June 8, 2015 by Leave a comment

Refinancing a mortgage means applying for a new home loan with an existing lender or a new bank, waiting for an approval, and paying closing costs.

It’s exactly the same process as getting the original mortgage. From start to finish, it can take a few weeks to complete a refinance — which can be annoying.

However, if you can be patient with your lender, refinancing can accomplish a lot of things. Some borrowers don’t know whether refinancing is the right move for them. To help you decide, here’s a look at five things you can accomplish by getting a new mortgage.

1. Save More with a Lower Rate

Mortgage interest rates can fluctuate at a moment’s notice. When rates hit historic lows, many homeowners rush to refinance their home loans before rates increase again.

Several factors determine our mortgage payments, such as how much we paid for the property, property taxes, insurance and the mortgage rate. You have little control over the cost of real estate taxes and insurance; but when mortgage rates decrease, you can refinance and take advantage of a lower rate.

This can reduce your mortgage payment, and with extra cash in your pocket you can do a lot of good. Pay off other debts, make home improvements or save for retirement.

2. Cash Out Your Equity

Home equity is the difference between your home’s value and what you owe your mortgage lender. If you have substantial home equity, there’s the option of refinancing your mortgage and cashing out some of your equity. This offers a simple way to get your money without selling the property.

A cash­ out refinance puts a lump sum in your hands, which you can use for any purpose. Some borrowers cash out and consolidate debt, or they use the cash for other purposes like paying for college or a child’s wedding.

Just know that cashing out your equity increases the amount owed to your mortgage lender. So even if you’re able to refinance and get a better mortgage rate, cashing out your equity can cause your mortgage payment to remain the same or increase.

3. Get a Fixed ­Rate Mortgage

An adjustable ­rate mortgage might be the best choice if you’re only planning to live in your home for three to five years. These loans feature a temporary fixed-rate period followed by annual rate adjustments.

Some borrowers choose an ARM because the rate is typically cheaper than fixed ­rate mortgages. However, adjustable rate mortgages are unpredictable, and your rate can fluctuate from year­-to-­year based on the current market. If you’re looking for a more predictable monthly payment, now’s the time to refinance and convert your ARM to a fixed ­rate.

With a fixed ­rate mortgage, your mortgage rate is guaranteed to remain the same for the duration of the home loan. It’s the perfect fit if you don’t like surprises.

4. Remove a Name Off the Mortgage Loan

If you’re getting a divorce, refinancing your mortgage is the only way to remove your spouse’s name (or your name) from the mortgage loan. If a name isn’t removed, you’re “both” still responsible for the mortgage payment regardless of who keeps the home. You and your spouse will also need to sign a quit claim deed, which allows one person to give up ownership rights of the property.

Just know that if you’re refinancing a mortgage to remove your spouse’s name from the loan, you must be in a financial position to afford the mortgage on your own. The lender will check your income and your credit to determine whether you qualify.

5. Buy a Second Home or Investment Property

Whether you’re looking for a vacation home or an investment property, you can refinance your primary residence, cash out your equity, and then use this money to pay cash for a second property.

Again, a cash ­out ­refinance increases your mortgage balance. On the other hand, paying cash for a second property is one way to avoid other fees and expenses associated with buying a property, such as private mortgage insurance and a down payment.

Bottom Line

Mortgage rates are unpredictable. So if you’re thinking about refinancing, now’s the time to apply for a mortgage. It doesn’t matter if you want a better rate and a lower monthly payment, or you want to convert your ARM to a fixed ­rate, refinancing might be the answer.

Get a quote from your mortgage lender, and then shop around and compare rates with two or three other lenders.

Eric Khan is a Senior Mortgage Banker licensed in 23 states. Eric has been in the mortgage industry for over 10 years, and can be contacted by phone at 203-783-4593 or by email at [email protected] NMLS# 184348.

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