IS IT WISE FOR YOU TO ACT NOW?
You may be asking yourself that very question, as you compare your mortgage’s interest rate to the current interest rate. Or, maybe your credit score has improved and you want to see if you can get a better rate and term than your original mortgage. Maybe you’ve built some equity and want to get some cash out of your home.
Whatever the motivation for your desire to refinance, you need to make sure it’s the right decision for you.
When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan. Refinancing may remind you of obtaining your original mortgage, since you may encounter many of the same procedures and the same types of costs the second time around.
WHAT ARE THE REASONS TO REFINANCE?
The most common reason people refinance is to get a lower interest rate, with the hopes that by lowering the interest rate, the mortgage payment will be lowered, creating some surplus income that can go to bills, retirement, investments, etc.
Another goal of refinance is debt consolidation. If you have both a first and second mortgage (or home equity), some lenders may be able to refinance both loans into one loan, with a lower interest rate and longer term.
If you took on an adjustable rate mortgage with the hopes of gambling a little and winning a lower interest rate down the road but now want the stability of a fixed-rate, you may be able to do that through a refinance.
REFINANCE TYPES AND ASSOCIATED COSTS
There are closing costs on a refinance, just like with a purchase, so if you don’t plan on being the home for a long time, the cost of refinancing may not outweigh the savings from refinancing. For example, let’s say it costs you $4,000 to do your refinance and the refinance lowers your monthly mortgage payment by $100 a month. You’d need to stay in your house for at little over 3.25 years to cover the cost.
If you are underwater on your loan, meaning you owe more than your house is worth, you may not qualify for traditional refinance programs
There are two main types of refinances – cash out and traditional.
Access cash through home equity
A cash-out refinance allows you to refinance your loan with a new balance and new interest rate that will give you money back at closing. The money can be used to pay off credit cards and free up cash each month.
Lower your homes’ interest rate
A traditional refinance allows you to refinance with a lowered interest rate. There is no cash back. The main goal of this type of refinance is to lower the overall interest paid on the life of the loan, potentially saving thousands of dollars.