Refinancing may be a good option for you if you’d like to lower your mortgage payment or pay off your home loan faster. Indeed, there are plenty of advantages and determining whether those advantages will benefit you is worth further inspection – especially with rates expected to increase.
Let’s take a closer look at refinancing, what it entails and whether it would be a good choice for you.
What is Refinancing?
When you refinance, your lender replaces your old mortgage with a new one. Most people do this to lower their monthly mortgage payment, but others change from a 30-year mortgage to a 15-year mortgage so that they can pay off their mortgage debt more quickly. One thing to note is that refinancing is not a second mortgage. A second mortgage gives you money from your home equity while refinancing gives you a new mortgage altogether (ideally with better terms).
The Two Major Types of Refinancing
Rate-and-term involves refinancing your remaining balance for a reduced interest rate and to shorten the number of years it will take to pay off the loan.
Another type is cash-out, in which you take out a new mortgage for more than you owe. You can use the difference in cash to pay off existing debt.
Is it a good idea?
As mentioned, the two primary reasons for refinancing are lowering your monthly loan payment and decreasing the amount of time it takes to pay off your loan.
- Lower monthly payments means paying less for your home overall while also freeing extra cash that you can use for short- and long-term savings goals. You can also use the cash to help pay off other debts.
- You’ll build equity in your home faster if you pay off your debt more quickly. But remember, your monthly payment will be higher if you take this route.
Other reasons to refinance your home include consolidating your debt, replacing an adjustable-rate mortgage with a fixed-rate loan, in which your payment remains the same for the length of the loan, eliminating FHA mortgage insurance, and earning more from your investment property.
Is refinancing right for you?
One way in which you can determine if a refinance is for you is to calculate the break-even point, i.e., the time it will take for the mortgage refinance to pay for itself. The break-even point is determined by the total closing costs and your monthly savings. So, if the closing costs of your refinance are $3,000, and you’re saving an extra $100 per month, it would take you 30 months to break even. If you don’t plan on keeping your house for longer than 30 months, it’s probably a good idea to stick with your current mortgage.
The most important question you should answer before deciding whether refinancing makes sense for you is: “What do I want out of this refinance?” Again, the answer may be lowering your monthly mortgage payment, shortening the terms of your loan, and more.
Peoples Bank’s Home Loan Center offers you a complete mortgage loan service, including refinancing your present home. Our staff has years of mortgage loan experience to serve you.
Get started on refinancing your mortgage today!