Refinancing for Beginners
Are you looking to refinance your mortgage? It’s a great idea to refinance if you can save on your interest rate, or shorten the term of your mortgage. Refinancing means you’ll pay off the existing loan on the house with a new one. Typically this is done to get more cash on hand or a better interest rate and lower monthly mortgage payment. There are two types of refinance loans.
Rate and Term Refi
The first is “rate-and-term refinancing”, which is used to save money. You refinance the remaining balance for a lower interest rate, and a more affordable loan term.
Cash Out Refi
The other option is cash-out refinancing, where you take out a new mortgage for more than you owe, and you use it to pay off existing debt or take the difference in cash.
The most important thing to check is if it’s even worth it to refinance. Try out our refinancing calculator and see if you can save on your interest rate. If you can reduce your interest rate by at least 2%, it’s a good time to refinance.
Alternatively, if you can refinance an existing loan without changing the monthly payment much, but with a shorter term, that’s a good time to refinance. For example, if you have a 30 year fixed rate mortgage on a $100,000 house, if you can refinance from 9% to 5.5%, you can cut the term to 15 years, and the only difference in your monthly payments is approximately a $12 increase.
Refinancing is a sound financial choice if you’re reducing debt, shortening loans, or even if it helps build more equity. But remember, refinancing costs 3-6% of the loan’s principal. This can take years to recoup that cost through the savings of refinancing, so if you’re not planning on staying in the home for more than 5 years, it could negate the potential savings.
Speak with one of our refinancing professionals to find out if refinancing is right for you!