Answers to Borrowers’ Most Common Questions about Refinancing
What is Refinancing?
Mortgage refinancing, in the simplest terms, is getting a brand new mortgage that you use to pay off your current mortgage. It’s true that interest rates are at historic lows, and getting a lower rate is the first goal of refinancing. Which, one way or another, almost always means saving money. But what exactly is going to be different about your new mortgage? What are the reasons to make a change?
How Will Your New Mortgage Be Different?
Below are some of the specific ways refinancing could make your new mortgage different, or better, than your current mortgage.
A lower interest rate — Refinancing to obtain a lower rate is the best way to lower your monthly payments since you’ll pay less interest over the life of the loan.
Smaller monthly payments — In addition to getting a lower rate, a different term or other loan conditions can also contribute to lower monthly payments.
A shorter term — Paying off your loan more quickly may mean monthly payments remain roughly the same, or go a little higher, but you’ll save thousands of dollars in interest payments over the life of the loan.
Switching from an adjustable-rate to a stable fixed-rate loan — Moving to a fixed-rate will help you avoid future monthly payment increases and plan for the future more confidently.
Turning your home equity into cash — Cashing out your home equity can provide the money you need for planned or unexpected expenses. You may use this cash for anything: renovations to your home, a vacation, paying for college, etc.
When Does it Make Sense to Refinance?
Just because you can refinance, should you? No two personal or financial situations are ever the same. The right time and the reasons to refinance are going to be different for everyone.
Below are some real life reasons refinancing can help.
You Need Some Extra Money
The equity in your home is like any other financial asset. Cash-out refinancing lets you turn your equity into cash to use however you want. You could get a lower interest rate, lower monthly payments, and the money you need without having to take out a second loan, most likely at a higher interest rate. Common reasons people choose cash-out refinancing include:
- Paying off a high-interest credit card
- Remodeling or home repairs
- Affording college tuition
- Covering unexpected health care costs
- Creating an emergency fund
- Taking a dream vacation
Your Household Income Has Gone Up
Has a new job, promotion or other event created a regular, long-term increase in your household Income? You could put some of that extra money to work by refinancing to a shorter term, and paying a little extra each month. Not only could you get a lower interest rate, more of your payments can go toward principle, helping you build equity faster and pay off your mortgage sooner. You could also save thousands in interest payments over the life of the loan.
You Could Use Some Help with Home Budgeting
Mortgage payments are a huge monthly expense. Having dozens of other expenses to keep track of can be bewildering. There are a few ways refinancing can help.
- Getting lower monthly payments can give you extra spending money each month to help with expenses.
- If you have an adjustable-rate mortgage, it can be a real shock to your finances and budget plans when your payments change. Refinancing to a stable and predictable fixed-rate loan will make long-term budget planning much easier.
- If you pay mortgage insurance, refinancing could offer a way to reduce or eliminate this expense, freeing up even more money for budgeted expenses.
Your Home Needs Remodeling, Repairs or Updates
If you’re living in an older home you love that’s maybe too small, needs repairs, remodeling or just a little TLC, there are specific renovation refinancing loans that can help. These types of refinancing loans let you roll the costs of the work into your new mortgage. You avoid taking out a separate loan, likely at a higher interest rate. And you’ll still have only one simple monthly payment. Refinancing loans to repair weather-related damage or increase your home’s energy-efficiency are also available.
Your Property Value Has Gone Up
As your property value goes up, your LTV, or “loan-to-value” goes down. Simply put, the LTV is the value of your home compared to how much you still owe on your mortgage. The difference between the two is your equity. As your home’s value goes up, so does your equity. Your monthly payments have also helped increased your equity. What does this have to do with refinancing?
- More equity would give you access to a greater amount of money through cash-out refinancing.
- If you’re paying for mortgage insurance, refinancing may allow you to use your home’s increased value to eliminate that payment altogether.
You’ve had a Change in Your Life or Personal Situation
Buying a home is often one of the biggest decisions we make. A big chunk of our income is dedicated to our monthly mortgage payments. And life is full of surprises. Having a child or sending one off to college. Getting married or divorced. Planning for retirement or having unexpected medical bills. Who knows what’s around the corner? Refinancing offers you freedom and flexibility to respond financially to a wide range of life events.
When it comes to mortgage refinancing, there’s a lot you can do and a lot of reasons why. Contact a PrimeLending loan officer who will help you make the right changes to your mortgage, for all the right reasons.
From the PrimeLending blog by Michael Nevin.