A refi is the process trading your current home loan for a new one – complete with a new interest rate and terms (aka refinancing).
But, how does the whole thing work? In a nutshell – refinancing is pretty much like securing your original mortgage.
There are two main types of ways to refinance your loan: rate and term refinancing, and cash-out refinancing.
Rate and Term Refinancing
With a rate and term refi, you’re essentially swapping your old mortgage for a new one. This new mortgage pays off your old mortgage and has new terms and rates. Normally these new terms and rates have a lower interest rate and shorter life. This means you’ll be able to pay off your loan fast and for less.
Currently, the lending industry is seeing historically low interest rates. This has made refinancing more popular than ever. The majority of homeowners are eager to save money by locking in a lower rate.
But, there are a variety of other reasons a homeowner would choose a rate and term refi. These could include:
- Getting out of an Adjustable-Rate Mortgage – Adjustable-rate mortgages have two phases. In the initial phase, your monthly payment is predictable. When the initial phase runs out, your monthly payment can fluctuate. By refinancing, you can get out of your adjustable-rate mortgage and into a conventional mortgage with a consistent monthly payment.
- Moving from an FHA Loan to a Conventional Loan – If you purchase your home with an FHA loan, you are required to have private mortgage insurance (PMI). With an FHA loan the only way to get rid of your monthly PMI is to refinance into a conventional loan. Once you have built your equity to 20% of the value of your home, you’ll be eligible to refinance.
The ultimate goal of any rate and term refinance is to save money. This means running the numbers. Refinancing isn’t free. There are costs associated with it. You’ll need to see how many years it will take until the reduction in your monthly payment pays for your refi before you can decide if this is the right decision for you.
Throughout the lifespan of your loan, you build equity in your home. But, this equity can be difficult to use because it’s not cash. A cash-out refi lets you tap into this equity. You’ll secure a new mortgage with new interest rates and the bank will give you cold, hard cash.
For some homeowners, this is a way to secure the necessary funds to do a remodel or make an investment. However, it’s important to understand you’ll most definitely be left with a larger outstanding balance than you previously had. And you’ll typically extend the term of your loan and/or increase your monthly payment.
Interested in learning about your options? Give me a call today.