If you have a mortgage, at some point you will wonder if refinancing your mortgage is the right thing to do. There are a number of reasons why refinancing your current mortgage could benefit you, either because of a change in your circumstance or because of your financial goals.
Let’s take a look at what refinancing means and walk through three reasons why refinancing your current mortgage may be of benefit to you.
What Is A Mortgage Refinance?
Refinancing your mortgage is much like refinancing your car. You pay off your current mortgage and get a new mortgage with new terms and conditions—all in one swoop. Because different elements of your mortgage can change with a refinance, it’s important to weigh the potential benefits against any new costs you would incur from doing so. Whenever you think about refinancing, make sure you perform a break-even analysis to help you decide if a refinance is right for you.
Lower Your Monthly Payment
One of the main reasons you would refinance your current mortgage is to lower your monthly payment. Your new mortgage will have new terms, and one of those new terms will be a new interest rate. If the current interest rates are lower than the interest rate on your mortgage, it may make sense to refinance. A good industry standard rule is it’s a good idea to refinance if you can lower your interest rate by at least one percentage point. This is a general rule, however, and should not be strictly followed. There are a few things that can influence your decision. One thing is the costs in doing so. You’ll want to find out how many months of interest savings it will take to break-even, or recoup the cost of doing the refinance, by running a Refinance Break-Even Analysis.
Pull Cash Out Of Your Home
We’ve mentioned that many of the terms can change when you refinance your mortgage. Another one of the terms that can change is the amount you finance. If you have equity in your current home (meaning you owe less than its value), you may be able to loan an amount higher than your current mortgage balance, and receive the difference as cash at closing. This can be of benefit if you’ve been making payments on your current house for years and would like to re-invest some of the equity in the form of home improvements.
Pay Off Your Mortgage Faster
Another term that can change when you refinance your mortgage is the length of time it takes to repay. Most mortgages are amortized for a term of 30 years. There are, however, options for 20-year and 15-year mortgages. Reducing the term on your mortgage to 20 or 15 years will reduce the time it takes to pay it off in full by 33 to 50 percent, representing a much shorter time and a significant savings in interest. Often times, these mortgages also come with a lower interest rate than your typical 30-year mortgage which only adds to the savings.
Refinancing your mortgage can be a great option to meet your specific goals and objectives. It can help ease your monthly budget, finance some home improvements, or even help you own your home free and clear in a shorter time. Whatever your goals, consult with one of our experienced loan originators today. They will help you weigh the benefits and costs, and can provide a strong recommendation to fit your unique needs.