refinancing

The Refinancing Process

When you refinance your mortgage, you’re actually replacing it with a brand new loan. In doing this, expect to go through a mortgage application process similar to what you experienced when you applied for your original mortgage. Refinancing is often a sound financial choice that can allows you to lower your payments, consolidate debt or get to large amounts of cash at a low cost.

Reasons to consider refinancing:

1. Reduce your mortgage payments and overall interest costs by taking advantage of lower interest rates or extending the repayment period
2. Reduce your interest rate risk by changing from an adjustable-rate to a fixed-rate loan or from a balloon mortgage to a fixed-rate loan
3. Pay off your mortgage faster (accelerating the build-up of equity) by shortening the term of the loan
4. Free up cash for major expenses or consolidate debts
5. Borrow up to 100% of your home’s equity with excellent credit scores
   

Rate and Term Refinance versus Cash-Out Refinance

A rate and term refinance has a loan amount that is just enough to repay the balance of the pre-existing mortgage and closing costs for the new loan. The purpose of this loan could be either to reduce your interest rate, loan term or monthly payment. A cash-out refinance, on the other hand, has a loan amount that exceeds the current mortgage balance for people who want cash for a variety of reasons. The higher loan amount converts a portion of your home appraisal into cash proceeds, which you receive after loan closing.

Good Rule of Thumb

A good rule of thumb is that if interest rates are 0.5% lower or more than your current interest rate, it is a good time to consider a refinance. However, under many circumstances, it can be beneficial to refinance even if your rate is staying the same or going up when other factors are considered.

Right Time to Refinance

Many homeowners consider refinancing when interest rates suddenly fall or there’s a change in financial circumstances. But even though a large decline in interest rates or an opportunity to pay off debt might seem like it’s a simple decision, you shouldn’t consider any single variable on its own. Think about how long you plan to stay in your home, how you plan to use your equity, and how a refinance will support your overall financial goals.

You may already have goals in mind for refinancing, but do you know which mortgage option will help you best achieve those goals? Selecting the right mortgage is key to the refinancing process, so it’s important that you understand your options. You’ll need to consider two things at the outset: which loan type best meets your refinancing needs and which loan term offers the ideal repayment schedule.