Refinancing is when you replace your current mortgage with a new home loan. With your new mortgage,you may be able to secure a lower interest rate and change the length of your loan, both of which can impactyour monthly payments.
There are many reasons why refinancing can be favorable, and there are some things to keep in mind when determining if a refinance would be right for you.
Top 5 Reasons to Refinance
These are some of the most common reasons why a homeowner would refinance their mortgage.
- Reduce yourinterest rate
Many people refinance to get a lower interest rate. Even a 1% difference between your old and new rate may shave a few hundred dollars off of your monthly mortgage payments and save you thousands of dollars over the life of your loan.
- Shorten your loan term
When the market interest rates are lower than the rate you secured when you first took out your current mortgage, you may be able to refinance your loan to a shorter-term without it increasing your monthly payments too much.And, if you switch from a 30-year loan to a 15-year loan, it will allow you to build up equity in your home much faster.
Even if your monthly payments are higher when switching to a shorter term loan, you may enjoy significant savings over the life of your loan by making fewer interest payments. For example, while the new loan may come with higher monthly payments, you’ll pay your loan down in less time and significantly reduce your overall interest costs, compared to the total interest payments of your prior loan’s terms.
- Switch from an adjustable-rate to a fixed-rate or vice versa
In some cases, you may want to refinance to switch between a fixed- or adjustable-rate mortgage (ARM). For example, ARMs usually start with a lower rate than a fixed-rate mortgage, but you can end up with a higher rate later on through the periodic adjustments. In this case, switching to a fixed-rate mortgage would protect you against future interest rate increases.
There are also situations where it makes sense to switch from a fixed-rate to an ARM. For example, if interest rates are lower, the periodic rate adjustments can reduce rates and lower mortgage payments. If you plan on staying in your home for a term less than the initial ARM adjustment period, this may save you more money than if you refinanced with a fixed-rate loan.
- Consolidate debt
A cash-out refinance is when you refinance your mortgage and borrow money against the equity in your home, which can be used to consolidate and pay off higher-interest debts. With a cash-out refinance, you refinance your mortgage and receive a check at closing when the balance owed on your new mortgage is higher than your prior loan, and that difference is given to you, minus any refinancing closing costs.
With a cash-out refinance, you could also put this money towards larger expenses, like home improvements or college tuition. However, it’s important to note that a cash-out refinance also increases your overall home loan debt.
- Lower your monthly payments
When you refinance to a lower interest rate or extendyour loan term, your new loan balance will typically result in lower monthly payments than what you were paying on your prior loan. If this is the case, you’ll have extra money available to put towards other expenses or put towardsyour savings.
What You Need to Refinance
The mortgage refinancing process is very similar to the processyou went through when you took out your prior mortgage. Your loan advisor will review your credit history, financial documentation, and current mortgage terms and payments. These criteria will determine if you are eligible for a refinance and if now is the right time to refinance.
Typically the following information is needed when applying for a refinance:
- Income: Pay stubs, tax returns, and W-2s
- Assets: Bank and security account statements
- Debts: Monthly payment amounts and current balances for car loans, student loans,credit cards, existing mortgage, or home equity line of credit
With most refinances,a home appraisal must also be done to determine your property’s value and assure your lender that your new loan does not exceed your home’s current value.
There are also closing costs that must be paid with a refinance, including fees for your application, appraisal, loan origination, and others, and may vary between lenders. Closing costs are typically 2-5% of the loan amount, with a smaller percentage for higher amount loans. For example, closing costs on a $100,000 mortgage might be $5,000 (5%), but on a $500,000 mortgage they’d likely be closer to $10,000 (2%).
Should You Refinance?
Refinancing can be the right move for many reasons, but whether it is ideal for your specific situation would be dependent on various factors. Speak to a Cross Timbers Mortgage loan expert who can review your financial scenario, crunch your numbers, and help determine if refinancing now would be your best move.