How the timeframe of your loan will change by refinancing
Since refinancing replaces your old loan with a new one, it changes the overall years of your loan term as well. Contingent on which new loan product you decide on, that loan term could be extended or shortened.
Here are some examples that will guide you:
- You have twenty years left on your current home loan, but refinance into a new thirty-year mortgage. In this example, your term would get longer. This means an additional 30 years until the loan is paid off in full.
- Take that same twenty-year example. This time, you refinance only into a fifteen-year loan. This will shorten the time to pay off your loan, now reducing it down to just fifteen years.
- The advantages or disadvantages will depend on your goals for refinancing your mortgage. If you want to pay off your loan quicker or want to pay less in overall interest, financing into a shorter-term loan can help (though it will mean a larger monthly payment as a result). If you’re merely searching for a lower payment, selecting a longer-term loan is typically best.
How refinancing your mortgage can help you as a homeowner
Your personal finances typically will fluctuate over the years. You will build equity; your salary may increase; or you’ll pay off debts and better your credit score. As your finances do better, you’ll likely gain access to better mortgage opportunities than you did when you first purchased your home. It’s also likely that mortgage interest rates will fluctuate over time. If rates have dropped since you took out a home loan, it’s a good prospect that you can refinance to a lower rate and save money — even if your finances look like they did when you purchased the house.
You can also remodel or renovate your home loan when you choose to refinance. You can select the number of years in your loan (your ‘loan term’); you can select the type of interest rate (fixed-rate or adjustable-rate); and, you can even select what you will owe in mortgage closing costs.
Many people refinance just to get a lower overall mortgage rate. But a refinanced mortgage can also assist you in paying off your home sooner, stop mortgage insurance, or utilize your home equity to eliminate debt or fund home renovations.
What are the costs of refinancing?
Your refinancing costs will be very close to what you had to pay when you initially applied for your home mortgage. You’ll need to finance a credit check, title search and policy, appraisal fees, origination and underwriting fees, and possibly more. According to Freddie Mac, the average cost to refinance is almost $5K.
Once you have applied for pre-approval with a mortgage lender, he or she will give you an estimate highlighting the anticipated costs for your particular refinance.
The mortgage refinance method
When you get a refinanced mortgage loan, you are setting up a brand-new home loan with brand-new conditions and terms. This usually means you will go through the full mortgage application and approval process again.
Most mortgage underwriters will evaluate your application in 3 particular areas:
- Credit score and credit history
- Income and employment history
- Assets and money reserves
Your home will be appraised to assure its current market value, just as it was when you got your current loan.
Despite the similarities between purchasing and refinancing, borrowers can usually expect to provide less documentation going through the refinancing process. You will still be asked to provide evidence of current income using W-2s and pay stubs; proof of assets via bank statements; and proof of citizenship or U.S. residency standing.
You will not be asked to provide documentation regarding the original transfer of the home. Refinance mortgages often close in thirty days or less.
Keep in mind that real estate market conditions can impact closing dates. If interest rates come down and homeowners rush to refinance at the same time, it can then take 40-45 days or longer to close.
You Can Get Money Through a Refinance
If you’re in need of money in hand—to pay for remodeling, health bills, college, or even to pay off high-interest credit cards—refinancing may be a good option for you. Also called “cash-out refinances,” these let you to take out a loan bigger than the one you have now, taking the balance in cash.
The amount of money you can withdraw will depend on your home’s current market value and how much equity you’ve accumulated for the property.
Example: Let’s say you made a $50,000 down payment on your house and you’ve paid $20,000 toward your principal since you purchased. You now have $70,000 in overall home equity. So long as your home hasn’t lost market value, you could utilize a large amount of that via a cash-out refinance.
Is Refinancing Worth It?
To better gauge if a mortgage refinance is worth doing, you will need to have a great understanding of your finances and your overall goals.
Start with, how long will you be in the home? You would want to be in the house long enough to reach what’s called a “break-even” scenario—the point in time when the cash you saved on the refinance outweighs the costs of refinancing. If you decide to move away in the next 5 years, and it will take ten years to realize the savings of your refinance, then it may not be the best move for you.
Also take into consideration your own financial situation. If cash is tight or your income has been reduced, refinancing into a lower rate and longer loan term may be important to make your mortgage payments more affordable. Contact a local mortgage lender for details on refinancing your mortgage.
