Is Refinancing Right for You?
As market rates shift, many homeowners wonder if they should consider refinancing their home. Maybe you want to lower your monthly mortgage payment, consolidate your debt, or have extra cash to finance your next home improvement project. Refinancing your mortgage can be a good decision for all these reasons and more!
What is a Refinanced Mortgage?
Refinancing your mortgage means applying for a brand-new mortgage to replace your current loan. Your new mortgage will have a new rate, loan term, and monthly payment. Like with your original mortgage, you’ll need to make sure you understand all the requirements and terms of your new loan.
There are two mortgage refinance options: a rate-and-term refinance or a cash-out refinance.
- With a rate-and-term refinance, the homeowner borrows just enough money to pay off the principal balance of their existing mortgage, but with a better interest rate and/or loan term.
- With a cash-out refinance, the homeowner borrows against the equity of their home, receiving a lump sum amount that can be spent as they choose, and paying back the new mortgage with a higher principal balance.
Regardless of which option you choose, the new mortgage will come with a set of closing costs.
To help you decide whether these costs are worth it to you, you’ll want to evaluate how long it will take you to offset the upfront costs of the transaction with the potential savings – or break-even. The HomeLoanServ Refinance Calculator can help you to understand your break-even point.
Refinancing Decision Guide
Now that you understand your potential break-even point, here are some broad questions that can help you evaluate your decision further:
1. What are your goals?
Looking for a lower interest rate? Hoping to pay off your loan faster than you originally expected?
Refinancing your mortgage can potentially save you thousands of dollars over the life of your loan by reducing the amount you owe for interest each month or by reducing the term of your loan, resulting in fewer interest payments.
For example, if you owe $375,000 and are able to refinance your mortgage and reduce your interest rate by 1%, you can save $200 in interest each month. Those savings add up over the life of your loan!
Additionally, if you are eligible for a new mortgage that does not require private mortgage insurance, then refinancing may allow you to save money each month by eliminating this extra expense.
Depending on your goals, the right time to refinance might be when interest rates significantly drop or when your credit score increases and makes you eligible for a lower interest rate or shorter loan term.
2. How long do you plan to stay in your home?
If your break-even point is less than the amount of time you expect to remain in your home, refinancing may be a good financial decision.
If you hope to move houses before you reach the break-even point, then refinancing probably won’t make sense for you, as you can expect to spend more in the transaction than you will save in the long-term.
3. What is your current loan type?
Different loan types have different requirements around refinancing. So your ability to refinance may vary depending on the type of your current loan and how long you have been making payments.
For example, a Veterans Affairs (VA) loan requires the borrower to wait at least 210 days after their closing date before they can refinance, while with a conventional loan you can likely complete a rate-and-term refinance whenever you like, as long as a lender approves it.
Is Refinancing Right for You?
The answer to whether, and when, to refinance will depend on your unique goals and financial situation. If you are considering refinancing and want more information, give us a call! Our loan officers can help you to explore your options and make sure you understand all the terms, conditions, and trade-offs of a refinance.
Have questions? Get in touch! Our HomeLoanServ support team is just a call or click away:
800.526.7145
support@homeloanserv.com