Home Refinancing: Is it the right choice for you?
Less than half of homeowners in the U.S. are free and clear of a mortgage, which means most are still tied to a monthly payment. If you’re in that majority, your mailbox is probably inundated with letters offering you the “best deal” on refinancing your home. Especially with the current booming market, and interest rates at an all-time low, you might be starting to wonder if refinancing is the right choice for you.
What is home refinancing?
Simply put, mortgage refinancing is when a homeowner replaces their current loan with a new mortgage loan.
Why would someone refinance?
- To lower the interest rate
- To cash out home equity
- To reduce monthly mortgage payment
- To pay off your loan sooner
- To switch mortgage types
- To save on total interest
The most common reason homeowners refinance is to lower their interest rate. Personal finances change, and if you’ve paid off debt, improved your credit score or landed a career promotion, it might make sense to take advantage of a better mortgage option. This option is called a rate-and-term refinance, which allows homeowners to change their loan’s mortgage rate, loan term or both.
For example, changing your loan term might mean you go from a 30-year fixed-rate mortgage into a 15-year fixed-rate mortgage. Changing both loan terms and mortgage rate might mean going from a 30-year fixed-rate mortgage with a 5% interest rate to a 15-year fixed-loan at 3%.
When you switch from a long-term loan to a short-term loan, you may have higher monthly payments, but you’ll be able to pay the loan off more quickly. This can save you thousands of dollars in interest. It all depends on your personal preference and financial situation.
Another type of refinancing option is to take a surplus in cash after replacing your old mortgage with a new one that has different terms. This might be a good option if you’ve built equity (the portion of the home that you own) in your home. Basically, you’re tapping into your home equity to generate liquid cash by replacing your current mortgage with a new loan for more than you owe on the house. This type of refinancing requires a stricter approval process.
As you may have expected, this type of refinance is the opposite of the cash-out option. With this type of refinancing, you would bring cash to closing to pay down the loan balance and lower the amount owed to the bank. Two common reasons for selecting this option are to take advantage of a lower interest rate, which is only available at lower loan-to-value ratios, and to cancel mortgage insurance premium payments.
What to Consider before refinancing?
- Cost of refinancing: Although the benefits of refinancing your home can be tempting, it’s important to note that the process is not free. You’ll be expected to pay closing costs similar to when you originally purchased your home. Think about whether you plan to stay in the home long enough to recoup these costs.
- Current interest rates: Compare rates and terms and find the right lender with options that fit your needs. Even the smallest changes in interest rates can have a great impact.
- Mortgage term: How many years do you have remaining on your mortgage? A new mortgage with new terms can extend the term of your loan, causing you to dish out more in interest over time.
Making the decision to refinance your home shouldn’t be taken lightly, and it’s important to consult a trusted professional in the industry. Our experienced agents at Points West Agency are here to guide you as you make the lifechanging decisions of purchasing a home, selling your home, or refinancing your home. Visit pointswestagency.com to speak to a trusted real estate professional today.