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What is Refinancing and Should I Refinance My Mortgage?

As interest rates drop to historical lows and the outlook on the economy uncertain, many homeowners are taking advantage by refinancing their mortgage. If you’re unsure, refinancing your mortgage means paying off your existing mortgage with a new loan, generally from a different lender.

There are many reasons why tens of thousands of Americans choose to refinance their existing mortgage each year.

These include:

      Obtaining a lower interest rate,

      Shortening the term of your mortgage

      Converting from a fixed-rate mortgage to an adjustable rate or variable rate mortgage (or vice versa)

      Financing a large purchase

      Paying for an unexpected emergency

      Consolidating debt

      Tapping into the equity in your home, also known as cash-out refinance.

In this article, we'll explore the pros and cons of refinancing your mortgage.

 


KEY TAKEAWAYS

      Getting a mortgage with a lower interest rate is a great reason to refinance.

      With interest rates at historical lows, consider refinancing to shorten the term of your mortgage and pay significantly less interest over the life time of your mortgage.

      Leveraging equity in your home to cash-out is a common reason many Americans refinance their mortgage each year.

      Depending on how long you expect to remain in your home, switching from an adjustable rate mortgage, or a fix rate mortgage might make sense for you.


What are the benefits of refinancing?

The most attractive benefit of refinancing your mortgage is the ability to lower your monthly payment. Depending on when you purchased your home, refinancing could help you secure a lower interest rate.

That said, a lower interest rate would mean a lower monthly payment and less money spent on interest over the life of the loan. This principal would help you save money not only each month but for each year that you pay your mortgage.

Beyond saving money, many Americans have seen a rapid increase in the value of their home’s equity. States like Massachusetts and Illinois, have seen real estate appreciate by 33% and 9.05% in 2019. This presents homeowners with a unique opportunity to refinance. By keeping their payment the same they can take out some equity - cash - on their property. This allows them to make a large purchase, renovate their home, pay for a child's education or consolidate higher interest debt. This is commonly known as a cash-out refinance.

In a recent interview with Business Insider, Joe Tyrrell, CEO of Ellie Mae, attributed the recent surge in refinancing to consumer savings.

"If you look at 2018 alone, the average [interest] rate that millennials were purchasing at was 4.78%. On a 30-year, fixed-rate mortgage at an average loan amount of about $241,000, that's a $1,263 payment that they're making. If you fast forward to today, where rates are at 3.8%, that's a savings of roughly $150-$250 per month."

What are the costs of refinancing?

With these benefits there it’s important to remember that refinancing does come at a cost. On top of needing to qualify for and close on a new mortgage, which can typically cost between 1%-2% of your home’s value, the process can take several months. Additionally, depending on your new loan, you could end up extending the life of your loan. Furthermore, depending on your reason to refinance you could end up with more debt if you choose to cash out.

Should I refinance?

Ultimately, the decision to refinance your mortgage is a personal one that should be made with care. To help you understand if your current situation makes sense to refinance, we’ve outlined some scenarios below.

Lower your interest rate

If you can lower your interest rate you, your monthly payment will drop and you will save money over time. You might be asking yourself “Is it worth refinancing to save $100 a month?”. A good way to decide is to look at the interest rate you’re paying now and the current interest rate if you refinance. If you’re going to get at a least half a percentage point reduction in rate, it is worth refinancing as you will benefit over time.

Switching from an adjustable-interest rate to a fixed-rate term

If you’re coming to the end of your introductory-rate and you’re concerned about the changes in your interest rate, it may make sense to refinance with a fixed-rate mortgage. This will give you stable monthly payments that will not change regardless of changes in the lending market.

Furthermore, if you’re looking to decrease the length of your loan, it could be a good idea to change from a 30-year loan to a 15-year loan.

Access the increased value in your home

If you’re like many Americans, you’ve likely seen your property appreciate in value over the last 5-10 years. If you’re looking to access the equity in your home, a cash-out refinance could be right for you. By leveraging the equity in your home, you can borrow more money and use the cash for large expenses.

As opposed to a personal loan, the money borrowed in a cash-out refinance is amortized over a longer term, 30-year in most cases. This makes your home renovation or your kids education much more attainable.

Conclusion

Predictions for record-low mortgage rates are expected for 2020 and beyond. This is good news for American consumers in the market to refinance their home.

If you’re feeling financially stable and you’re in a position to refinance now is likely a good time to do so.

Visit our preferred partners today to figure out how much you could save by refinancing now.

 

 

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