Your house is a financial asset. If you’re a homeowner, you could be hearing about refinancing from everyone from your neighbors to television anchors. You may utilize your house to leverage your investment by refinancing. Many people choose to refinance for a variety of reasons, including taking cash out of their property, decreasing their monthly payment, and shortening their loan term. Now is a great time to think about a mortgage refinance and shortlisting the best mortgage lenders in Texas.
Refinancing your mortgage might be beneficial in a variety of scenarios. Let’s take a look at how a mortgage refinances works, so you know what to expect.
What Does Mortgage Refinancing Mean?
Refinancing your mortgage entails exchanging your previous loan with a potentially higher sum for a new one. When you refinance your mortgage, your bank or lender pays off your previous loan and replaces it with a new one; this is why refinances are used.
The majority of borrowers refinance to decrease their interest rates and shorten their payment terms or to take advantage of turning a portion of their home’s equity into cash. Rate term refinancing and cash-out refinancing are the two primary forms of refinancing.
Rate and Term Refinance
Rate and term refinancing entails receiving a new mortgage with a lower interest rate and, in certain cases, a shorter payment period (30 years changed to a 15-year term).
With recent record-low interest rates, converting a 30-year mortgage into a 15-year mortgage may result in monthly payments that are similar to your original loan. This is due to the lower interest rate on your new mortgage, even though 15-year mortgage payments are typically greater than 30-year mortgage payments.
You may refinance up to 80% of the current value of your house for cash with a cash-out refinance. In a cash-out refinance, you’re not necessarily saving money by refinancing; instead, you’re obtaining a lower-interest loan on some much-needed cash. You may wish to use the cash from a cash-out refinancing to dig a new pool for your backyard getaway or go on a dream vacation.
Top Reasons to Refinance Your Mortgage
What makes you think about refinancing in the first place? It all depends on what you want to achieve. Refinancing is done for a variety of reasons, but here are a few of the more prevalent ones:
1. You want to cut your monthly payments in half
If interest rates have reduced after you took out your first loan, you may be eligible to refinance into a lower-interest loan. As a result, your monthly payments may be reduced, and you may pay less throughout the term of your loan.
Alternatively, if interest rates haven’t fallen considerably, but you’ve had or expect to have a decrease in income, you may be able to extend your loan term to pay off your debt more slowly.
If you go from a 15-year fixed-rate mortgage to a 30-year fixed-rate mortgage, your monthly payments will be cheaper. It’s worth noting, though, that you’ll have to pay interest for a longer amount of time.
Finally, if you’ve paid off a substantial portion of your mortgage or if the value of your property has grown, your loan-to-value ratio (LTV) will be lower. A lesser loan amount compared to the value of your property indicates the lender sees the loan as a reduced risk, which might help you receive a better rate.
If your home’s equity has just surpassed 20% and you’ve been paying private mortgage insurance, you can refinance to eliminate your mortgage insurance payments.
2. Your credit score has improved
You may be able to refinance to receive a better rate if your credit score has improved significantly. A 20-point boost in your credit score, for example, might lower your rate enough to save you thousands of dollars in interest over the life of the loan, depending on the circumstances of the loan.
You may enhance your credit score by making payments on time, paying off debt, and decreasing your total credit use. It’s a good idea to keep track of your credit score regularly so you know where you are and when you might be able to refinance for a better rate.
3. Your adjustable-rate mortgage’s fixed period is coming to an end
While adjustable-rate mortgages (ARMs) might save you money on your monthly mortgage payments in the early years of homeownership, your interest rate may rise significantly once the fixed term finishes. Switching from an ARM to a fixed-rate mortgage can help you prevent this. You have the financial means to make larger monthly payments.
Changing the term of your loan while refinancing might be favorable in some instances. You might refinance into a shorter loan (such as from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage) to pay it off faster. You could save thousands of dollars in interest payments over the life of the loan if you can afford greater monthly payments due to an increase in income. While your new fixed rate will almost certainly be more than your initial flexible rate, you will be shielded against rate rises in the future.
4. You have the financial means to make larger monthly payments
Changing the term of your loan while refinancing might be favorable in some instances. You might refinance into a shorter loan (such as from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage) to pay it off faster and save thousands of dollars in interest payments over the life of the loan if you can afford greater monthly payments due to an increase in income.
5. You wish to withdraw cash
You can also conduct a cash-out refinance, which allows you to borrow money against the equity you’ve established in your property. Homeowners frequently put their earnings back into their houses to undertake upgrades or repairs that increase the value of their property. Taking cash out might also be beneficial if you want more finances for things such as schooling or medical bills and do not have other sources.
6. You’d like to combine your debts
Finally, refinance to combine many loans into a single, more manageable payment. If you have high-interest loans and obligations, such as credit card debt, school loans, or a second mortgage, this might be extremely beneficial. Because debt consolidation refinancing is technically a cash-out refinance, they function similarly.
A portion of your home equity is effectively converted into cash, which you might use to pay off other loans and debts. Your previous mortgage will be replaced with a new one that includes the money you borrowed to pay off those other obligations.
Relevant Reading: The Underwriting Process: Everything You Need to Know
Refinancing is a terrific method to leverage your house as a financial instrument when the time comes. To save money in the long run, you can shorten your loan term, acquire a better interest rate, and switch loan types. Alternatively, you can cash out your home’s equity and spend the funds as needed. If you’re unsure about whether or not to refinance and the other choices accessible to you, speak with your mortgage lender.Ready to refinance your loan? Get started with Lone Star Financing by checking out your refinance options and locking your rate today.