What are some good reasons to refinance your mortgage?
- Lower your payment
- Convert and ARM to a Fixed Rate loan
- Use your home equity to better manage debt
- To get cash out to make home improvements
- Pay off your loan faster
- Get a low rate for the life of your loan
What Is Refinancing?
Refinancing is the process of replacing an existing mortgage with a new loan. Typically, people refinance their mortgage in order to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable rate mortgage to a fixed-rate mortgage. Additionally, some people need access to cash in order to fund home renovation projects or paying off various debts, and will leverage the equity in their house to obtain a cash-out refinance.
Regardless of your goal, the actual process of refinancing works much in the same way as when you applied for your first mortgage: you’ll need to take the time to research your loan options, collect the right financial documents and submit a mortgage refinancing application before you can be approved. Contact us to hear how easy it can be for you.
Benefits of a Home Refinance
There are several reasons to refinance your mortgage. Some of the potential advantages include:
- Lowering your monthly payment. With a lower monthly payment, you are free to put the savings toward other debts and other expenditures, or apply that savings towards your monthly mortgage payment and pay off your loan sooner.
- Remove private mortgage insurance (PMI). Some homeowners who have enough property appreciation or principal paid off will not be required to pay mortgage insurance which will reduce your total monthly payment.
- Reducing the length of your loan. For homeowners who took out a mortgage in the early stages of their career, a 30-year mortgage may have made the most financial sense. But for those who want to pay off their mortgage sooner, reducing the loan term can be an attractive option. For example, it could be possible to change your 30 year term to a 15 year term and keep your payment the same. Contact us and let us do a quick calculation for you.
- Switching from an adjustable-rate mortgage to a fixed-rate loan. When you have an adjustable-rate mortgage, your payment can adjust up or down as interest rates change. Switching to a fixed-rate loan with reliable and stable monthly payments can give homeowners the security of knowing that their payment will never change.
- Consolidating your first mortgage and your home equity line of credit (HELOC). By rolling these into a single monthly payment, you can simplify your finances and focus on one debt. HELOCs often have adjustable rates, so refinancing into a fixed-rate loan could potentially save you money in the long run.
- Using the equity in your home to take out cash. With rising home values, you may have enough equity to do a cash-out refinance. This money can be used to finance home improvements, pay off debts or to fund large purchases.
Frequently Asked Refinancing Questions
Before you choose to refinance, it’s important to be prepared. To gauge your refinancing readiness, consider the following questions.
Should I refinance if I only plan on living in my home for a few more years?
Similar to when you initially purchased your home, you will have to pay fees, taxes and closing costs on your refinance mortgage. It is important to determine how long it will take to reach your “break-even point” when refinancing a mortgage. The break-even point is the point at which the monthly savings created by a mortgage refinance offsets the cost of refinancing.
Per the Consumer Financial Protection Bureau, you should consider how long it will take for the monthly savings to pay for the cost of the refinance. Review the closing costs you paid for your original loan to purchase the home. Refinancing costs can be about the same amount. A common rule of thumb is to proceed only if the new interest rate saves you that amount over about two years (in other words, if you break even in about two years).
So, make sure you do the math and understand how the new loan will affect you.
How does my credit score affect refinancing?
Your credit score not only helps determine your mortgage refinance approval, but also determines the interest rate your lender is going to offer. Simply put, the higher your credit score, the lower your interest rate is going to be.
For example, a borrower with an average loan size of $250,000 and a credit score of 640 may pay around $2,500 more a year in interest payments than a borrower with a credit score of 760. If your credit score has fallen since you first obtained your mortgage, you can expect to pay higher rates—which may negate any potential benefit of refinancing.
What’s my remaining loan balance?
Before signing a new mortgage, you’ll need to assess your current loan balance. If you’re currently on the 15th year of your 30-year loan, you may want to look at your options for refinancing with a shorter term. This makes sense for a lot of homeowners because it allows them to take advantage of historically low rates without pushing out their payoff date, which can often provide substantial savings.
Do I need flexibility or a rigid payment schedule?
A common use for refinancing is to shorten the length of a loan and pay it off earlier. If current mortgage interest rates are lower than your current interest rate, it’s common to have a similar monthly payment amount while shaving years off your mortgage.
For example, homeowners with a 30-year mortgage may refinance into a 15-year loan. This can be a great choice, but there are things to consider:
First, most lenders will allow you to pay off your mortgage early. So, if you want to pay off your 30-year loan in 15 years by making extra payments, you may be able to do so. This can help you build equity faster and save on interest payments. If circumstances change and times get tough, you have the freedom to revert to the original contractual 30-year payment.
On the other hand, a 15-year loan typically offers even greater interest savings, and can also help you build equity quickly—so you can own your home free and clear sooner rather than later.
Is Refinancing available for FHA, VA, Jumbo, or USDA loans?
Yes, depending on your current situation, one of these options might make sense for you. Also, if you currently have a Conventional, FHA, VA, Jumbo, or USDA loan, there are options available..
Is Now the Right Time to Refinance?
Ultimately, it’s critical to crunch the numbers to see if refinancing makes sense for you. Even if you’ve been unable to refinance in the past, loan programs and rates are always changing. These changes, along with rising home values in several markets, may enable you to reduce your rate or lower your monthly payments.
At Valley Mortgage we would be happy to visit with you about the options of refinancing your current mortgage loan(s). Contact us today for a no-cost, no-obligation assessment. and guide you along the path to a successful refinancing.