What Is A Mortgage Refinance?
You may be getting messages from lenders about the need to rush out, refinance and take advantage of rate changes in the market. In reality, every homeowner is different, and though refinancing comes with many benefits, it’s up to you to decide if a refinance meets your needs.
Refinancing means you’re taking out an additional loan to pay off your existing mortgage – essentially replacing your mortgage with a newer one. Mortgages are not one-size-fits-all, so we would customize a new loan package to fit the changes in your life since your last closing.
As you negotiate a newer mortgage, you can:
- Shorten the term to pay it off sooner (for example, convert a 30-year loan to a 15-year).
- Take advantage of lower interest rates to save possibly thousands over the life of the loan.
- Change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.
- Access the equity in your home as cash that you can use for renovating your home or anything else.
These points, and others, should be what you consider as you decide whether a refinance makes sense for you.
Choosing The Next Steps
With everything that a refinance offers, you may want to know if you’re prepared to take advantage of this home finance solution. To learn the answer, you have to know what’s involved in the process. Consider these points if you’re thinking about refinancing.
- Cost: The cost associated with a refinance (often 2% to 5% of the loan’s principal).
- Rates: Will a refinance lower your interest rate, or is your current rate ideal?
- Cash availability: If you want to access your equity as cash, are there better options to raise funds?
In order to refinance, you must have a steady income. Also, as was likely during your last mortgage, your credit score and credit history should be in good standing.
Your name must be on the title of the home for a certain period that depends on the refinance program you choose. That means you may not be able to get a refinance soon after purchasing your home.
Your Refinance Options
There is a long list of refinance programs available to you, from FHA Streamline to Home Affordable Refinance Program (HARP) to Freddie Mac Enhanced Relief Refinance (FMERR). Generally, however, these programs fall into one of three general categories.
Rate-and-term refinances: This is the most common type of refinance and only changes your rate, your term or both. This is a great option for homeowners who are not happy with the interest rate on their current mortgage.
For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1% reduces your payment to $477. Over time, and with the median home price at $320,000,* a drop in interest can save you thousands.
Cash-out refinance: With this refinance, you can take out equity in your home as cash, typically up to 80% of your equity. You can use this cash for any purpose, including:
- Funding home improvement projects
- Consolidating debt with the lower home interest rate
- Paying for your higher education
- Placing a down payment on a second home/investment property
Cash-in refinance: This refinance type allows you to put additional money on your mortgage. This means two things. 1) Because you’ll be lowering your loan-to-value, you’ll have access to better mortgage rates. 2) Putting added cash into your mortgage can cancel mortgage insurance premium (MIP) payments on FHA loans.
To learn more about refinancing, contact me today!