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Congratulations on being a proud homeowner! If you purchased your home with a loan more than a few months ago, you may have heard about the option to refinance. Refinancing your existing home loan can be a great way to reduce your monthly mortgage expense, or potentially extract some cash from your home equity.
As with any loan decision, it is important to carefully consider all your options and the long-term impact of changes to your loan to ensure a refinance is right for you.
A refinance is generally a new loan that replaces your existing home loan. There are a few reasons to refinance your existing home loan:
One of the most common reasons people refinance a home loan is to lower the interest rate on their existing loan. This can help you save money, decrease the amount of your monthly payments, and help you build equity faster in your home. Another reason people refinance their existing loans is to replace an adjustable-rate mortgage with a fixed-rate loan. An adjustable-rate mortgage can be a great option when rates are low, but comes with the risk of rate increases as the market changes. As rates are beginning to climb, it may be a good idea to refinance to a fixed-rate loan to lock in a good deal before your rate changes.
If you are considering a refinance, remember to consider the full lifetime cost, e.g. total value of all payments, of a refinance to ensure it is the right choice for you.
The term of your loan is the number of years it will take you to repay your loan. The options for a refinance loan term are the same as any other loan type. Adjusting the term of your loan often has an impact on the potential interest rate you can receive on your loan. For instance, refinancing from a 30-year loan to a 15-year loan could mean you have higher monthly payments in the short-term, but you will pay less over the life of the loan.
It is important to consider the rate and term together when deciding if a refinance is right for you.
You can also use a refinance to borrow additional cash against the value of your home. This is called a cash-out refinance, or cash-out refi. In this type of refinance, you, the borrower, refinances your loan for more than the current outstanding balance. You then keep the difference between the old loan and new loan as cash. This can be a helpful option if you have investment opportunities, want to pay off some other debt, or want to pay for home improvements. Also, cash-out refis often offer cash at better interest rates than unsecured personal loans or credit cards.
However, you should be careful about the additional risk to your home associated with a cash-out refi. If housing values drop, the amount of your loan could be higher than the value of the home.
As your mortgage is likely to be one of the biggest monthly expenses your family, it is always a good idea to keep a close eye on interest rates and loan offers to ensure you are never paying more than you have to.
Remember, you will likely have to pay mortgage closing costs on a refinance loan, so you will always want to make sure to calculate your break-even point. The break-even point is the time it will take for the savings from a refinance to pay off the closing costs of the new loan.
When you are considering a refinance, you will want to keep in mind some of the following:
And of course, be sure to regularly comparison shop for rates and loan offers from multiple lenders to ensure that you don’t miss out on an opportunity for a better loan position!