Typically, when interest rates drop significantly, there’s a lot of ‘buzz’ about refinancing and lowering your monthly payment. If you’re new to homeownership or a homeowner that’s been in their current mortgage for some time, you may have some questions regarding refinancing and what it means.
For starters, refinancing is simply the process of financing something again. Often, this is a new loan at a lower interest rate. The decision to refinance your mortgage should be carefully considered based on your short and long-term goals. What’s more, you should always consult a qualified home loan consultant to discuss your options as well as any costs associated with refinancing your home.
Why Would A Homeowner Refinance their Mortgage?
Quite simply, a refinance is intended to save you money. The interest rate of your mortgage loan impacts your monthly payment, so a lower interest rate means a lower payment. Plus, it reduces the overall amount to finance your home over the life of your loan.
Just take a look at the following payment examples:
For a $200,000 loan, here are principal and interest (P & I) payment examples*:
30-year term loan:
5.00% P & I $1,073/month
4.50% P & I $1,103/month
3.25% P & I $870/month
2.75% P & I $1,357/month
Another common reason to refinance is to reduce the term, or duration, of a homeowner’s mortgage. For example, a homeowner may have financed a home for 30-years initially but, after rates dropped, decided to refinance at a lower rate and at a 15-year term. Although this may not always lower your payment, it will considerably reduce the timeframe it takes to re-pay the mortgage loan.
Sometimes, however, homeowner’s consider utilizing a cash-out refinance loan for various reasons, including debt consolidation, much-needed home improvements, or even investment opportunities.
It’s really up to the homeowner to consider all of the options, weigh the costs to the associated benefits of refinancing, and to determine his or her refinance needs.
* Payment examples only. Actual payment, rate, and costs could be higher.