When interest rates are low, as they are now, you may hear friends and neighbors talking about refinancing. So what is refinancing, anyway, and should you be considering it?
Let’s take the second question first: If you have a mortgage on your property, yes, you should at least explore your options. It doesn’t cost you anything to do so and it may save you money in the long run.
Now to the first question: a mortgage refinance is very simply a matter of paying the remaining balance on an existing loan by replacing it with a loan that offers more favorable terms.
The answer to the “why refi” question lies in what is favorable to you. Here are five of the strongest reasons to refinance a mortgage:
- Pay your mortgage off sooner. A substantial portion of each mortgage payment is interest that you are paying on your loan. If you can reduce the length of time you will take to fully pay off the loan, then it follows that you will pay less interest. (Paying off your mortgage sooner may also leave less of a financial burden on your heirs.) To pay off your mortgage sooner, you can increase the amount of your monthly principal payment, or you can refinance with a shorter-term loan, such as a 15-year mortgage instead of the more typical 30-year. If your financial outlook has improved – a raise or promotion, for example – this may be a great option.
- Lower your interest rate. As market conditions change, interest rates change. If the currently available interest rates are lower than what you are paying on your mortgage, you may be able to get a loan with a lower rate, which will save you money. What’s more, if your credit scores have improved, you may now be eligible for lower interest rates.
- Lower your monthly payment. If your mortgage payment is putting more of a pinch on your monthly budget than you’d like, or if you want to save for a major purchase, it may make sense to be paying less each month. The most common ways to lower your monthly payment are a) to refinance with a lower interest rate, and b) to refinance with a longer-term loan (so, for example, if you have 20 years left on your 30-year loan, refinancing with a new 30-year loan reduces the amount you’ll be paying each month).
- Change from an adjustable-rate to a fixed-rate mortgage. An adjustable-rate mortgage (ARM) may have offered you extremely attractive rates at the time you borrowed to purchase your home. But if rates go up, your ARM may adjust upward and put significant pressure on your budget. Refinancing offers you an opportunity to lock in a fixed rate so there are no surprises in your mortgage. (If you like the ARM, you might also be able to refinance for a new ARM with better terms.)
- Take cash out. As you make your mortgage payments, you build equity in your home – that is, you own more and more of it each month. Once you’ve paid off your loan, you will own your property “free and clear,” except, of course for taxes, repairs, etc. While building equity should be your long-term goal, you may have expenses that exceed your current budget, such as paying for education or critical home improvements. When you refinance to put cash in your pocket now, you reduce your equity, but the reward may be the solution to a financial crisis.
Whatever your reason for refinancing, your decision needs to make financial sense. Your mortgage banker / loan officer can help you evaluate your needs and the costs and benefits of refinancing. Give us a call and let’s explore the possibilities.