Refinancing a home is something many homeowners consider at least once during the life of their home mortgage loan. What does it mean to refinance your home? The concept is straightforward—getting a new loan at a different interest rate or terms and paying off the old loan—but the reasons why people refinance varies. Here are a few of the top reasons why people refinance their home:
Lower Interest Rate
Interest rates are always changing. Refinancing your home at a lower rate can decrease your monthly payment so you pay less over the life of the loan while increasing the rate at which you build equity in your home. It was widely recommended that reducing your interest rate by at least 2 percent was worth the cost to refinance. Today, many lenders say a 1 percent savings is enough of an incentive to refinance.
Change Loan Type or Terms
People refinance their homes to change the length of their loan and/or to switch an adjustable rate mortgage to a fixed mortgage (or vice versa). Depending on the type of change made during a refinance, you could save a lot of money over the life of the loan. For example, switching from a 30-year fixed mortgage to a 15-year fixed mortgage could save you thousands of dollars in interest because you are cutting the time you pay interest on the loan. To discuss the right loan type or terms for your unique situation, contact a CIS loan officer.
Improved Credit Rating
If your credit rating has significantly improved since you took out your original mortgage, you may be eligible for a mortgage offering a much lower interest rate. Again, refinancing your home at a lower rate decreases your monthly payment so you pay less over the life of the loan.
Also called a second mortgage, cashing out allows you to take money from your home’s equity (the amount left after outstanding loan balances are subtracted from the property’s fair market value). Money from a second mortgage can be used to pay off other high-interest loans (such as credit card debt), fund a child’s college education, or make home renovations to increase the value of your home and/or make it easier to sell. NOTE: You should exercise caution and discretion when taking out a second mortgage because your home is collateral—it’s what secures the second mortgage. If your financial situation changes and you are unable to pay your monthly payments as agreed upon, the lender may seize your home—aka foreclosure—and sell it to pay off what you owe.
Other Refinancing Thoughts
While refinancing can be a great option, not everyone should refinance a home loan. Refinancing incurs the same type of closing costs you paid with the original mortgage and costs between three and six percent of the loan’s principle. Talk to a CIS loan officer first to find out what fees you would pay so you can determine if this is the right option for you. When you call, you’ll be asked questions such as how much is left of the original loan, if your current mortgage has a pre-payment penalty, why you want to refinance, and if you’re planning to move soon.
There’s a quick way to calculate the break-even point—the time it will take for the mortgage refinance to pay for itself—to see if refinancing is in your best interest:
Break-even point = Total closing costs ÷ monthly savings
For example: $3000 in closing costs ÷ $100 per month in savings = 30 months to break even. If, in this scenario, you plan to keep the house for less than 30 months, you should probably stay in your current mortgage.
If, after discussing the options with a CIS loan officer, you decide to refinance your home, you will go through a process similar to what you went through with your first mortgage loan. You will complete a loan application, which includes credit history, verification of income, debts and assets, account information, an appraisal, and title search. You will also be asked about outstanding mortgage balances and the status of property tax and insurance payments.
Refinancing your home can be a great financial move if it shortens the term of your loan, reduces your mortgage payment, or helps you build equity more quickly. Ready to begin the discussion about refinancing your home? CIS Home Loans, a full-service mortgage bank, has served homeowners since 1991. The personal relationships we form during the loan process are as important as the loan itself. It’s why Character, Integrity, and Service make up CIS Home Loans’ name. Call us today at 800-844-4845 or visit our contact page to get in touch with our team.