The idea of refinancing is to pay off your existing mortgage and take out a new one, preferably at a lower interest rate. There are many reasons why people choose to refinance. Here are some reasons for refinancing:
- Lower monthly payments – By refinancing at a lower interest rate you can typically enjoy lower monthly mortgage payments. In order for this to work interest rates usually must drop .75% -1% below your current rate. You can also switch to a different type of loan such as an adjustable rate mortgage. This option doesn’t always make sense, so please contact us with any questions. Lastly, your improved credit score may be able to save you money with a new mortgage!
- Access ready cash – Your home’s equity is defined as the difference between your home’s value (what it may sell for) and the balance on your current mortgage. You can turn this equity into cash with a refinance that can help to make improvements on your home, pay for a kid’s college education or pay off high-interest debts.
- Shorten your mortgage term – By shortening your mortgage term you get a better interest rate and pay less in interest overall. Typically shorter mortgage terms have higher monthly payments but you will build the equity in your home faster and get your home paid off before retirement!
- Change how interest is calculated – If you plan to move and sell the home in a few years, switching from a fixed-rate mortgage to an ARM (adjustable rate mortgage) can reduce your monthly payments. ARMs typically carry a lower interest rate during the first few years of your loan, thus you pay less interest and can build more equity. If you are not planning on moving or are using your first home as an income producing property when you do, a fixed-rate mortgage is still the better option.
Refinancing can save you a lot of money but it does not make sense for every situation. If you are thinking about refinancing, we highly suggest consulting with us so we can help you choose the best possible option.