Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance.
When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one; this is the reason for the term refinancing.
Most borrowers choose to refinance so they can lower their interest and shorten their payment term, or to take advantage of turning some of the equity they have earned on their home into cash.
There are two main types of refinancing: rate and term refinance and cash-out refinance.
Rate and Term Refinance
In a rate and term refinance, you would typically be getting a new mortgage with a smaller interest rate, as well as possibly a shorter payment term (30 year changed to 15 year term).
With the recent record-low interest rates, refinancing your 30 year mortgage into a 15 year mortgage may end up getting you similar monthly payments as your original loan. This is because of the lower amount of interest you would be paying on your new mortgage, even though 15 year mortgage payments are usually higher than the 30 year loans.
The Truth about Mortgage states that it’s important to be sure you find your break-even point before deciding to refinance your current mortgage rate. This is essentially when the refinancing costs are “recouped” via the lower monthly mortgage payment.
cash-out refinance
In a cash-out refinance, you can refinance up to 80 percent of your current value of your home for cash. Thus, why it is called cash-out refinance. So, say your home is valued at $100,000 and you owe $60,000 on your loan. Your bank or lender can give you, as a qualified borrower, $20,000 in cash-out, making your new mortgage be $80,000.
In a cash-out refinance you are not always saving money by refinancing, but instead getting a form of a lower-interest loan on some needed cash. Reasons for taking a cash-out refinance could be that you may want to dig a new pool for your backyard retreat or go on your dream vacation.
Be aware, with taking a cash-out mortgage there is an increase in the amount of your lien. This could mean larger and/or longer term payments. Remember that this is not free money and that you must pay it back to your lender.
Deciding to refinance your mortgage is not something to be taken lightly. Consider the cost of the refinance versus the savings in return. Talk to a financial planner if you are worried about whether or not to refinance, along with other options available to you.
Four Reasons To Refinance Your Mortgage
As we mentioned, there are a variety of reasons why you might want to refinance your mortgage. Let’s look at some of the main reasons here.
- Change Your Loan Term – Many people refinance to shorten their loan term to save on interest. For example, say you started with a 30-year loan but can now afford a higher mortgage payment. You might refinance to a 15-year team to get a better interest rate and pay less interest overall. You can also lengthen your loan term to lower your monthly payment.
- Lower Your Interest Rate – Interest rates are always changing. If rates are better now than when you got your loan, refinancing might make sense for you. Lowering your interest rate can lower your monthly payment and you’ll pay less interest over the life of your loan.
- Change Your Loan Type – There are many reasons a different type of loan may benefit you. Perhaps you originally got an adjustable-rate mortgage(ARM) to save on interest, but you’d like to refinance your ARM to a fixed-rate mortgage while rates are low. Maybe you finally have enough home equity to refinance your FHA loan to a conventional loan without paying for private mortgage insurance.
- Cash Out Your Equity – With a Cash-out refinance, you borrow more than you owe on your home and pocket the difference as cash. If your home’s value has increased, you may have enough equity to take cash out for home improvement, debt consolidation or other expenses. Using cash from your home allows you to borrow money at a much lower interest rate than other loan types. A cash-out refinance can have tax implications, though.
What are the benefits of refinancing?
While refinancing is usually a pretty straightforward process, it can take a few hours of paperwork and phone calls.
What are the benefits of refinancing?
- You can save some serious money.
- You can repay your mortgage faster.
- You can unlock equity.
- You can get your finances back on track.
- You can unlock better features.
When Should You Refinance Your Mortgage?
There are a lot of factors to think through when deciding if you should refinance or how often to refinance. Consider market trends (including current interest rates), as well as your personal financial health (especially your credit scores). It’s a good idea to use a mortgage refinance calculator to calculate your break-even point after accounting for refinancing expenses.
You also need to know how refinancing differs from other mortgage options like loan modification and second mortgages. The major difference between finance and a loan modification is that refinancing gives you a new mortgage while modification changes your current terms. The new mortgage you get from refinancing replaces the existing one, an important distinction between getting a second mortgage and refinancing. Review what works best for you before deciding what to do.
It’s important to note that a modification should only be considered if you can’t qualify for a refinance and you need long-term payment relief. Modification typically has a major negative impact on your credit score.
When shouldn’t you refinance?
There are times when refinancing might actually be a bad idea, and it’s really important to assess whether or not switching mortgages will hurt you. Here are some situations where you probably shouldn’t refinance.
- If you have a fixed rate home loan.
- If the set-up costs outweigh the savings.
- If the new loan has high fees
- If your new home loan doesn’t have the features you need