What Does It Mean to Refinance a House?
Refinancing can allow a borrower to get a better interest rate on their mortgage.
To refinance a house means you replace the mortgage you have with a new mortgage that has more favorable terms. Whether or not you should refinance depends whether doing so will save you enough money. Looking at interest rates, closing costs and how many years you will remain in your house will help you determine your potential savings.
What are the benefits of refinancing a house?
This depends on the person’s goals, needs and financial situation. Generally, refinancing carries significant benefits in terms of time and money. Here are some of the benefits refinancing can provide:
A lower interest rate on your mortgage
When interest rates go down, refinancing picks up. Depending on the length of your loan and how long you plan to stay in the home, refinancing for a lower rate could save you thousands over the term. But there’s no need to wait for falling rates if you’ve improved your credit. Sometimes credit can improve enough that you can refinance at a lower rate based on having a better credit score.
More manageable, lower monthly payments
Lower monthly payments can come with lower interest rates, but you can also lower your payments by lengthening the term of your loan when you refinance. In that scenario, you would also be paying less toward principle every month, which means your expenses over the life of your loan would be higher. You’ll need to crunch the numbers based on your own situation to see what makes sense. A reputable lender will walk you through the scenarios so you understand all the options before you make a decision.
A shorter term
Changing from a 30-year mortgage to a 15-year mortgage can save you a significant amount of money. You’ll pay off your loan faster and at a lower interest rate. You will typically have a higher monthly payment but, depending on the amount of your loan and the rate, the difference may be minimal.
Costs you can budget for
If you started out with an adjustable rate mortgage (ARM), you may want to lock in a lower, fixed rate you can count on. This type of payment eliminates the impact rising interest rates can have on your budget.
Use the equity you have in your home to borrow money you can use for renovations, and other major expenses like college educations. You’ll be able to use the money for anything, and the money you take out will be added into the principle of the amount you refinance. Depending on your amount of home equity and the rates, this way of borrowing is typically more cost effective than personal loans and lines of credit.
What should you know before you refinance?
Whether or not refinancing makes financial sense for you depends upon several factors. They all have to do with your goals, financial situation and the options available to you. Here are the factors that will impact your decision:
- How much equity you have in your home – the more the better.
- Your credit score – higher scores can get lower interest rates
- Your debt-to-income ratio – how much you owe compared to how much you take in
- The rates available and the length of the terms you are considering
- Any fees or expenses or closing costs associated with refinancing, and any tax implications
- Whether or not you will require private mortgage insurance