To refinance or not to refinance? That is the question that many homeowners have had to ask themselves at least once or twice while discussing their finances. Refinancing your home can come with a lot of perks, but it can also come with some risks. To ensure that you make the right decision for your family, it’s best to become more knowledgeable about what a refinance entails.
There are a variety of refinance options that could benefit you financially. Financial institutions offer options such as express refinances, cash-out refinances, and conventional refinances. While there are plenty of great possibilities out there, it can still be challenging to know if it will be worth it to move forward with refinancing.
Read on for more information on refinancing to help you decide if it’s worth it to refinance your home loan.
What Is Refinancing?
When you have a mortgage on your home, you have the option to refinance that mortgage. Refinancing your home is the process of exchanging your existing loan with a new loan. It usually involves changing certain aspects of your mortgage to better suit your current needs, such as lowering your interest rate or securing a more appropriate repayment term. Refinancing can be done with your current lender or by reaching out to a different financial institution.
Your new home loan will be used to pay off the balance of the previous loan, essentially transferring the remaining balance to the new loan. All payments going forward will then be paid to the new loan.
What Are the Benefits?
Many people choose to refinance their homes because it can come with some serious financial benefits, the biggest one being the possible change in interest rate.
Improve Mortgage Rate
When you open a mortgage, you usually tie yourself to an interest rate based on the economy and your financial situation at the time. This rate determines how much your monthly payments are and how much you’ll pay in interest over the life of the loan. In other words, the lower the interest rate the lower the monthly payment. But interest rates are constantly changing.
If interest rates were high when you applied for your initial mortgage, it may benefit you to refinance at a time when the interest rates drop. This can lower your monthly payment by hundreds of dollars a month, depending on how much lower the interest rate is. Usually, if you can reduce your mortgage rate by 1 percent, it may be worth it. This is one of the most popular benefits of refinancing your home.
Change Terms
Another popular benefit of refinancing is the ability to change your loan term. If your current mortgage has a repayment schedule that’s set up for 30 years and you want to change it to 15 years, a refinance is the way to accomplish that. This is a popular option among people who are in a position to make higher monthly payments than when they first took out their loan. If you shorten your repayment schedule, you’ll be able to pay a little more each month and pay off your mortgage in half the time, saving money on interest.
Remove PMI
Lastly, when you choose to refinance, you may have the option to remove private mortgage insurance (PMI). Borrowers typically have to pay private mortgage insurance when they finance more than 80 percent of the value of their home. Once you’ve paid off more than 20 percent of the home’s value, you may be able to stop paying for private mortgage insurance. Refinancing is a common way to remove PMI. The money you save on that could be used to help you pay off your mortgage balance faster.
What Are the Risks?
While there are plenty of benefits to refinancing, there are also a few things to be aware of. One of the downsides of refinancing for many people is the closing costs. Much like with your initial mortgage loan, a refinance also requires borrowers to pay closing costs. While there are some lenders, such as Solarity Credit Union, that can bundle your closing costs into your loan, most standard refinancing will require you to pay the costs up front. This amount can range depending on the value of your home and where you live.
There are also some risks associated with choosing to refinance. Your home is still the collateral for your loan, which means if you’re unable to keep up with your monthly payments after changing your terms, your home could go into foreclosure. If you opt for a cash-out refinance and borrow some of the equity you’ve built up, you could end up underwater with your mortgage, or owing more than it’s worth.
Is It Worth It to Refinance?
When it comes to deciding if it’s worth it to refinance, you have to consider your personal financial situation. You also have to consider your financial goals. Refinancing isn’t the best option for everyone.
If your goal is to pay off your home as quickly as possible, then a refinance could work in your favor. Lowering your interest rate and lowering the repayment schedule for your loan could allow you to pay off the full balance in fewer years than with your previous mortgage. If you’re determined to keep making payments on time and maybe throw in a few extra payments, a refinance could help you achieve this goal much sooner.
Some borrowers just want to save money each month. For some, refinancing is worth it just because it lowers their monthly payment and gives them more financial freedom with their monthly budget. If you want to spend less each month on your mortgage, then a refinance could be worth it for you.
On the other hand, a refinance could be less worth it if the rates are currently high. If the national interest rates are at the same number or higher than they were when you applied for your initial mortgage, then it may be best to wait until the rates decrease to pull the trigger on a mortgage refinance.
If you’d like to learn more about refinancing your home loan, reach out to the experts at Solarity Credit Union. A Home Loan Guide can walk you through your options and help you consider your particular situation in order to make the best decision for you.