There are several tools homeowners with good credit can use to save money over the life of a loan. Refinancing a mortgage may be helpful for those who want to lower monthly payments, consolidate debt, or secure a lower interest rate.
Conventional refinancing is getting a new mortgage to replace the original. The original loan is paid off, while the new one is restructured in a way more beneficial to the borrower. Other refinancing options exist as well, such as cash-out refinancing. The main difference is that a cash-out refinance replaces the old mortgage with a new one for more than is owed on the house. The difference is then given to the borrower in cash.
Each situation is different, and it might not always be a good time to refinance. Before deciding if the time is right, borrowers should consider their overall financial situation and have a decent understanding any of costs and changes going forward
Many home owners have the desire to lower monthly payments on their mortgage. As the total monthly payment includes principal and interest, any reduction in the interest rate could equal thousands saved in interest over the life of the loan.
Another goal of refinancing could be term reduction. Changing a 30-year to a 15-year mortgage obviously pays the loan off quicker, but at a higher cost. If borrowers can better afford higher monthly payments, a shorter term could make sense.
Getting a different mortgage rate can also be very advantageous for borrowers, as switching from an adjustable-rate to a fixed-rate mortgage can lower interest payments over the life of a loan. The fixed rate may be higher initially, but the rate remains unchanged, insuring against any rate increases in the future.
If borrowers have substantial equity and need cash to complete projects around the home, or for any other reason, they can refinance to take out cash above the amount needed to pay off the existing loan.
A major risk with any refinance is the possibility of penalties incurred from paying off loans too early. Since the lender could potentially miss out on thousands in interest payments, they include provisions that allow recuperation through various fees.
New loans can mean new terms. Borrowers should double-check to make sure any new terms are in line with the stated goals.
Last but not least, borrowers should assess their ability to repay the new loans in light of their current financial situation. Failure to repay any loan can result in foreclosure.
Home owners should first consider how they will repay the new loan. Unfortunately, refinancing a mortgage can be expensive. Borrowers can expect to potentially pay thousands in closing costs. While not necessarily paid up front, these would then be rolled into the life of the new loan.
In the case of a cash-out refinance, if the loan is for more than 80% of the home’s value, borrowers will have to pay private mortgage insurance (PMI). This cost is typically between .05% to 1% of the loan amount per year.
While refinancing a mortgage can be beneficial in the long-term, it needs to make sense when compared to the terms in any original mortgage. If the need arises and it makes sense against whatever costs will accrue, refinancing the mortgage is something credit-worthy borrowers should consider.