• Refinancing: The Why of the Refi

    January 6, 2015
  • Refinancing, which is informally called refi, is essentially paying off one loan with the money you receive from another loan using the same property as collateral. In other words, you can refinance your home, business, or other property be taking out a new loan against the property and using the new loan to pay your original loan.

    There are a number of reasons to refinance your home (many of which we’ll list below), but it’s not something that should be done without the advice of a professional. Just like when you bought your home, refi involves closing costs, which can be 3-6% of the loan. It’s a big decision and one that should not be taken lightly.

    The Why of the Refi

    These five reasons (along with cash out refi) are the most common reasons for a person to consider refinancing.

    Refinance to Lower Your Interest Rate

    This is probably the most common reason to refinance but should be approached with caution. As we said, your refi will include closing costs, so you’ll want to do the math and make sure that your savings in interest (and possibly in monthly payments) can help you recoup those closing costs in a reasonable amount of time. If you plan to move in the next few years, you may not have the time to recoup those closing costs and may end up losing money. A good guide is that your new interest rate should be at least a full percentage point below your current interest rate and you should be planning to stay in your home for several years.

    Refinance to Switch from a Fixed-Rate Loan to an ARM Loan

    or

    Refinance to Switch from an ARM Loan to a Fixed-Rate Loan

    While Adjustable Rate Mortgage (ARM) Loans have their benefits, it seldom makes sense to switch to an ARM from a fixed-rate loan. If you are considering this, you will want to carefully weigh The Pros and Cons of ARM Loans with a mortgage professional.

    Switching from an ARM loan to a fixed-rate loan, however, can often end up saving you a lot of money. If you are able to qualify for a fixed-rate loan with an affordable interest rate, it may be worth the temporary inconvenience of new closing costs to refi your home, business, or other property.

    Refinance to Consolidate Multiple Mortgages

    If you currently have multiple mortgages on your property, it can be beneficial to combine those debts, allowing you to simplify and organize your financial obligations. The benefits of doing so can vary depending on your equity level, the amount of your mortgages, how old the mortgages are, and your current credit score. Again, this is a time that you’ll want to do the math and see if it makes financial sense for you to pursue this type of refi.

    Refinance to Lower Your Monthly Payments

    If you are refinancing just to lower your monthly payment, you should make sure that it won’t cost you more in the end. There are multiple ways to lower your payment, including refinancing at a lower interest rate and lengthening the term of your loan. We already covered refinancing for lower interest rates, so let’s look at lengthening the term of your loan. Generally speaking, this will lead to paying a lot of extra money in interest over the life of your new loan. If you feel that you absolutely need lower payments, check to see if you qualify for a lower interest rate before considering lengthening the term of your loan.

    Refinance to Shorten the Term of Your Loan

    When done correctly, this can be a very good move. If you are able to refinance at a lower interest rate and shorten the term of your loan, you may end up with payments similar to those you are currently making, but can save thousand in interest over the life of your new loan.

    The Why of the Cash Out Refi

    Our last reason is actually several reasons that fall under the concept of a cash out refi. A cash out refi allows you to refinance your current mortgage for an amount higher than you currently owe on your property and keep the difference in cash for a specific purpose. Some of the reasons a person may wish to look into a cash out refi are to:

    • Perform home improvements that will increase the value of your home,
    • Pay college tuition,
    • Pay off student loans,
    • Pay off credit card debt,
    • Fuel an emergency savings account,
    • Buy a second home or an investment property,
    • or Pay for medical bills.

    If you have decided that refinancing is right for you (or you need help determining if it is), you should contact a mortgage professional for help. If you are in New Hampshire, Massachusetts, or Maine, The Mortgage Specialists would love to help you. Contact us today to find the help you need in determining if a refi is right for you.