If you’re a homeowner, you probably went to great lengths to make sure that the mortgage rate you signed on for was the best rate you could get. However, financial markets – and our lives – change over time. This might mean that the home loan you took out when you first bought your home is not the best choice for you now. The good news is once you get into a mortgage, you’re not stuck.
That’s where refinancing comes in. Refinancing is a way to obtain a new mortgage – with a different APR, term, or both – once you’re already in one. Keep reading to learn more about how home loan refinancing works, why you might want one, and when you should get one.
How Home Loan Refinancing Works
Home loan refinancing is when you use a new mortgage to pay off your current mortgage. The new mortgage is usually a better deal in some way. This means that you replace your original mortgage with the new one and start making payments on the new loan.
Essentially, refinancing requires a very similar process to the one you went through when you first took out a home loan. This includes shopping for loans and rates, applying for approval, and closing on the loan. Depending on how long it has been since you purchased your home, you may also need to have it appraised, inspected, or both.
Why Homeowners Choose To Refinance
Here are some of the common perks that drive people to refinance their home mortgage.
Lower Your APR
Most homeowners will choose to refinance when they can obtain a better APR (annual percentage rate). This may happen for several reasons. Sometimes, average rates for mortgages have dropped overall, nationwide. Other times, rates may be the same, but your credit score may put you in a position where you can access much better APR.
Lower Your Monthly Payments
Depending on how you refinance, you may be able to significantly lower your monthly payments. For example, if you take out a loan with the same term, for the same amount, with a lower APR, your monthly payments will be lower.
If you’re in a pinch and just find that you cannot afford your monthly payments, you can also refinance your home loan and extend your term. This way, even if your APR remains the same, your monthly payments will drop. However, beware that extending your term without a lower APR means that you will pay interest for longer, increasing the overall cost of borrowing the money.
Decrease The Term Of Your Loan
If you can lower your APR and are willing and able to keep paying the same amount monthly, you can often decrease the overall term of your loan. In this case, while you’ll be paying the same amount per month, you’ll be done paying off your mortgage faster. This means you’ll pay less in interest overall.
Switching Your Rate Structure
Refinancing can also enable you to switch from a fixed-rate mortgage to an adjustable-rate mortgage or vice versa. Adjustable-rate mortgages can offer low fixed rates at the beginning of the mortgage, but their variability can sometimes be stressful.
On the other hand, a fixed-rate mortgage means that to take advantage of lower interest rates, you have to refinance. Switching to an adjustable-rate mortgage can allow you to seize falling interest rates without the hassle of refinancing every few years.
Access Low-Interest Money Via A Cash-Out Refinance
Once you’ve accrued equity in your home, you may want to access that equity in the form of cash. A cash-out refinance can help you do just this. Essentially, a cash-out refinance is where you replace your mortgage with one for a higher principal than you owe. You can then access that difference in cash.
This gives you a relatively low-interest way to borrow money. Also, the interest is usually tax-deductible if you use the money to buy, build, or substantially improve your home.
When – And When Not – To Refinance Your Home Loan
Refinancing can help you save money in a lot of cases, but you have to keep in mind that it does come with a cost. Typically, this cost is between 2% and 5% of the total mortgage principal.
Because of this, the timing of your mortgage can really affect how much money refinancing saves you. If you are planning to be in the home and paying the mortgage for a long period of time still, it can be a good idea to refinance. Essentially, you want enough time to recoup the costs of refinancing, which can take several years.
If you are planning to sell your house and move in the near future, you may not make back the money you spend on refinancing. Similarly, if you’re nearing the end of your mortgage term, it may not be worth it to refinance.
In addition, the interest rates and new mortgages you can access will affect how much money you save and how quickly you recoup the costs of refinancing. One of the best ways to determine how much money you will save and how long it will take you to make back the money you spent is by using a mortgage refinancing calculator.
Shopping For A New Home Loan
If you’re ready to start looking for a new mortgage, you can start by making a list of the best rates you can access. Credit Unions like Jeanne D’Arc offer competitive rates to our members.
You can find information about our mortgage options at the following link.