You’ve probably heard about some of the benefits of refinancing. It can help you lock in a lower rate, reduce your term, and even cash out your equity for extra buying power. But how do those benefits translate to everyday life, and how do you take full advantage of them? We’ll answer five of the most common refi-related questions borrowers ask us, so you can be strategic when considering changes to your mortgage.
1. What are the benefits of refinancing?
The benefits of refinancing differ depending on your situation and financial goals. Refinancing may enable you to:
- Reduce your interest rate to lower your monthly payment and/or pay less over the life of your loan.
- Switch from an ARM to a fixed rate to avoid future rate increases as the market fluctuates.
- Use your home’s equity to fund home improvement projects, pay off debt, or invest in another property.
- Consolidate debt to take advantage of a lower rate compared to the interest rates of credit cards and student loans.
- Reduce the term of your loan to help pay off your loan faster and pay less overall.
Want to learn more about these benefits? Explore the 10 Reasons You Should Refinance.
2. What are the different types of refinance options?
Refinances come in various shapes and sizes. The different types of mortgage refinance loans generally fit into three categories.
In this type of refinance, you’re only able to change the interest rate or the loan length. Cash back is not an option. These include:
- Conventional Refinances
- FHA Refinances
- VA Refinances
Cash-outs can be useful when you’ve built up equity and want to use it to pay off debt or fund projects such as home improvements. These include:
- Home Equity Loans
- Cash-Out Refinances
- Home Equity Lines of Credit (HELOCs)
Wondering how these differ? Compare a HELOC to a Cash-Out Refi.
Streamlines are only available for government-backed loans like VA loans and FHA loans. They are known for being faster, simpler, and easier to qualify for than their traditional counterparts. These include:
- FHA Streamline Refinances
- VA Interest Rate Reduction Refinance Loans (VA IRRRL)
3. Fee-based or no-cost: Which is better?
When given the option to pay closing cost fees or not, it can be tempting to think a no-cost refinance is the obvious choice. However, it’s important to realize that a no-cost refinance isn’t necessarily cheaper.
A no-cost refinance wraps fees into the loan instead of charging fees up front. This is possible when you refinance at a higher interest rate and/or a higher monthly payment. You’ll also likely pay more interest over the life of the loan. That’s not necessarily a negative; there are many reasons to want to avoid the immediate expenses that can come with refinancing.
Once again, it comes down to what makes the most sense for your situation.
4. Do I need an appraisal?
You often need an appraisal for a mortgage refinance. An appraisal assesses your home’s current value based on a physical inspection and comparison to similar properties. While it adds time and costs to the refinance process, an appraisal is helpful to both you and your lender. It’s necessary to ensure you aren’t borrowing more money than your home is worth.
There are, of course, exceptions. Appraisals can often be waived for some types of government-backed loans. That’s part of what makes a FHA Streamline Refinance and VA Streamline Refinance so appealing.
5. When is the best time to refinance?
The short answer: It depends. Market conditions can cause an influx of refinances, but there isn’t one time that makes sense for everyone. The best time for you may be when no one else is talking about it. Here are three possible strategies:
When it will save you money in the long run
- There is often buzz about refinancing when interest rates start dropping. That’s because a lower rate, especially coupled with a shorter term, can save you thousands over the life of your loan. Just keep in mind that a shorter term may increase your monthly payment.
- You may also consider refinancing if you have an Adjustable Rate Mortgage (ARM) and want to avoid the risk of higher rates as your fixed-rate period ends. Locking in a lower fixed rate will save you money and worry about future rate fluctuations.
When it will lower your monthly payments
- If you’re experiencing financial strain, it may be helpful to use refinancing as a tool to provide immediate financial relief. A lower rate or longer term can help lower your monthly mortgage payments and add more cushion to your budget.
- If you have private mortgage insurance (PMI), consider refinancing once you’ve built up equity equaling 20% of your home’s value. Getting rid of monthly PMI payments will open up funds for you to save or pay down the mortgage principle.
When it’s beneficial to use your home’s equity
- Many consumers appreciate the option to use equity to finance home improvement projects that raise their home value such as a remodeled kitchen or outdoor patio.
- Did you know refinancing could help you pay off debt? Used carefully, a HELOC or cash-out debt consolidation mortgage can help make your payments more manageable and help you pay less interest over time.
As you can see, these questions rarely have cut-and-dried answers. That’s why it’s important to educate yourself and not be afraid to seek guidance from a professional.