As inflation continues to rise, straining our everyday purse strings, people continue to look for ways to cut down on their monthly bills and spending. One popular strategy for relieving the burden of debt is through mortgage loan refinancing.
Refinancing your home mortgage doesn’t eliminate the financial requirements you’ve been navigating. Instead, it replaces your current mortgage with a different one—preferably one with better rates and terms to help you manage your debt.
If this is an option you’re exploring, let’s help you by covering the basics of what you need to know and when mortgage financing is a timely choice for homeowners.
The Pros of Refinancing Your Home
- Even a slight decrease in your interest rate could save you thousands or even tens of thousands of dollars over time, especially if you plan to be in your home for some time.
- A cash-out refinance can give you access to a lump sum of cash to use however you want.
- If you’re switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, it can provide you with more certainty about what your monthly payments will be.
- You can gain more control over your monthly payments by changing your repayment terms.
- If your loan balance is less than 80% of the value of your home on a conventional loan, you can drop private mortgage insurance, which can save you hundreds each year.
The Cons of Refinancing Your Home
- You’ll likely have to pay closing costs, which can be between 2% and 5% of the loan amount.
- If you expect to sell your home in a matter of a few years, the savings may not be worth it.
- If you reset your terms to 30 years, it can cost you more in interest.
- Reducing your equity in the home can increase your monthly payment, even with a lower interest rate.
When Does Refinancing Your Home Make Sense?
With both the benefits and drawbacks in mind, it’s important to understand when refinancing is the right financial move for you.
When the Savings Outweigh the Costs
No matter why you’re refinancing, it’s important to compare the savings to the costs. If your new loan saves you $100 per month through a lower interest rate and the closing costs were $5,000, it’ll take 50 months for you to break even.
If you’re planning on staying in the home longer than that, it’s a good idea. If you’re not planning on staying in the home long, though, it may cost too much to be worth it.
When You Want to Shorten Your Term
You may also consider refinancing if your financial situation has improved since you first bought the home and you can afford a higher monthly payment. Cutting your repayment term from 30 years to 15 years can save you a lot of money and make you debt-free sooner.
Before you do this, though, it’s important to run the numbers to make sure you can afford the higher monthly payments. Otherwise, you could end up missing a payment, which will affect your credit.
When You Want a Fixed Interest Rate
Adjustable-Rate Mortgages, or ARMs, are incredibly appealing to homebuyers because they start off lower than fixed interest rates. Depending on the loan, you may get that lower rate for three, five, seven, or even 10 years.
Once that fixed period ends, though, your rate will fluctuate based on market conditions. If you’re coming up on the end of the fixed period of an ARM, you may want to refinance to a fixed-rate mortgage to get more certainty in the future.
You Need Some Cash
There may be situations where you need to tap into your home’s equity. For example, you may want to take on a significant renovation, or if you are going through a divorce in which one party may get a cash-out refinance to buy the other out of their ownership stake.
Mortgage rates are often much lower than interest rates on a credit card or personal loan, making a cash-out refinance a worthwhile choice when financing personal or professional goals.
Final Considerations
Refinancing your home loan can be an important step in achieving one of your financial goals. Whether you’re hoping to gain some savings, lower your monthly payment, pay off your balance sooner, get a different interest rate, or access some cash, it’s important to shop around and compare rates and other features.
SouthEast Mortgage Services is proud to offer mortgage refinancing, along with construction loans, home equity lines of credit, and more. Since decisions are made locally, you can expect personal attention and fewer delays. Speak with a member of the SouthEast Bank team for help with your home financing needs. SouthEast is a Equal Housing Lender.
Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as financial, legal, or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
