Mortgage refinancing is a simple, common process of replacing your existing mortgage with a new mortgage for the same property. The funds from your new mortgage are used to pay off your existing loan.
Deciding if or when to refinance isn’t always easy. You may want to save money every month, cut your total interest expense over the life of your loan, or achieve other important financial goals. The shortcut to a faster decision is to focus on your reasons or goals for refinancing.
5 reasons to refinance your mortgage
Among the many reasons to refinance, here are five that may fit your situation:
1. Lower rate or payment
If are lower than the current rate on your existing mortgage, you may save money by refinancing to a lower rate. Your monthly payment may also be lower.
A could help you estimate how much of your monthly payment would be applied to principal and interest with a lower rate.
2. Switch from adjustable to fixed or fixed to adjustable
A fixed interest rate protects you from rate fluctuations that could trigger a higher payment with an . An adjustable rate can give you a lower payment for an initial set period, after which your payment may be more if rates move higher.
3. Change your repayment period
With a shorter term, such as 15 years instead of 30, your payment typically will be higher, but you should pay less interest expense over the lifetime of your loan. With a longer term, say 30 years instead of 15, your payment typically will be lower, but you’ll probably pay more interest expense over your loan’s lifetime.
4. To stop paying for mortgage insurance
Some types of loans allow borrowers to cancel their when they have enough equity in their home. If your loan doesn’t allow cancellation of mortgage insurance at any level of equity, you’ll have to refinance into a new loan to stop paying for it.
5. Add or remove a borrower
A change in personal or family circumstances, such as a divorce or an inheritance, may make refinancing necessary to update who’s responsible for repaying a mortgage loan.
One reason not to refinance
One time when you may not want to refinance is when you’re planning to sell your home in the next few years. In that case, the benefits of refinancing may not outweigh the costs and the time involved to complete the refinance process.
3 types of mortgage refinances
In addition to your goals for refinancing, you should consider what type of mortgage refinance might fit your needs.The options include:
1. Rate-and-term refinance
A rate-and-term refinance occurs when your new loan amount equals your current loan’s outstanding balance. Your rate, repayment term, or other aspects of the loan may be changed.
2. Streamline refinance
A streamline refinance occurs when you replace your current loan with a new loan of the same type and the paperwork and documentation requirements are simplified.
Two types of loans that allow streamline refinancing are , which are insured by the Federal Housing Administration (FHA), and , which are guaranteed by the U.S. Department of Veterans Affairs.
3. Cash-out refinance
A occurs when your new loan amount is significantly higher than your current loan’s outstanding balance and the difference is paid to you in cash. This type of refinance reduces your equity in your home, but allows you to use the cash for home improvements or other expenses.
Costs to refinance your mortgage
Refinancing isn’t free. Examples of costs you’ll probably have to pay include an appraisal fee, loan origination fee, and title search and insurance costs.
One type of fee that you may encounter when you refinance is optional. It’s called a “buy-down” and it’s a form of prepaid interest. If you elect to pay it, you should receive a lower interest rate for an initial period for your new loan.
Some borrowers choose to pay refinancing costs upfront in cash. Others prefer to wrap the costs into their loan through a higher loan amount or a higher interest rate. Which options you choose may depend on how much cash you have available.
Shop around to save when you refinance
Regardless of your reasons for refinancing, you should shop around and compare refinancing offers from several lenders to find the lowest rates available to you. The rates and fees you’ll be quoted will depend on your income, your credit score, the type of loan you want, your desired loan amount, and your home’s current value, among other factors.