What is a mortgage refinance? Should I be considering it?
You see and you hear about the low interest rates and how now is the time to buy or restructure your mortgage loan, but is it for you? Skepticism surrounds the advertisements as salesman who only want your money and to start your loan all over again, removing all the hard work you’ve done to pay down the largest debt in your name. This causes the potential benefits of a mortgage refinance to go largely unnoticed. The truth is that a mortgage refinance is more capable of assisting you toward your goal of paying off your home quicker, rather than harming you when utilized correctly. Educating yourself on what exactly a mortgage refinance is and how it can benefit you as a borrower can create monthly and yearly savings!
What is a Refinance?
When you look at the big picture of what a refinance is, it is simply a request for a home loan by the home owner in order to buy their current home from themselves at a new rate and term. This begins their new mortgage payment, at a new interest rate, and loan term length of their choice. It is a tool for home owners to examine their current mortgage debt structure and determine whether it is the best it could be for them or not. You do not have to do this determination on your own, as there are mortgage professionals with more knowledge of the industry with more accurate information to help analyze your current position and potential benefit of a refinance.
Is a refinance good for me?
I wish that the answer to the question was cut and dry, but it isn’t. Every borrower’s financial picture is different than the others just as a borrower’s current mortgage loan amount, interest rate, and current term length remaining are different. The important questions to ask yourself and your trusted mortgage professional is:
- Will the refinance lower my monthly payment amount?
- Will the refinance lower the amount of interest I am paying?
- Will the refinance shorten the term of my home loan?
- Will the refinance remove the costly mortgage insurance every month?
- Is there equity in my home that I can use to improve my own/family’s financial picture?
Answering yes to just one of these questions is a great benefit, but combining two, three, or even four of these together makes for truly remarkable savings and improvements to the long-term picture. Often, it is overlooked that just because your monthly payment may not go down, a refinance right now can remove years off your current term and it wouldn’t cost you anything more per month. Of course every borrowers situation is different. Call your trusted mortgage profession and have a conversation about whether a refinance is right for you.
Refinancing your mortgage is not right for everyone
While the benefits of a mortgage refinance are great, it does not make sense in all cases to do so. As explained above, a refinance is a home loan to buy your house from yourself at a new rate and term. This means that similar closing cost fees paid to buy the home initially will again need to be paid to start this new refinanced loan. If that interest rate drop will not be that great, the equity in the home to remove the mortgage insurance isn’t quite there yet, and the monthly savings are minimal, taking a slightly lower rate and paying the cost to refinance may not be for you. Solely removing monthly mortgage insurance on a conventional loan (NOTE: Not FHA) may not need the cost of a refinance either. Contacting your lender and ordering an appraisal to see what your home is worth might be all that you need to remove the mortgage insurance instead of a refinance. However, if you’re also looking to reduce a rate as well as remove mortgage insurance, then a refinance should be your aim. Just as you would contact a mortgage professional to determine if a refinance is good for you, ask questions and determine whether it makes sense not to refinance as well.
A mortgage refinance could be a great tool to free up some monthly savings in these trying and uncertain times. At the time of this writing, I am originating loans from home as COVID-19 has made it that way for many occupations. If you find yourself in the same situation, take a break and connect with a mortgage professional about your mortgage saving options, mortgage term shortening, and interest rate reduction. Here at NEXA Mortgage, we say that “7 minutes could save you 7 years on your mortgage” and it could not be more accurate.
