance: Replaces your existing loan with a larger one, providing cash equal to the difference
• Cash-in refinance: Brings cash to closing to reduce the loan balance — may eliminate PMI or improve rate
• FHA to conventional refinance: Converts an FHA loan to conventional once sufficient equity is built — eliminates ongoing MIP

The Break-Even Calculation

Refinancing costs money — typically $3,000 to $7,000 in closing costs in San Diego. To determine if refinancing makes sense, divide the total closing costs by the monthly payment savings. If closing costs are $5,000 and monthly savings are $200, your break-even period is 25 months. If you plan to stay in the home longer than the break-even period, refinancing likely makes sense.

When Refinancing Makes Sense in San Diego

• You can reduce your rate by at least 0.5 to 1.0 percent — enough to justify closing costs over your expected stay
• You want to eliminate FHA MIP by refinancing to conventional after building 20 percent equity
• You need to access equity for home improvements, debt consolidation, or another investment
• You want to switch from an ARM to a fixed rate before your adjustment period begins
• You want to shorten your loan term from 30 years to 15 years as your income has grown

What to Watch Out For

Extending your loan term when refinancing can reduce your monthly payment while significantly increasing your total interest paid over time. Refinancing serially — every few years — also resets your amortization and may not be financially optimal. Calculate the true long-term cost of each refinancing decision, not just the payment change. Rieder Homes Group can refer you to trusted San Diego mortgage professionals for refinancing analysis.

Related Reading on RiederHomes.com:

→ Blog #7: Interest Rates Explained

→ Blog #13: Private Mortgage Insurance

→ Blog #14: 15 vs. 30 Year Mortgage

→ Blog #11: FHA Loans San Diego

— Mance Rieder, Broker Associate | Rieder Homes Group | REAL Broker | riederhomes.com | 858-295-0556