Maybe you’ve heard about the benefits of refinancing your mortgage to take advantage of the currently low interest rates. Does that mean it’s a good time to refinance for your situation? That all depends on a variety of factors. In general, there are a handful of reasons you may want to refinance, such as you wish to take advantage of lower interest rates or secure other debts. However, each reason and method of refinancing often comes with some pros and cons homeowners should be aware of, which will ultimately help determine if now is the right time to refinance.
What Is Refinancing?
Refinancing, in general terms, refers to replacing an existing debt with another one. In the case of a mortgage, refinancing is a method for adjusting or receiving a new home loan in place of the original. This can be great news for homeowners, as life can dramatically change just years after purchasing a home. Changing the terms of your loan may be a sound option if you’re looking to save money on interest or pay off your loan sooner.
Reasons for Refinancing
One of the primary reasons many want to refinance is to get a lower interest rate. These days, experts and lenders agree that if you can reduce your interest rate by just one percent, it may be worth it to refinance. A lower interest rate will help you build equity in your home faster and help you save money.
Another reason to refinance is to shorten the term of your mortgage. In the case of low interest rates, a homeowner with a 30-year fixed rate refinancing from nine percent to five and a half percent could cut their terms in half by paying just a small amount more in their monthly payment.
Refinancing is also an opportunity to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM). Depending on what kind of interest rate you currently have, transitioning to either an ARM or fixed-term mortgage could prove beneficial. For example, if rates are falling, converting from a fixed-rate to an ARM allows a homeowner to take advantage of lower interest rates. Conversely, when rates ebb and flow, converting to a fixed, lower rate stabilizes your payments.
Consolidating debt is another popular reason for refinancing. As a homeowner, you can tap into your home’s equity to pay for a large purchase by adding more years onto your mortgage term. You can also replace a high-interest debt, like a credit card payment, with a low-interest mortgage. In these situations, it’s prudent to ask yourself how long you plan to live in the home, and if the added years and cost of paying the mortgage principal will outweigh the initial costs of refinancing.
Ways to Refinance
There’s three primary ways you can refinance. What method you choose depends on your refinancing goals. Most common, however, is swapping a lower rate for your existing rate to save money.
Rate and Term – This is the most common method of refinancing. It works by refinancing the remaining mortgage loan balance by adjusting the term or the interest rate. It’s primarily used to receive a lower interest rate and more affordable payment.
Cash-Out – This method is rare due to the higher risk it poses to the bank. It’s often used to pay off other debts because it provides the homeowner the opportunity to get a “pay out” of their home’s equity by taking out a replacement mortgage that’s more than the original.
Cash-In – The opposite of a cash-out refinance, in simple terms it means you bring cash to the closing table to reduce the overall mortgage balance and qualify for more beneficial refinancing options. Obviously, it’s not often people have a large sum of money on hand, so this option isn’t as commonly utilized.
Other Things to Keep in Mind
Refinancing can be beneficial for many reasons – most notably it can save you money on interest or help get debt under control – but there are drawbacks to keep in mind as well. For example, the refinancing process involves paying three to six percent of the principal loan up front and includes appraisal, title search and application fees. If your closing cost is more than you will end up saving in interest, it may not be worth it to refinance. It’s important to consider how long you plan to live in your home before you make any decision.
Work with Trusted Mortgage Professionals
Refinancing can be a complex process with many different avenues you can take depending on your current credit and financial situation, which is why working with a trusted mortgage professional is critical for getting a loan with terms that are right for you. The experts at Pinnacle Capital can help ensure you’re getting the best possible loan for your situation. Contact one of our many locations for a free consultation today!