To some homeowners, the idea of refinancing their mortgage seems a little daunting. The process is akin to buying your house all over again. Paperwork, credit checks, an appraisal, and closing costs are all aspects of the loan origination process that can complicate the answer to whether refinancing makes sense.
For those unfamiliar with the term, refinancing simply means restructuring your debt. You’re modifying the current terms of your loan in favor of better ones. Keep in mind that if you do refinance, a new loan is originated — and lenders don’t go through this process for you free of charge. It’s just one of the factors that you need to consider before trying to refinance in order to free up cash in your budget.
Refinancing could be a great idea that allows you to free up cash despite the initial obstacles. Excessive loans, high interest rates, adjustable-rate mortgages, or longer-than-necessary loan terms are all good reasons to choose to refinance. Let’s take a closer look at each of the reasons, and how they can help free up cash for homeowners.
Holding Multiple Debts
If you have a home equity line of credit (HELOC) and a mortgage, refinancing can combine these two into one loan. This is a great option considering your HELOC is likely to have a variable interest rate. Refinancing both your HELOC and mortgage into one will ensure that both are locked in at a lower interest rate that you can afford — which also creates lower monthly payments and more money saved over the term of the loan.
Dealing with High Interest Rates
Perhaps you purchased your house a while ago, and have a 6 percent – 8 percent interest rate on your mortgage. You’ve seen many people locking in really low 3 percent – 4 percent rates for a while now. You want to get in on that!
Refinancing is the best way to get those lower interest rates. In fact, it’s the most popular reason people choose to refinance their mortgages.
Everyone knows interest eats away at every mortgage payment you make, bringing you further away from your hopes of paying it off. It can be discouraging to realize how little of your payment is actually going toward the principal balance.
If you have $120,000 left on your mortgage at a 6.8 percent interest rate on a 30 year term, you’re paying $782.31 monthly in principle and interest — with $445.92 of that payment going toward interest.
What if you were eligible for a 4 percent interest rate? You’d pay only $572.90 monthly, with $240.62 going toward interest. More of your payment would go toward the principal than the interest. Plus, you’d save $209.41 on your overall payment.
Switching from an Adjustable Rate Mortgage
Who really enjoys having their monthly mortgage payment fluctuate? Wouldn’t you rather not have to worry about when your interest rate will spike? If the initial rate of your adjustable rate mortgage is about to change, refinancing to a fixed-rate mortgage could be the best solution.
You’ll be saving yourself a decent chunk of money, and you won’t have to worry about being able to afford future payments as they increase. It’s much easier to budget around a set payment each month or year rather than having to adjust your spending to accommodate an interest rate that keeps going up.
Looking for a Shorter Term
While some people are perfectly fine paying their mortgage back in the traditional 30 years, there are a few that would rather have the burden lifted from their shoulders in 15 years (or even less).
Refinancing to a shorter term isn’t likely to save you much money initially. In fact, your payments will probably increase. However, keeping interest in mind, going with a shorter term will save you more in the long run. More of your payments will go toward the principal balance as opposed to interest.
Let’s go back to the earlier example of having a mortgage with $120,000 remaining. Instead of a 30 year term, you refinance to a 15 year term. You’d pay $887.63 per month (a bit more than the $782 you were originally paying!), but only 25 percent of that ($221.91) would go toward interest and your mortgage would be paid off much sooner.
Be Sure It Really Makes Sense to Refinance
When it comes to refinancing, you want to be sure that it truly makes sense. You must factor closing costs and any other fees into the equation.
The simplest way to determine if this is a financial win for you is if your savings and freed-up cash are going to be more than the amount you’ll pay in closing costs.
Also, refinancing works best when you’re going to stay in your house for a while longer. You don’t want to go through the hassle of refinancing and pay closing costs when you won’t stay in your house long enough to recoup those costs.
Remember that refinancing should be an all around beneficial move for you, not just a short-term win.
On a side note, today is my last day at Total Mortgage. It has been great, I have worked with some awesome people and learned a lot during my time here. I wish all my co-workers good luck in the future and wanted to thank anyone who ever read the blogs I wrote, I hope they were useful. Go Patriots!