Is It Time to Refinance My Home Loan?
There are many reasons why homeowners decide to refinance their home loan. If you’re a homeowner, you may decide to refinance because you may be able to get a lower interest rate that can save you money on your monthly payments, to get a shorter term of your mortgage, help you afford home renovations, or simply because you need to get your finances back on track. But how do you know if refinancing your mortgage is right for you? Start by asking yourself the below questions to find out if a mortgage refinance is the right option for your situation.
What does refinance mean? To refinance your mortgage, you’re simply replacing an existing mortgage with a new one, and you can tailor the details on the new loan including the type of interest rate, the term length, and the amount borrowed. For example, if you’re refinancing to get a new interest rate, and your mortgage has a $300,000 balance, if you apply and get approved for the new loan, it will pay off the old loan. This means you’re left with a new mortgage with the same $300,000 balance, but it will have a different rate this time around.
Types of refinance programs? There are several refinancing programs for just about any situation. Here are the different types of programs available:
- Cash Out: This option allows homeowners to increase the amount that they are borrowing by tapping into their home’s equity and pulling out the cash difference. When a mortgage refinance is used to provide the borrower a lump sum of cash, you can use the cash in nearly any manner you choose.
- Rate and Term: The interest rate and loan term are the only changes that occur with this type.
- Cash In: A homeowner brings cash to the closing in order to pay down the loan balance that is owed to the lender. This type is the opposite of a cash out refinance.
- HELOC: A Home Equity Line of Credit lets the homeowner borrow cash against their home equity. The homeowner can borrow what they need and potentially return for additional draws, unlike a second mortgage.
Refinancing your mortgage may seem like a good idea, but there are several things to consider before making the decision. Although refinancing a mortgage typically closes more quickly than buying a home and requires less paper work, there are several other key factors to keep in mind before making this decision such as the following:
- How will it affect you financially?Try our refinancing calculator to figure how much refinancing might help your budget.
- How long will you live in the home?If you’re planning to sell or move soon, refinancing with a low interest, Adjustable Rate Mortgage could be the best choice for you.
- Any potential risks?There may be a clause which penalizes you for paying down your mortgage with a home equity credit line of credit. There may be other attorney fees and costs in addition.
When should you refinance your home loan? Most borrowers are required to keep their original mortgage for at least one year prior to moving forward with refinancing. You should still check with a licensed Loan Officer as each lender and their terms are different.
While it is often best to refinance with the original lender, this is not required. Many lenders will want to keep existing customers and so they may choose to waive a new title search, property appraisal, or other requirements for refinancing.
There are also many reasons homeowners choose to refinance their mortgage. The top reasons are:
- Get a lower interest rate
- Refinancing out of an ARM into a fixed-rate
- Change the mortgage term, pick any term from 8 to 30 years with the I CAN
- Lower monthly mortgage payment
- Make home improvements or repairs
- Remove mortgage insurance
There are also several benefits to refinancing your home loan. Some of the benefits include:
- No More Private Mortgage Insurance (PMI)– Refinancing your home could allow you to get rid of your PMI. If your home has increased in value or if you have paid enough into your home so that you owe less than 80% of what it’s worth, you can refinance into a new loan and stop paying PMI, which may lower your monthly payment.
- Lower your monthly payment – Refinancing your mortgage gives you greater financial flexibility. One of the best benefits of refinancing is the relief it can provide you in terms of your monthly expenses.
- Getting a better loan:Whether you want to switch from an Adjustable Rate Mortgage to a 30 Year Fixed Rate, or simply wish to lock in a lower rate, refinancing can provide an opportunity to optimize your mortgage loan.
To see more of the benefits to refinancing your loan, check out our refinance loan page.
What is the cost to refinance a mortgage? While a lower interest rate can mean lower monthly payments and less money out of your pocket for the remainder of the loan, most refinance options require you to pay closing costs and, in some cases, mortgage points-fees that go to the lender in exchange for a lower interest rate. If your monthly savings exceeds these costs, refinancing can be a good option.
Where to begin?
- Check your credit score: The higher your credit score, the better interest rates you will be offered to refinance.
- Know your home’s value: Research recent home sales prices in your neighborhood to get a good estimate of what your home is worth.
- Determine all the related costs: Closing costs and assorted fees for the application, appraisal, origination, and processing of documents need to be factored in.
- Collect your paperwork: Gather, download and print statements, pay stubs, and anything else the lender requires during the process.
Deciding when to refinance may not be an easy decision, so you’ll want to take some time to figure out if it’s the right decision for you. Is it time to refinance your home loan? Contact a New American Funding Loan Officer today to learn more and to get started on the process.