To refinance a mortgage means to replace an existing mortgage loan with a new one. With a refinance, the principal balance of the existing loan is paid-in-full using the balance of the new loan.
When the refinance is complete, your old loan is retired — replaced with a new mortgage loan with new mortgage terms.
There are lots of reasons why a homeowner would want to refinance.
Sometimes, a homeowner refinances to exploit a change in market conditions, such as a change in today’s mortgage rates or a rise in local home values. A new mortgage can give lower mortgage rates or payments to the homeowner, and can remove private mortgage insurance (PMI) payments.
Other times, a homeowner refinances to take “cash out” for a home improvement project, or to fulfill legal obligations, such as the removal of an ex-spouse from a mortgage loan.
There are dozens of reasons why a homeowner would want to refinance. However, the two most common reasons are to lower the loan’s mortgage rate; and, to lower the loan’s monthly payments.
When you’re considering a refinance, then, define your goal first — what is it you’re trying to accomplish? Then, consider all of your available mortgage refinance options.
Refinancing your mortgage means getting a new loan to pay off your existing loan. Depending on your current financial or personal situation, there are many good reasons to refinance. Based on the type of loan you choose, there are a lot of great benefits too.
Here are the most common reasons homeowners seek to refinance:
Get a lower interest rate. A lower rate often results in lower mortgage payments. You can use the extra money each month to pay off debt, for savings or investments, or to spend however you like. ** Refinancing your existing loan may result in higher total finance charges for the life of the loan.
Get a shorter loan term. You may end up with a comparable, or slightly higher, monthly payment, but with a shorter term you’ll pay off your loan sooner. You’ll save a ton of money over time by paying less toward interest, and you’ll build equity faster, increasing your net worth.
Switch from an adjustable to a stable fixed rate loan. Switching from an adjustable rate mortgage (ARM) to a fixed rate loan gives you predictable monthly payments over the life of the loan. You won’t experience dramatic monthly payment increases, making long-term budget planning easier.
Turn your home’s equity into cash. Cash-out refinancing turns the equity in your home into cash. From paying off high-interest credit cards to taking a dream vacation, there are no restrictions to how you use the money. And there are no tax penalties for accessing or using this money.
If your home or current mortgage meets one or more of these three conditions, it’s a good time to consider refinancing.
Your current mortgage is relatively new. In the early part of many mortgages, most of the monthly payment goes toward interest. If you can get a new mortgage that applies more of your payments toward the principal, that’s good. You’ll build equity faster. It’s like paying money to yourself.