Is Refinancing Your Mortgage a Smart Idea?

You may have heard that refinancing your mortgage in a low interest rate environment is a good idea.

You may have heard that refinancing your mortgage in a low interest rate environment is a good idea. But many people do not fully understand what it means to refinance your mortgage and how it works.

Refinancing is the process of getting a new mortgage loan to replace your existing mortgage. Most people refinance to take advantage of a lower interest rate and lower monthly payments. This often saves thousands of dollars of mortgage interest over the life of the loan. But that’s not the only reason people refinance their mortgage.  You can also refinance into a new loan type or a new loan term that may help you pay off your mortgage sooner. Some people also refinance to cash out on their home’s equity.

So how does refinancing work? When you refinance your mortgage, you are taking out a new loan to replace your existing loan. You must apply for the new loan but instead of using the money to purchase a home, you are using the money to pay off your existing mortgage. A refinance often lets you choose the rate and loan terms on your new mortgage, so you can get a new loan that saves you money or helps you accomplish other financial goals. In the end you are still paying off your home, but you are making payments on a new loan.

Why refinance your mortgage? Your financial circumstances change over time. Chances are you are making more money than when you first purchased your home, and you might have paid down your debts and improved your credit score. These are all reasons you may want to consider when deciding to refinance your mortgage.

Changes in your financial picture may qualify you for better rates and terms than when you originally purchased your home. Lower interest rates also play a large part in the decision to refinance  because you might still be able to reduce your payments even if your financial picture hasn’t changed.  

Refinancing also allows you to change the features of your mortgage loan. You can choose the loan term, the loan type, and even the closing costs you pay. The loan term is the number of years in your loan; common terms are 15 and 30 years. The loan type is related to the interest rate, which can be fixed or adjustable. A fixed interest rate remains the same for the life of the loan. An adjustable interest rate changes after a predetermined number of years, such as 1, 3, or 5 years. Typical closing costs for refinancing your mortgage include loan application fee, loan origination fee, home appraisal, credit report fee, title search, mortgage points and settlement fee. Closing costs vary by lender and by state.

Most people refinance their mortgage to take advantage of lower interest rates. A refinance can also help you pay off your home sooner, eliminate mortgage insurance or you can use your home equity to fund home improvements or pay off debt. Before making the decision to refinance your mortgage, speak with a financial planner to determine if this is a smart idea for you. The financial planners at MMBB are happy to guide you through each stage of your financial journey.