As homeowners, we’ve all heard the term mortgage refinancing. Perhaps you’ve received an offer in the mail or maybe your mortgage company reached out personally to discuss it. But does refinancing actually make sense? And how do you know if you’re ready for such a move? Let us help you break down the basics of refinancing your mortgage and how to know if it’s the right step to take.
Mortgage Refinancing 101: The Basics
Refinancing is a relatively straightforward concept. You essentially trade in your old mortgage for a new one, preferably with better terms and a lower interest rate. For many people, this results in significant cost savings and flexibility. Depending on your end goal, there are two primary refinance options: rate-and-term refinancing and cash-out refinancing. Rate and term refinancing’s main goal is to simply provide the homeowner with better rate and term advantages. Cash-out refinancing offers the advantage of acquiring money through your home’s equity when you obtain your new loan.
As mentioned earlier, rate-and-term refinancing allows the homeowner to take advantage of lower interest rates and more flexible term agreements. In some cases, it can also allow a loan to switch from a variable-rate to a fixed-rate mortgage.
Typically, as you pay off your mortgage and your credit score increases, you are able to earn better terms for your loan that you may not have had previously. Lowering your interest rates can help lower your overall monthly payments, allowing you more monetary flexibility in your day-to-day living.
This refinancing option has the primary goal of providing the homeowner with a certain amount of cash income after the new mortgage has been acquired. Essentially, a home’s value is assessed and if it is found to be larger than the amount owed in the loan, the homeowner has the potential option to apply for refinancing that would pay off their old loan and also give them the cost difference based on that increased value amount. For example, if a home is found to be worth $300,000 and the amount owed on the loan is $250,000 homeowner can potentially get $50,000 cashback after refinancing their loan (minus any associated costs and fees).
A home can increase in value simply over time or as a direct result of improvements made. If you’re unsure of your home’s value, your lender can assess your home’s value and let you know where you stand with your mortgage.
Are You Ready To Refinance?
So, when is a good time to consider refinancing your mortgage? Typically, lenders require you to have had your loan for at least 12 months before you can apply for refinancing. You may also want to wait until you can get your credit score as high as possible. Paying off debts, making payments on time, and having a strong credit-to-debt ratio are all ways to increase your scoring. The stronger your credit score the better terms and the interest rates you can expect, regardless of which refinancing option you choose.
Also keep in mind that any refinancing will come with costs and fees, which can cost thousands of dollars. And if your home’s equity isn’t at least 20%, you may be responsible for PMI (Private Mortgage Insurance). Adding this to your monthly bill would completely negate the savings benefits of a lower interest rate mortgage.
Finally, evaluate how long you actually plan on staying in your current residence. Considering that refinance fees usually cost about 3-6% of the loan amount, you’ll want to make sure you’re planning on living in your house for however long it takes to reach an even breaking point where the anticipated savings are worth the costs. This can typically be anywhere from 2-5 years.
What’s the Next Step?
Once you’ve decided to refinance is the right move for you, you can rest assured the process is pretty simple. As mentioned earlier, be sure your credit score is in tip-top shape. And if you’re planning on taking advantage of the cash-out option, make as many quality home renovations as possible to ensure your home’s equity is at its best. Finally, shop around for the best terms and rates. You don’t have to refinance your mortgage with your original lender (though it may be much more convenient to do so).
When you’re ready to take the next step in your mortgage refinancing process, let us help! Our experts guarantee quick quotes, low rates, and some of the fastest closing times on the market.