Mortgage Refinancing Explained
Refinancing a mortgage is the process of taking out a new loan to pay off your original mortgage loan. When mortgage interest rates go down, many homeowners refinance to get the benefit of a lower interest rate. Other common reasons people refinance is to cash out some of the equity in their home, to extend the length of their loan and reduce their monthly payment, or to change into a different loan program altogether. Read on to learn more about how mortgage refinancing works.
Benefits and Costs of Refinancing
Determining whether it makes sense to refinance your mortgage involves understanding the costs of the new mortgage loan. Remember that refinancing your mortgage means you will be getting a new loan. Here is a guide to help you make your decision.
Refinancing for a Lower Interest Rate
One of the most common reasons to refinance is to get a lower interest rate than you currently have. Interest rates may drop based on market conditions, but you may be eligible for a lower rate if your credit score has improved since your original mortgage. Having a lower interest rate is desirable because it will lower your monthly payments and you will pay less total interest over the life of the loan.
However, you must factor in to this calculation the costs of the loan and how long you plan to own the home. For example, if refinancing your loan will cost $6,000, and your new monthly payment is just $100 lower than what you’re currently paying, you’ll need to stay in the home at least 60 months, or five more years, to make this refinancing worth it.
Cashing Out Equity in Your Home
People often refinance their mortgage to get access to the cash value of their home. If your home is worth considerably more than the mortgage balance you owe, you have some equity in your home. Lenders are willing to give you a new loan against a portion of the equity. This gives the homeowner cash to use for emergency expenses, education, and other high value items.
If you are planning to refinance to get cash, be aware that you are increasing the amount of the debt you will owe on the home. The result will be that your monthly payments may go up. Depending on the length of the new loan, you may also be extending the due date out in time. You will also pay more interest over the life of the loans, and the interest rate on these home equity loans is usually higher than the rate available on a loan that finances the purchase of a home.
Changing to a Different Loan Program
Another popular reason to refinance is to change from an adjustable rate loan to a fixed rate loan. People do that when interest rates go down to lock in the lower rates and avoid the risk of the interest rate adjusting upwards. Some people change from a fixed rate loan to an adjustable rate loan to lower their monthly payments if they believe they will be moving in the near future.
You can probably lower your interest rate if you take a new loan for a shorter term. For example, if you refinance your existing 30-year mortgage with a new loan that has a 20- or 15- year term, you will save considerably on the interest rate and the total interest you pay.
Eliminating the Private Mortgage Insurance
When you bought your house, you probably had to pay a down payment. If you paid less than 20% down, you probably have to pay private mortgage insurance (PMI) as part of your monthly mortgage payment. You can eliminate that cost by doing what is called a “cash-in” refinancing. This requires that you refinance your mortgage loan by bringing enough money to the table to reduce the new mortgage balance and get rid of the need for private mortgage insurance. You can also do a cash-in refinancing to get other benefits such as a lower interest rate, lower total interest, and a lower total loan amount.
Other important considerations to refinancing include:
- You will have to qualify for the new loan, and the lender will want information about your income and debt information, the home’s value, your credit score, and similar information just like a lender would on a new loan.
- Refinancing could affect your credit score by showing multiple inquiries over a period of more than 30 days, by reflecting any missed payments during the refinancing period, or by closing out your old loan and replacing it with a new one.
Contact Mathis Title Company for more information about refinancing
If you are thinking about refinancing your home mortgage for any reason, get in touch with the professionals at Mathis Title Company at 703.865.7880. They can answer all of your questions about refinancing and help you decide whether refinancing makes sense for your situation. They also provide refinancing services at competitive rates.