Refinancing 101

As expected, many prospective buyers are contemplating if now is the right time to buy as interest rates are higher than they’ve been in years!

Did you know, the experts say that, in fact, the next few years is the best time to buy? Why, you ask? Because prices are only going to go up! Dave Ramsey, an American personal finance personality, offers his advice, “Buy the house. If interest rates come back down, refinance, but don't not buy, waiting on interest rates to come down.” 

So, what is refinancing? Essentially, you are trading in your current loan for another with a lower interest rate, different terms, and/or a new principal balance. The new loan is to pay off the old loan so that you’ll have just one new monthly payment remaining.

Refinancing a mortgage can be greatly beneficial to homeowners, depending on their circumstances and financial goals. Whether you would like to lower your interest rates, lower your monthly payments, build more equity, or change your loan type, refinancing may save you thousands of dollars in interest alone, if you refinance at a time when it will most benefit you!

Typically refinancing will best benefit you if your financial circumstances have improved since you applied for the original mortgage loan. If your credit or financial circumstances have not improved, you may consider waiting until your circumstances are better to apply for a rate and term refinance so that you can get the best rate and terms possible.

The three types of refinancing options are rate and term refinance, cash-out refinance, and cash-in refinance, all of which have their own pros and cons associated with each of them, and typically take between 30-45 days to close. 

Rate and term refinance is the refinancing option that interests our current buyers the most as we’ve recently seen interest rates spikes. This refinancing option allows homeowners to change their existing mortgage loan interest rate, term, or both. 

Rate Refinance example: Changing your interest rate from 5.5% to 4%

Pros: Reducing your interest will help you save on your monthly payment and over the life of your loan.

Cons: If you decide to move forward, you will be responsible for closing costs.

Term Refinance example: Changing your loan term from a 30-year to 15-year loan or from a 15-year loan to a 30-year loan

Pros: If your loan term is shorter, your monthly payment will increase, but you’ll pay off your loan sooner. 

Cons: If you change your loan term to be longer, your monthly payment will decrease but will take longer to pay off and you’ll have to pay closing costs.

A cash-out refinance is when you cash in on the equity of your home. In this type of refinance, the new loan may also offer a lower interest rate or shorter term but the goal is to ultimately pull cash out of the equity you have in your home. Oftentimes, this cash is used to pay off debt, to use for home improvements, or to use for home repairs. 

Cash-out refinance example: your home value is $300k, the current loan balance is $200k, the new loan balance is $250k, and the cash you received at closing was $50k (minus closing costs).

Pros: If you cash out refinance, you’re able to pull cash out to take care of other various expenses. 

Cons: The downside is you’ll be responsible for paying closing costs and your rate may not be as low as it once was, as you’ll be subject to current interest rates. 

With a cash-in refinance the homeowner brings cash to closing in order to pay down their loan balance. This type of refinance could lower your mortgage rate, shorten the loan term, or both. 

Pros: Homes with lower loan-to-value ratios (LTV) are often eligible for lower interest rates and are also often eligible to remove private mortgage insurance (PMI), which can also save you hundreds per month. With a cash-in refinance, you can reduce your overall debt and will have more equity in your home. 

Cons: A cash-in refinance will leave you with less cash in the bank, which may leave you less money to invest or spend elsewhere, and you may also incur closing costs. 

All in all, refinancing your mortgage can be a great move for your financial health if it proves to be beneficial to you. 

Want to know if refinancing is right for you? Chat with a lender about your options! They can give you a snapshot of what your new loan amount, loan terms, interest rate, and closing costs will look like so that you can decide if refinancing your home would benefit you.