What Does It Mean to Refinance a Mortgage?
Refinancing involves replacing your current mortgage with a new loan that better suits your current goals, such as a lower interest rate, lower monthly payments, or more favorable terms. Home owners refinance their home loans by working with a lender to obtain a loan that is more beneficial based on their current needs and circumstances. The previous mortgage is then paid off and the new loan takes its place, with new terms and a new payment.
Keep in mind that a refinance loan and a second mortgage are not the same thing. A second mortgage gives home owners cash from the home equity that they’ve built, and doesn’t actually involve taking out a new first mortgage.
Should I Refinance?
Whether you want to take advantage of lower interest rates, switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or cash out some of your home’s equity to pay off debt or complete that remodel, refinancing may be a good option for you. However, timing also plays a role in refinancing your home. The following conditions can make refinancing particularly beneficial:
- Current market rates are lower than your current rate (we can help you run the numbers to determine if the difference is worth refinancing).
- Your home’s market value has appreciated significantly since you originally purchased it.
- You have had a 30-year loan for less than ten years.
The Refinancing Process
Home owners are often surprised by how simple the refinancing process is, as it mirrors the initial home loan process but involves fewer steps. At Seattle Mortgage Planners, we will discuss your goals for refinancing your home and then work to find the loan that will best meet those goals.Learn More About the Refinancing Process
Choose Your Refinance Loan
Although anyone considering a refinance loan will have some experience with home loans, speaking with a trusted mortgage planner is still crucial to maximize your potential gains.
We’ll assess your current situation, determine if refinancing is right for you, and help you find and apply for the best refinance loan. Explore your refinance loan options on our site. When you are ready to explore further, schedule a consultation with us to get started. There is no cost and no obligation!Explore Your Refinance Loan Options Schedule a Consultation
The benefits you’ll receive from refinancing depend on the loan you choose and your particular situation, but most home owners refinance for one of the following reasons.
Get a Lower Interest Rate
The principal reason that people refinance is to get a lower interest rate, which will lower your payment each month. You may want to take advantage of drops in current interest rates.
Switch From an Adjustable-Rate Mortgage to a Fixed-Rate Mortgage
Many home buyers choose adjustable-rate mortgages for their first home loans because of their initial lower interest rates. This allows buyers to purchase homes that would have higher initial monthly costs compared to a fixed rate.
At some point, however, the interest rates for ARMs “adjust” — potentially to higher rates with higher monthly payments. Refinancing to a fixed-rate mortgage allows home owners to enjoy peace of mind knowing that their rates won’t change in the future.
Pay Off Your Loan Sooner
Refinancing offers a couple options to help you pay off your loan sooner.
If you are able to get a lower interest rate, you’ll be paying less in interest monthly and will have more cash to put toward the loan principal. This often enables you to pay off the remaining balance sooner.
When refinancing, you may also have the option of switching from a 30-year loan to a 15-year loan. Whereas higher monthly payments are the downside of a shorter loan, the upside is the ability to build equity and pay off your loan more quickly.
Consolidate Your Debt
While most refinancing options replace a home owner’s existing home loan with a new loan for the same balance, cash-out refinances replace the existing loan with a larger loan. The home owner receives the difference between the two amounts in cash, which they can use to pay off other debt.
This is especially beneficial if the other debt has higher interest rates than the refinance loan, and removes the need to worry about various monthly payments, as all the debt is consolidated into one loan. Mortgage interest payments are also typically partially tax-deductible, providing an even greater benefit for the homeowner.