What is a mortgage refinance and when to consider it

The road to owning a home isn’t always simple and doesn’t end the day you receive your keys. When that day comes, you usually still have 15 to 30 years of mortgage payments waiting. In the meantime, some changes are expected, especially related to finances.

If so, consider refinancing your home loan.

What is home loan refinancing?

When you refinance your mortgage, you take out a new loan to pay off your existing mortgage. The difference: this new loan has new (hopefully better) terms. Here are the top reasons to consider refinancing your mortgage:

  1. Your monthly payment may be reduced. Refinancing to a lower interest rate or longer term loan can significantly reduce your monthly mortgage payments, making it easier to pay off and cover other expenses and liabilities.
  2. You pay less interest over the life of the loan. When interest rates drop, you may find yourself in a position to secure lower interest rates. This can lead to significant savings between now and the end of the period.
  3. you are your residential property: Also known as cash refinancing, which is when replacing an existing mortgage with a new one with a higher balance. You then receive the difference in the form of cash and use it to fund other costly expenses and projects.

How does a mortgage refinance work?

Refinancing takes about 30 to 60 days. The process itself is similar to when you applied for your original mortgage, so be sure to collect and prepare all your important financial documents ahead of time to ensure a smooth process. As seamlessly as possible.

“Lenders will need to double-check your finances to determine your ability to repay the new mortgage. They will also re-evaluate your home to get an updated property value,” BMO said. said Thomas Parrish, Managing Director and Head of Retail Lending Product Management at The Financial Group. “Various documents (income documents, property statements, property insurance policies, etc.) must be provided to the lender. I will decide what.”

Pro Tip: Get pre-approved from multiple mortgage lenders so you can compare rates and terms and choose the most favorable option.

Refinancing—by the numbers

How much can you actually save by refinancing? Let’s break it down.

Let’s say you have a $300,000 20 year fixed rate mortgage with 15 years remaining.

Your Interest Rate: 6% (the current national average for a 30-year fixed rate loan is 7.04%).
Monthly payment amount: $2,200
Mortgage balance: $270,000

Now suppose you refinanced to a 15-year mortgage (approximately the remaining term of the original loan) at a lower interest rate.

New interest rate: 3.5%
New Loan Term: 15 years

By lowering the interest rate and choosing a 15-year term, you can save:

New monthly payments: $1,930.18
Monthly savings: $269.82
Different interests: $48,567

Why not calculate the numbers yourself? Try using our mortgage refinance calculator below.

What are the pros and cons of borrowing?

Many experts agree that if refinancing your mortgage helps you save at least 1%, it may be worth paying all the extra paperwork and fees. But if the savings aren’t that great, you might be better off sticking with your current mortgage and original terms. Here are some of the pros and cons to consider when considering refinancing .

Pros: Lower monthly payments. One of the obvious benefits of refinancing your mortgage is that you can secure a lower interest rate and thus lower monthly payments.

Pros: You Can Get Rid Of You private mortgage insurance (PMI). If you made a small down payment when you first bought your home, you may be responsible for monthly PMI payments to cover the risk your lender assumed when financing your home. Refinancing is one way to remove this requirement. The cost of PMI depends on many factors, but generally: freddie mac estimate the cost Between $30 and $150 per month for every $100,000 borrowed.

Cons: You will incur closing costs. Refinancing is not free. So you’ll have to do the math to determine if you’re actually saving enough money to justify these additional costs. If you refinance, you will incur closing costs…again. This could range from 2% to 5% of the value of the refinancing. “Some aspects homeowners should keep in mind when refinancing are the costs associated with it,” Parrish said. “generally, [there are] Closing costs such as origination fees, assessment fees, title searches and insurance, searches, recording fees, closing attorney fees and taxes. ”

Cons: Refinancing doesn’t always help you save money. If you plan to move, or if you can’t secure a low enough rate, refinancing can actually cost you more than you can save. If it’s $50 less than your previous payment, you’ll have to stay home for at least 100 months before breaking even.

Takeaway

Refinancing is not a panacea for housing costs. While it can help some homeowners cut back on their spending, whether or not you attempt to refinance your home loan will largely depend on your financial situation and the interest rate you’re being offered.

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