Refinancing. That’s a term you regularly hear thrown around in the mortgage industry.
It is, in fact, exactly what it sounds like- replacing your current mortgage with a new one. While there are a variety of reasons that lead people to refinance, these are some of the most common:
The first is to lower your interest rate. If you took your mortgage during a time where interest rates were slightly higher, choosing to refinance could, ultimately, save you thousands of dollars. This type of refinance is typically referred to as rate-and-term refinancing. You refinance the remaining balance on your mortgage for a lower interest rate and a term (or number of years it will take to repay) you can afford.
The second reason to refinance is to convert an adjustable rate loan to a fixed rate loan. Just like it sounds, an adjustable rate loan has an interest rate that fluctuates based on market conditions. So, when interest rates are low, converting your loan to a fixed rate loan secures that low interest rate for the remaining duration of your mortgage.
The third is a way to “free up” cash. Typically referred to as cash-out refinancing, this entails taking out a new loan for a greater amount than your previous balance. You can then take the difference in cash or even use it to pay off other forms of debt.
Other reasons to refinance are to eliminate FHA loan insurance or even to settle a divorce.
The potential benefits seem pretty obvious. Lower interest rates means less money paid over the life of the loan. It even means you could lower your monthly mortgage payments. Having additional cash on hand. All of these benefits are compelling.
To refinance or not to refinance
Refinancing, however, is not for everyone. There are a variety of other factors that contribute to the entire refinancing process. The length of your loan, the amount of money you owe, even the amount of time you plan on staying in that particular home.
Both the length of your loan and the amount of money you owe can directly affect the additional costs to refinance. These “hidden costs” are important to factor into your decision to refinance (or to keep your current loan). Cost of a house appraisal, loan origination fee, plus a variety of other costs for filing documents, purchasing title insurance and even fees for your new mortgage application.
Time to break out your calculator
Before you take the plunge, take a minute to crunch the numbers. Is refinancing something you can afford, at this time? And, will you ultimately save money over the duration of your loan?
The goal is to not only “break even,” but to do so in a time frame that is affordable and beneficial to you. Essentially, how long it will take for the refinance to pay for itself. For example, you have $2,000 in costs to refinance, but you are saving $100 in your monthly payments. In that situation, you will “break even” after 20 months of payments.
Are you considering refinancing? Take a look at your current mortgage and financial situation. You can even discuss the benefits of refinancing with one of our loan officers. In doing so, you can determine whether or not refinancing is the smartest move for you (at least for now).
By Natasha Mason