Home Refinance Mortgages
Everything You Need to Know About Refinancing
There comes a time in the life of most homeowners when a drop in prevailing interest rates coupled with the prospect of reducing monthly mortgage payments makes too much sense not to explore; hence, the lure and the logic of a home refinance.
As a homeowner intent on optimizing value, locking in a new mortgage rate through a refinance can be a great way to generate tangible savings and create financial flexibility. Given the built-in complexities, make sure you take time to conduct research, run the numbers and talk to a trusted and experienced loan officer who can guide you through the refinance process.
What is a Mortgage Refinance?
When it comes to home financing, the initial purchase agreement on your property—the mortgage—is not fixed and immovable. It can be recast and it can be replaced.
A refinance (or “refi” as it is commonly referred to) is simply a way to replace your original mortgage agreement with a new contract that contains updated terms and rates that are more attractive. You may be looking to shorten your loan term, change from a variable rate to a fixed rate and even take out cash to use towards renovations or consolidate debt. There are many reasons individuals may desire a refi, but the catalyst for acting is more often than not a low interest rate environment that holds the potential to reduce your payments and save you money.
Of course, there are always some caveats. Even if the savings appear worthwhile at current interest rates, you’ll want to take into consideration all the paperwork, time commitment and associated costs involved in a refi. This is where the rubber meets the road when it comes to determining value. Closing costs, for example, are just some of the charges you’ll be required to pay. To make a prudent decision, every detail needs to be factored in.
It’s worth mentioning that to obtain a mortgage refinance, you’ll have to undergo a whole new loan application process—either with your existing lender or a new bank or mortgage company. The lender will evaluate your current financial situation (including credit score) to ensure you are a low-risk candidate eligible to refinance at the lowest market rate.
How to Refinance Your Mortgage
As you begin to contemplate a refi, You’ll want to keep your eye on the average mortgage rates for 15- and 30-year loans. This will give you market insight into what home refinance rates may be available, given your lender, desired terms and financial history. Historically, many mortgage experts have said that a good time to refinance is when market rates dip 1% below the interest rate you currently pay. Of course, if you currently have a 30-year loan, 15-year mortgage refinance rates on their own might make a refi appealing.
Once you’ve decided the time is right to lock in lower interest rates and refinance your mortgage, you need to have a discussion with your lender to begin the process in full.
Interestingly, many homeowners opt to work with a new lender when choosing to refinance. The reason? A mix of factors, but the ability to secure the best interest rate is high on the list for many borrowers. Borrowers also prioritize a quick, seamless process and a helpful team of experts who can help guide them through their journey.
Should I Refinance My Mortgage?
Clearing Debt, Moving and Break-Even Point
First, you’ll want to gather a clear picture of your financial goals as well as your expectations for how long you intend to live in your home. For example, is it financially prudent to obtain a new 30-year refinance mortgage and further extend interest payments deep into the future? What about your desire to own the property outright? 15-year mortgage refinance rates could speed up your path to paying off your loan. Have you established a time horizon for paying off the interest + principal and clearing away all mortgage debt?
Also, think about how long you intend to live in your home before selling the property. Two years? Five years? Ten years? Given the required closing costs and other associated fees that are frequently folded into your monthly mortgage payments, you may be on the hook for higher monthly payments during the first couple years of your refinance. In other words, despite the appeal of a low interest rate, if your break-even point does not occur in the period before you sell your home, you will be denied an opportunity to recoup any savings.
Reasons to Refinance
There are many reasons why refinancing your home is a great move. And most of them have to do with saving money, extracting money from your home or restructuring your loan to gain new flexibility.
The most common type of refinance is a rate-and-term refinance. This is exactly what it sounds like: a refi method in which the chief goal is either to switch to a lower interest rate, change the term of the mortgage (number of years or variable vs. fixed rate) or both. The other common refi is a cash-out refinance, whereby you extract equity from your home in the form of cash for any number of purposes.
Let’s take a deeper look at some of the main reasons homeowners decide to refinance their mortgage:
- Reduce Montly Payments.
- Reduce Overall Interest Payments
- Change From a Variable Rate to a Fixed Rate
- Take Cash Out
Refinancing your home when rates are low is the No. 1 way to reduce interest payments and create financial flexibility. The savings you receive with a refi can differ dramatically depending on a range of factors, but according to Freddie Mac the average household saved $2,800 last year by refinancing.
Are you able to tolerate higher monthly payments now that your financial situation has improved? Higher payments may sound counterintuitive, until you realize this may enable you to switch from a 30-year fixed rate to a 15-year fixed rate mortgage, thus reducing the amount of interest payments and accessing real savings. Yes, a 15-year loan agreement will mean higher monthly payments (you’re paying off the principal more quickly, after all), but you will also receive the benefits of reduced interest and a more rapid accumulation of equity.
Many homebuyers agree to an adjustable rate mortgage (ARM)—rates that begin steady but then could fluctuate with the market after an initial fixed-rate period. Given the lack of control over market conditions and the risk of paying substantially higher interest rates in the future, homeowners often switch to a fully fixed rate option over the entire term of the loan. A refinance enables this. The fixed rate you receive may not be quite as attractive as the introductory rate in your original mortgage, but it insures you against wild fluctuations in interest rates that could cause financial pain.
A cash-out refinance allows the borrower to tap into home equity and turn it into liquidity—often for purposes of debt consolidation, home renovations, college tuition or other purchases where a lump sum is necessary. This type of refinance usually requires the borrower to have established a minimum of 20&percent; equity in the home.