By: Leighton Gordon0 comments

Refinancing essentially means you are applying for a new mortgage to replace your existing home loan at possibly a lower interest rate for a shorter or longer repayment period. Some homeowners never consider refinancing due to various reasons such as the current interest rates in the mortgage market not being that much lower than the rate they are already paying.

However, if you do your research and talk to an experienced and knowledgeable mortgage professional, you can leverage refinancing your mortgage as a powerful financial tool to save you money on your monthly cash outflow or to utilize the extra cash (home equity) to clear off your other high-interest debts.

The two main types of refinancing options

First, there is the Rate and Term Refinance Loan– This is the most common type of refinancing option available to a homeowner. Assuming there is enough equity in the property and the homeowner is to take this route then in essence what happens is that their original mortgage is paid off and they obtain a new mortgage at a lower interest rate than they had before. The homeowner is also able to change loan programs for example from a 5-year adjustable rate mortgage to a 30 year fixed rate loan. Overall the key benefit to a rate and term refinance is that the homeowner will likely end up paying a lower monthly mortgage payment that’s more affordable for their household budget.

Secondly, there is the Cash-Out Refinance Loan– Although there is no set rule, the general consensus among mortgage professionals is that a cash-out refinance is a good option if a homeowner as a credit score of 740 or higher, doesn’t need to exceed a 60% LTV (loan to value meaning what your home is worth versus what you owe) and they will need to receive more than $50,000 in cash paid to them at closing. The goal here is to access the equity in your home assuming your house is now worth more than when you made the original purchase. Keep in mind the tradeoff is that a lower interest rate will most likely come at the price of a larger loan amount and a longer amortization period.

Summarizing the Pro’s and Con’s of Refinancing

The Pro’s:

  • The most popular reason to refinance is to secure a lower interest rate, which in effect lowers the principal and interest portion of your monthly payment.
  • You also have flexibility in changing the length of the repayment period for your loan. If you decide to switch from a 30-year to a 15-year loan, refinancing is an option that helps you pay off your mortgage faster.
  • With refinancing you can tap into your home’s equity to pay off other high-interest consumer debts.

The Con’s:

  • All loans have closing costs (as well as application fees and appraiser fees) and these can add up to hundreds or thousands of dollars in addition to loan payments which reduces the amount of money you will walk with at closing
  • Most refinance options extend the life of your loan, which means you’ll be further away from paying off your mortgage.

Gathering the necessary paperwork

To help you secure the best possible deal in terms of a low interest and providing solid professional guidance, your mortgage professional will need several documents to evaluate your ability to qualify for a refinance. This includes your most recent pay stubs covering your last 30 days of work, a recent copy of your credit report(s), W2 or 1099’s typically along with two years of tax returns (including business returns if applicable). In addition, chances are a property appraisal will need to be conducted to determine the present value of your home. Contact us to find out how you can save on your appraisal fee by working with one of our mortgage professionals.

Overall, refinancing your home isn’t a bad idea if you plan to live in the house for an extended period of time. Make sure you’re completely prepared by doing research and talking to your mortgage professional to properly understand the long and short-term potential cost savings by having a new lower interest rate.

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