By Dan Brown
I’m often approached by clients who are curious about refinancing: what it is, when it’s the right time to go about it, and why they should consider it.
A refinance is the process of swapping out your existing mortgage loan with a new one that’s based on a current snapshot of your financial situation. The process is similar to when you first secured your mortgage loan, except this time it uses up-to-date information including the latest rates and your current home value, credit, and income levels. Although refinancing doesn’t make sense for every homeowner, there are instances of when you should consider refinancing your existing mortgage to realize a range of benefits.
What Refinancing Can Do For You
It’s a commonly held belief that when interest rates decrease substantially, generally about one percent or more, then it’s a good time to refinance. I always encourage yearly financial checkups to ensure that my clients’ existing mortgages complement their short and long-term financial well-beings, instead of just focusing on the rate. Below are some key benefits to consider.
Lowering Your Monthly Payments
Budget and lifestyle aren’t always in sync, which makes a reduction to your monthly payments a great reason to consider a mortgage refinance. In cases like this, I focus on a detailed analysis to make sure any additional costs associated with the new loan still lead to an overall benefit for my clients. Refinancing can save you by:
- Eliminating monthly mortgage insurance premiums. Depending on the current value of your property, you may qualify for a refinance loan that doesn’t require monthly mortgage insurance. Similarly, you may be able to qualify for a different type of loan, such as moving from an FHA to a conventional mortgage, where the mortgage insurance payments can be reduced or even eliminated at some future date.
- Extending the length of your loan. Life is constantly changing and sometimes it makes sense to recast your mortgage to a longer term, which will reduce your payments today. This can help prevent stress as well as help avoid potential, more significant issues like falling behind on your payments or worse. Handling all monthly obligations is important and adjusting your mortgage payment based on your current situation can be a key component to finding the right balance for you.
- Enabling you to take advantage of lower interest rates. Although we are not currently in a decreasing rate environment, if you qualify for a mortgage with a lower rate, it can translate into lower monthly payments, which could save you tens of thousands of dollars over the life of the loan.
Becoming Debt Free Sooner
While it might seem counterintuitive to consider a new mortgage, there are times when taking out a new loan can actually help pay off your mortgage debt faster. For example, if you are making additional principle payments to pay off your existing mortgage faster, then refinancing to a new loan with a shorter amortization schedule could provide additional benefits. Since mortgage interest accrues on a daily basis, the main benefit to a short-term mortgage is that you pay less interest over the life of the loan. The benefits of a 20-year or 15-year mortgage can surprisingly offer significant savings.
I encourage my clients to take the time to understand the benefits of finding a better balance today. That can lead to owning your home free and clear at a younger age, which could lead to additional opportunities like owning a vacation home or lowering your expenses during retirement years.
Using the Equity in Your Home
The “equity” in your home is the difference between what your home is worth and what you owe in mortgage. For example, if your home is worth $300k and you owe $200k on your mortgage, you have $100k in equity. In some cases, it can be financially advantageous to “cash out” your mortgage, or call upon the equity in your home, to finance other immediate needs. Over the years, I’ve helped many clients refinance to consolidate non-mortgage debt, pay for tuition, finance home improvements, invest in other opportunities, satisfy unexpected medical bills, and so much more. Leveraging the equity in your home can be a very sound strategy when balancing the needs of today with the long-term strategies of the future.
The Bottom Line
Ultimately, there are a variety of circumstances that might call for you to refinance your mortgage. It can be a great way to improve your family’s finances. However, it’s worth having an in-depth discussion with an experienced mortgage professional to gain a complete understanding of your choices and their potential impact. I’m here to help answer your questions. Please don’t hesitate to contact me if you’re interested in learning more.