December 8, 2020
What are the benefits of refinancing?
Every so often there seems to be a lot of chatter about refinancing your home. You may hear interest rates have fallen or might want to consider consolidating your debt. Whatever your reason, it is important to consider some of the benefits of refinancing your mortgage? Some of the most popular reasons to refinance include:
- Getting a better interest rate compared to your current loan
- Lowering your monthly payment
- Having more predictable costs each month — a fixed rate vs. an adjustable rate mortgage (ARM)
- Consolidating debt
- Paying off student loans
- Accessing cash from the equity in your home
- Improving your home
- Shortening the length of your loan
- Combining two mortgages into one
- Eliminating your mortgage insurance
What are the different types of refinancing?
There may be different reasons to consider refinancing, so there are different refinancing options available. In general, most refinancing can be categorized into these types:
- Rate and Term Refinance. This refinancing option is just like it sounds — it allows you to adjust your rate (interest rate), term (length of the loan and type), or both. For example, you could change from a 5-year ARM to a 30-year fixed rate mortgage with a low interest rate.
- Cash-Out Refinance. Once again, just like it sounds — a cash-out refinance allows you to take advantage of the equity in your home and refinance to a lower interest rate while taking out cash to use for different purposes.
- Home Equity Line of Credit (HELOC). A HELOC is not offered by all financial institutions but allows for refinancing with a line of credit secured with the value of your home.
- Interest Rate Reduction Refinance Loan (IRRRL). An IRRRL is geared towards reducing the interest rate on a VA loan through a lower rate VA loan.
What are the steps to refinancing your home?
Refinancing your mortgage to a loan with a better interest rate can save you a significant amount of money over the life of your loan. As with most things, you need to understand if refinancing to a lower rate is right for you based on a number of factors. Refinancing your mortgage involves several steps. Just like your original purchase, you should think about the following:
- Understand your goal for refinancing. Do you need to consolidate debt, reduce your monthly payment, or something else?
- Determine if refinancing makes financial sense. Think about your goals, current rates, and if the fees and costs of refinancing are worth it.
- Check your credit score and financial readiness. You are reapplying for a mortgage by refinancing and you'll need to ensure you are in a good financial place to refinance.
- Determine how much equity you have in your home. This can be tricky, but you'll need to understand current home values in your area and how much equity you have with your current loan.
- Get an appraisal on your home. You'll need an appraisal to determine the current market value of your home.
- Find a lender like PenFed. Your lender should work with you and coordinate all your refinancing needs.
What are the fees involved in refinancing your home?
When you refinance your home, you’re changing from one mortgage type to another. Therefore, you should expect some fees and costs when refinancing. Here are a few you can expect:
- Appraisal fees
- Title fees — you'll need to document the title of the property
- Attorney fees (if necessary)
- Recording fees
- Points — if you want to reduce the interest rate even further you can pay points like during a purchase, where one point represents 1% of the total loan amount
Is refinancing right for me?
As you walk through your needs, goals for refinancing, credit score, and more, you can work with your loan expert to determine if refinancing your mortgage is right for you. While making your calculations, you'll need to determine if you’re refinancing to reduce your monthly payment or to extend the term of your loan. If you refinance and get a lower rate, are you adding years to your payments? There may be a reason to do so, but it is always important to understand the total costs of potential total savings over time.
If your goal is to reduce to a shorter-term mortgage — let's say a 30-year fixed mortgage to a 15-year fixed mortgage — your interest rate will likely be lower, but your payments will likely be higher because you are spreading the debt over a shorter period. The interest savings over the life of the loan by reducing from 30 years to 15 years can be huge.
As you can see, the factors involved in determining if refinancing is right for you can range from interest rates, to goals, to the equity you currently have, along with many other factors — like how many more years you plan on being in that home or how many years you have left in your current mortgage.
Overall, this article illustrates some things to think about as you determine if refinancing is right for you. After you've done some homework, it's probably worthwhile to talk to your lender and review your options.
To learn more about refinancing and if it’s right for you:the Mortgage Center