What is refinancing and why should I consider it?

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What is refinancing and why should I consider it?

When it comes to finances, buying a home is one of the most important decisions you can make. And just as buying a perfect pair of jeans can take some patchwork over the years, with long-term real estate ownership comes some maintenance and adjustments along the way. Refinancing is one way to make sure you get the most out of your investment – replacing your original mortgage with a newer loan that’s better suited to your time and place.

But for those who struggle with any combination of indecision, commitments, or economic strategy, the term “finance” itself may be enough to demoralize your efforts. But don’t give up just yet, we’ve broken it down for you into a simple, digestible guide on a topic every potential or current homeowner should be aware of: refinancing.

Let’s start at the top, you buy a home and take out a mortgage to fund the next “X” years it takes to have full equity in your home. Mortgages are among the longest loans with the average US mortgage being around 25 years. This gives the economy 25 years to fluctuate its interest rates and 25 years for your personal and financial circumstances to change with it. So why not update your loan to best match all three variables as they change?

This is where refinancing comes in. There are a few common reasons homeowners choose to refinance:

  1. When current interest rates are lower than they were when the loan was taken out
  2. To modify the duration of the loan; either the buyer is able to pay off the mortgage faster than expected, or is looking to extend it in exchange for a lower monthly rate
  3. Giving up private mortgage insurance (PMI)
  4. To “cash in” a portion of the buyer’s equity in the property
  5. Switching from a variable rate mortgage (ARM) to a fixed rate mortgage

If you think you might fall into one of these categories, or if you’re curious about how best to make that decision, the rest of this article is for you!

The first point on the list will depend on the interest rates at the time of the refinancing consideration versus those at the time of its initial loan. Interest rates depend on the condition of the market itself, as well as personal economic factors such as the buyer’s credit rating. So if your credit score has increased since you took out your loan, or if the banks are offering lower rates overall, now is a good time to consider refinancing.

Each month that a homeowner pays off their mortgage is another interest payment month. For those who want to trade off higher overall costs in exchange for lower monthly payments, a longer loan may be ideal. Refinancing can help reduce your stress each month simply by replacing your current loan with a longer one. But let’s say you’ve just scored an unexpected sum of money and are looking to put it on your home equity to shorten the term of your loan, refinancing could help you cut your overall costs significantly.

Now let’s talk about private mortgage insurance. This is usually a requirement for buyers who both make a down payment of less than 20% and are using a conventional loan. If your equity has increased by more than 20% since you took out your mortgage, you may be able to refinance, say goodbye to your PMI, and save a lot of money on your monthly payment.

Refinancing with withdrawal is another popular way to modify your mortgage, and who doesn’t love having the extra cash on hand? This choice allows you to take back part of your own funds in cash, rather than keeping them in the bank. This strategy is a good idea if you need a loan with a higher interest rate than a refinance with withdrawal. For example, personal loans or credit card debt can be expensive and unnecessary if you already have capital on which to get hold of your own funds. This process is done by refinancing your existing loan with a new high balance mortgage. The difference between the two loans would be returned to the owner in cash.

Are you still with us? We are almost there!

There are therefore two different types of mortgage loans (finallyat least as far as this topic is concerned): variable and fixed rate mortgages. ARMs fluctuate with market interest rates. So, if you initially got an ARM mortgage at a low interest rate, but now, 10 years later, the interest rates have gone up, refinancing a fixed rate mortgage may ease the increases. futures, and therefore the costs to you. If you plan to stay in your home for an extended period of time, fixed rates are usually a good bet as they will lock you in at what is (likely) a lower rate. Make sure you are familiar with current interest rates before making this decision. If you get a mortgage when interest rates are high, it may be better to go for an ARM.and you can always switch later.

So, you think refinancing might be the right decision for you, what now?

Unfortunately, like most things in life, it comes at a cost. Refinancing fees typically cost between 2% and 3% of the mortgage. It may seem overwhelming, but the savings often outweigh the costs. And luckily, it’s easy to tell if they do. Simply divide the total cost of refinancing by your monthly savings. This will equal the number of months it will take you to reach the breakeven point of your trade. If you plan to stay in your home longer than that number of months, it probably makes sense to go for refinancing. Otherwise, it’s probably best to stick with your current loan.

If you’re reading this “OMG, The Stars Align, Refinancing is For Me” thinking, it’s time to take that final hurdle and make sure you’re eligible. If it seems like we’re boring, we are. You shouldn’t have to go through a process that isn’t right for you, so we want to make sure that’s the case! But the good news is, if you have a stable income, a credit score above 620, at least 20% equity, and a history of on-time payments, then things are looking good for you.

I am ready to refinance, what now?

Okay, all of the boxes are checked and you are ready to refinance. Rates and closing costs vary from lender to lender, and you want to be sure you get your money’s worth. It’s there that Refily Between. Refily is a technology-driven lender comparison marketplace, combining technology with personalized support to ensure the user gets the best deal possible. Just plug all your preferences into Refily’s platform and let them take care of the rest. They will bring you to your most suitable lender and allow you to compare them to others based on estimated rates, costs and fees.the whole package.

The hardest part of refinancing is figuring out if it’s right for you. If you are not sure, check Refily’s free comparison technology and see if it gets any clearer. They really are there to make the buyer’s experience as smooth as refinancing can be. If you’ve made it this far, it looks like you should at least weigh your options! Let Refily do the rest.

NMLS # 167283

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