You own a home, you have a mortgage and you know that, after some time, you’re supposed to consider refinancing that mortgage.
At least that’s what friends and neighbors are doing.
But what exactly does it mean to refinance? And why should you do it? You’d be hard-pressed to find a clear-cut answer to those questions — at least one without tons of jargon and other fancy mortgage terms you’re not familiar with.
Want refinance guidance that won’t just confuse you more? This no-jargon guide is here to help.
What is a Refinance?
Put simply, refinancing is closing out your old loan and replacing it with a new one. It requires the same process you used when you initially purchased your home: you’ll choose a mortgage company (or use your old one), fill out a bunch of paperwork, show them your income and assets, and in the end, you’ll get a new loan, rate, and monthly payment.
Why Would You Want to Refinance?
There are several reasons you might want refinance. Many people do it to lower their monthly mortgage payments, shorten the overall length of their loan (changing from a 30-year loan to a 10-year one, for example), consolidate their mortgage, credit cards, and other debts, or to leverage their stake in the home for some extra cash flow. You may also want to refinance if your current loan has an interest rate that fluctuates (called an adjustable rate mortgage).
Typically, refinancing is a good move if:
- Current mortgage rates are lower than the rate you have on your current loan
- You have an adjustable rate mortgage and your rate is about to change
- You have several different kinds of debt you’d like to roll into one convenient monthly payment
- You need cash and want to use your home to get it
Is Refinancing Right for You?
It’s important to do the math before you decide whether to move forward with a refinance. Like with your first mortgage, refinancing will come with some costs. Closing costs on refinance loans typically range from 3 to 6 percent of the loan’s total — so it could mean considerable costs on closing day.
Though refinancing to a lower rate may mean lowering your monthly payments, if you only have a few years left on the loan, you might not save enough to make the refinance worth it. Take into account both the savings and costs of a refinance — and make sure you stand to come out on top.
Not sure if you should refinance your mortgage? An Embrace Home Loan officer can help. Contact us today to learn more.