What is Refinancing?
Per Merriam-Webster, the term refinance verb
re·fi·nance | \ ˌrē-fə-ˈnan(t)s , (ˌ)rē-ˈfī-ˌnan(t)s, ˌrē-(ˌ)fī-ˈnan(t)s\
Definition of refinance: to renew or reorganize the financing of something : to provide for (an outstanding indebtedness) by making or obtaining another loan or a larger loan on fresh terms refinance a mortgage.
There are plenty of reasons to consider refinancing your current mortgage including lower your interest rate, lower your monthly payment, switching to a shorter payoff term, or pulling cash equity out.
“With rates tumbling, pay a little more now and retain the flexibility to refinance again next year.”
Why would I pay off my current mortgage with a new one?
MONTHLY SAVINGS
If interest rates have declined since you initially purchased your home, you could qualify to refinance your mortgage and reduce your monthly payment with a lower interest rate. There are some streamline refinance products that don’t even require a new appraisal. Also, if your current Loan-to-Value ratio is at or above 80%, you could refinance to remove mortgage insurance from your monthly payment!
CONSOLIDATE DEBT
If you have substantial equity in your home, it could be worth looking at pulling cash equity out of your home to allow for debt consolidation on high-interest debt.
POOL ADDITION OR HOME IMPROVEMENT
It could be time to borrow from your equity to do home improvements.
What are my loan options if I refinance?
RATE & TERM REFINANCE
In a rate and term refinance, you would typically be getting a new mortgage with a lower interest rate. You can also choose to shorten the payment term, like moving from a 30-year term to a 15-year term.
With the recent record-low interest rates, refinancing your 30-year mortgage into a 15-year mortgage may end up getting you similar monthly payments as your original loan. This is because of the lower amount of interest you would be paying on your new mortgage, even though 15-year mortgage payments are usually higher than 30-year loans.
CASH-OUT REFINANCE
In a cash-out refinance, you can refinance up to 80 percent of the current value of your home for cash. Thus, why it is called cash-out refinance. So, say your home is valued at $200,000 and you owe $120,000 on your loan. Your bank or lender can give you, as a qualified borrower, $40,000 in cash-out, making your new mortgage be $160,000.
In a cash-out refinance you are not always saving money by refinancing, but instead getting a form of a lower-interest loan on some needed cash. Reasons for taking a cash-out refinance could be that you may want a new pool for your backyard, to do home renovations, or to go on a dream vacation.
It’s important to note when taking cash-out that there is an increase in the amount of your lien, which could mean larger and/or longer term payments.
Deciding to refinance your mortgage is not something to be taken lightly. Consider the cost of the refinance versus the savings in return. Talk to a financial planner if you are concerned about whether or not to refinance, along with other options available to you.
What happens to my old loan?
When you refinance, you replace one mortgage with another. Funds from the new mortgage will be used to repay the old loan.
Refinancing also means that loan servicing may be transferred from one servicer to another. This is the time when you need to work carefully with your new lender and your old lender.