When you refinance your home, you are replacing your current home loan with a new one. This new mortgage comes with a new term and interest rate, which can lead to lower monthly payments or the ability to pay off your home more quickly. Ultimately, refinancing your home is an opportunity to save money on your mortgage.
Benefits of Refinancing
There are many potential benefits to refinancing your home. The main reasons homeowners choose to refinance are for a lower interest rate, a decreased loan term and the ability to tap into the home’s equity.
Lower Interest Rate
The most common reason people refinance is for lower interest rates, leading to more affordable monthly payments, and less money spent overall on your investment. Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home.
Shorter Loan Term
When interest rates are low, some homeowners will have the chance to cut their loan term way down while keeping monthly payments relatively the same. Homeowners might refinance their home to pay off their loan faster, leaving them mortgage-free.
Tap into Equity
A Cash-Out Refinance allows you to take equity from your home and use it as cash to deal with a financial emergency or finance a large purchase. For example, many homeowners will access their home’s equity for a remodel, since that remodel will ultimately add to the value of their home. Others may use the cash to consolidate debt. Just be prudent with this debt rather than returning to overspending once it is paid off.
Other possible benefits:
- Eliminate Private Mortgage Insurance (PMI) if your home value has increased enough and meets termination requirements. If your loan includes PMI, contact your lender for further details.
- Adjust your loan type from Fixed Rate to Adjustable-Rate or vice versa depending on what types of loans your lender offers.
Types of Refinancing
There are two types of refinancing, rate-and-term refinance and cash-out-refinance. A rate-and-term refinance is best for those whose financial status has changed and they wish to pay their house off early or a homeowner whose current interest rate is higher than the market rate. A cash-out refinance, on the other hand, would allow a borrower to take some of the equity out of their home and use it as cash for other purposes.
Refinancing when interest rates dip is a smart move and may save you money. If you’re looking to lower your interest rates, decrease your loan term or tap into your home’s equity, refinancing might be right for you. Speak with a Citizens Bank Mortgage Expert to see how refinancing could better your financial future.
FAQs
By refinancing to a shorter term, you could pay off the loan quicker, decreasing the amount of interest you're charged over time. Pulling cash out: Beyond saving money, refinancing allows you to tap into equity you've built to fund other areas of your life.
Is it ever a good idea to refinance your house? ›
For most borrowers, the ideal time to refinance is when market rates have fallen below the rate on their current loan. If you want to refinance, calculate the break-even point so you'll know exactly how long it'll take to reap the savings.
What are the negative effects of refinancing? ›
The pitfalls of refinancing your mortgage
- Closing costs. To begin with, refinancing loans have closing costs just like a regular mortgage. ...
- You may end up in more debt. You also need to have a clear idea of how you'll use the money you free up when you refinance. ...
- A slight dip in your credit score.
To Lower Your Mortgage Interest Rate
So, refinancing to a lower interest rate can help decrease your monthly payment and save you money long term. Plus, it can help you build equity in your home at a faster rate. Your equity increases when you pay down the principal balance on your mortgage.
When should you not refinance? ›
Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Does refinancing hurt credit? ›
Applying For A Refinance Results In A Hard Inquiry
This notifies the major credit bureaus that you're applying. This is the type of inquiry that causes a small dip in your credit score. Although credit inquiries stay on your report for 2 years, only inquiries in the last year impact your score.
Is there a catch to refinancing a house? ›
Your Monthly Payment Could Increase
If you refinance from a 30-year mortgage to a 15-year mortgage, your payment will likely increase because you are shortening the amount of time you have to pay off your loan.
Is it expensive to refinance? ›
Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you're refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500. Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges.
How often is it OK to refinance your home? ›
There are no limits on the number of times you can refinance a Conventional loan assuming you meet our requirements and have a net tangible benefit by refinancing.
What do you lose when you refinance? ›
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
You could pay more in interest
If you refinance to a longer loan term to reduce your payment, you may actually pay more overall because of the additional months of interest you pay. Even a reduced rate may not offset the cost of continuing to pay interest for an extra year or two.
Does refinancing actually save you money? ›
Depending on the amount of the mortgage and the terms, the savings could be significant. Refinancing when mortgage interest rates drop one or two points could result in thousands of dollars in savings over the life of your loan.
Why do banks always want you to refinance? ›
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender.
Is it smart to refinance your home? ›
Refinancing can be a smart financial move if it reduces your mortgage payment, shortens the term of your loan, or provides cash for necessary expenses. However, it can also involve significant closing costs and fees, so you may not realize savings for several years.
Why are my closing costs so high on a refinance? ›
Why does refinancing cost so much? Closing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third-party fees. Refinancing involves taking out a new loan to replace your old one, so you'll repay many mortgage-related fees.
Do you get money back when you refinance your home? ›
A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.
What do I get if I refinance my house? ›
There are many reasons to refinance a mortgage but the most common are changing loan terms, locking in a better interest rate, lowering your monthly payment, or pulling cash out of your home equity.
What will happen if I refinance my house? ›
Loan starts over: You'll be replacing your current mortgage loan—and any time you have left until it's paid off—with a brand new mortgage. Depending on how long you've had your current mortgage and how long your new mortgage will last, you're likely extending the amount of years you'll be making mortgage payments.
How often should you refinance your home? ›
Fortunately, you can refinance as often as it makes financial sense to do so. A mortgage refinance can help you manage your money more effectively as well as lower your interest rate, remove private mortgage insurance or take cash out of your equity.
