Should you refinance your mortgage? Refinancing an existing mortgage loan is a great financial choice for many borrowers. One of the reasons it’s so successful for so many individuals is that it offers a variety of choices each homeowner can tailor to fit their own financial situation and goals.
What are these choices and what can they do for you? Here’s what you need to know to decide between a cash-out refinance, shortening your terms, and lowering your payments.
Refinancing to Lower Payments
One of the most popular refinancing choices is to reduce the size of your monthly payments. How does refinancing accomplish this? It can happen in several ways. First, if you financed more than 80 percent of the value of the property, you likely have to pay private mortgage insurance (PMI) on top of your payment. Refinancing once you owe less than 80 percent can remove PMI.
In addition, if you refinance when interest rates are lower, the interest portion of each month’s payment is lessened. Even if the amount of capital borrowed is the same, the lower interest rate may result in less overall money owed.
Finally, refinancing when you have paid off a significant amount of what was originally borrowed means you can borrow less this time. And the payments on a $150,000 mortgage will be lower than those for a $200,000 mortgage even over the same time period.
Refinancing to Take Out Cash
A cash-out refinance is another very popular choice for borrowers. In this scenario, your goal isn’t to reduce the payments but to access the equity sitting in your home’s value.
How does a cash-out refinance work? Consider a borrower with $300,000 left on their mortgage but whose home is currently appraised at $500,000. There is $200,000 equity available in that home if you can tap it. This homeowner could take out a new loan for up to 80 percent of the current value (or $400,000), pay off the original $300,000 mortgage, and use the remaining $100,000 for other expenditures.
Cash-out refinancing may or may not result in lower payments. If interest rates are low or you can get rid of PMI, you may get both the extra cash and lower monthly bills. However, because low-interest liquid cash is the goal, it may also result in similar or even higher payments. Many people use this option to pay off higher-interest debt and to save money.
Refinancing to Shorten Your Terms
Finally, don’t overlook the value of refinancing to pay off your loan sooner. This is a popular choice for borrowers who took out a standard mortgage when they earned less or had less financial stability. If your earning power has risen over time and you can afford to do so, you may want to get rid of your mortgage sooner and save money. It may also help those with a deadline such as retirement.
By opting for a new loan stretched over fewer years — such as a 10-year, 15-year, or 20-year mortgage — you can save thousands of dollars on interest over the course of the loan. In addition, many lenders offer better interest rates for shorter terms, adding to the money savings.
How to Choose a Refinancing Option
Which refinancing goal is right for you? The answer is unique to each borrower. The best way to find the right path is to consult with a reliable refinancing lender and learn more about how these choices will affect your particular mortgage.
Dominion Capital Mortgage, Inc. has helped homeowners refinance to improve their finances and meet their goals for more than 15 years. Call today to speak with our team and get your questions answered.