What are the Major Motivations for Refinancing a Mortgage?
If you’re a homeowner, you might be hearing everyone, from your neighbors to news anchors, talking about refinancing. For a multitude of economic reasons, refinancing your mortgage loan could be the perfect solution, and it goes well beyond just easing up on the monthly mortgage bill. While rates have certainly gone up since this time last year, rates are still historically low. So, should you be considering it too?
First of all, what is refinancing?
When you refinance your mortgage, you are basically swapping out your old loan for a new one. There are two main types of refinancing:
The remaining balance on your current mortgage is transformed into a new loan that has a better rate and/or term for your situation.
You liquidate some of your home’s equity, creating a new loan that consists of your previous mortgage balance plus the cash you took out.
You can get a refinance from any mortgage lender you choose—it doesn’t have to be from your current lender. We encourage you to shop around when refinancing your mortgage.
Let’s go over some of the major reasons which refinancing your mortgage may be right for you.
So why might you consider refinancing in the first place? It all depends on your goals. People choose to refinance for a diverse set of reasons, but here are some of the more common motivations I see:
Lower your monthly payments:
If rates have dropped since you got your original mortgage, you may be able to refinance into a loan with a lower rate. Doing so can reduce the amount of interest you pay and lower your monthly payments, meaning you’ll also pay less over the life of your loan.
Or, has the value of your home gone up, or have you paid off a good chunk of your mortgage? With that additional equity in your home, your new loan-to-value ratio (LTV) will be smaller, which may help you get a better rate regardless of current rate trends. Or if you currently pay mortgage insurance, but now have more than 20% equity in your home, you may be able to refinance to cancel your mortgage insurance payments.
Improved Credit Score:
If your credit score has gotten a significant boost, you may also be able to refinance and get a better rate. For example, depending on the specifics of the loan, a 20-point increase in your credit score could reduce your rate and help you save thousands of dollars in interest over the life of the loan.
The fixed period on my adjustable rate mortgage is ending:
While adjustable-rate mortgages (ARMs) can save you money on your monthly mortgage payment in the early years of owning a home, once the fixed period ends, your interest rate may increase significantly. You can avoid this by switching from an ARM to a fixed-rate mortgage. While your new fixed rate will likely be higher than your original adjustable rate, you’ll be protected from future rate increases. (On the flipside, if you know you’ll be selling your house in the next few years, switching to an adjustable-rate mortgage could lower your rate and monthly payments until the fixed period ends and/or you sell your house.)
My personal finances have changed:
In some cases, changing the length of your loan when refinancing can be advantageous. If you can afford higher monthly payments, thanks to an increase in income, you could refinance into a shorter loan (such as from a 30-year fixed to a 15-year fixed) to pay off your mortgage faster, saving thousands of dollars in interest payments over the life of the loan.
I want to take cash out:
As I mentioned earlier, you can also do a cash-out refinance, which allows you to use the equity you’ve built in your home to borrow money at a low cost. People often reinvest that cash out back into their home to make improvements that boost their home’s value. Taking cash out can also be useful if you need extra money for expenses such as education or medical costs and do not have access to other funds.
I want to consolidate debt:
Lastly, you can refinance to consolidate other debts into a single, more affordable payment. This can be especially helpful if you have high-interest loans and debts like credit card debt, student loans, or a second mortgage. A debt consolidation refinance is technically considered a cash-out refinance, so the two work in a similar way. Essentially, a portion of your home equity is turned into cash out that you can use to pay off other loans and debts. Your old mortgage will be replaced by a new one that includes the amount you took out to pay those other debts.
So what’s the verdict? Is refinancing right for you?
While there can be many benefits to refinancing, it’s important to remember that you’ll still have to complete a loan application and pay closing costs, similar to the ones you paid when you got your original mortgage. You’ll typically have to pay things like bank/lender fees, appraisal fees, and title insurance fees.
Review your options
We’re more than happy to help walk you through your refinance options and find the right choice for you. You can schedule a call with one of our knowledgeable staff or you can get started on your refinance journey here.
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