Mortgage Refinancing Explained: Understanding Your Options
If you have owned your home for several years, you may have wondered whether refinancing could improve your mortgage. The answer depends on what you want to accomplish and how your current loan compares with today's options.
After more than 16 years in the mortgage industry, I have helped homeowners refinance for many different reasons. Some want to change their loan structure, others want to use their home equity, and some want a mortgage that better fits where they are financially today.
Understanding the different refinance strategies is a good place to start.
Questions to Ask
Why Do Homeowners Refinance?
There are several reasons a homeowner may consider refinancing.
Your financial situation may have changed since you purchased your home. Your home may have increased in value, you may have built substantial equity, or your priorities may be different than they were when you first took out your mortgage.
Refinancing may give you an opportunity to:
Change your interest rate or loan term
Restructure your mortgage
Access available home equity
Potentially reduce mortgage insurance
Move into a different loan program
Pay off the mortgage sooner
The best strategy starts with identifying why you want to refinance.
What Types of Refinancing Are Available?
There are several refinance strategies, and each serves a different purpose.
A rate-and-term refinance can change the rate or term of your existing mortgage. A cash-out refinance can allow you to access a portion of your home's equity. Other options may involve changing from one type of mortgage to another.
The right choice depends on your current loan, financial situation, available equity, and what you want to accomplish.
How Can a Rate-and-Term Refinance Change My Mortgage?
With a rate-and-term refinance, the goal is generally to replace your existing mortgage with a new loan without taking significant cash out.
You may use this type of refinance to pursue a different interest rate or change the length of your mortgage.
For example, some homeowners may want to shorten their loan term, while others may be more focused on creating a payment that fits their current budget.
I look at the numbers carefully to determine how the new loan compares with what you have today.
What If I Want to Access My Home Equity?
If you have built equity in your home, a cash-out refinance may allow you to access some of that equity.
The new mortgage pays off your existing loan, with the difference between the two loan amounts potentially available to you as cash, subject to the loan's requirements and available equity.
Homeowners may consider cash-out refinancing for renovations, major expenses, debt consolidation, or other financial goals.
Because this strategy increases the amount borrowed against your home, I always recommend considering both the immediate benefit and the long-term cost.
Could Refinancing Help With Mortgage Insurance?
Mortgage insurance can be a significant part of a monthly mortgage payment.
If you have gained equity since purchasing your home, your options may have changed.
Depending on your loan type and qualifications, refinancing could potentially allow you to move into a mortgage with different mortgage insurance requirements.
This is one area where reviewing your current loan alongside your available options can be especially helpful.
Is Changing My Loan Program an Option?
Sometimes the opportunity is not simply changing the rate. It may be changing the type of mortgage you have.
Depending on your circumstances, you may be able to explore conventional, FHA, VA, USDA, jumbo, or other mortgage options.
Each loan program has its own requirements, costs, and benefits. I recommend looking at the entire picture before deciding whether changing loan programs makes sense.
What About Refinancing Into a Shorter Mortgage?
Some homeowners want to use refinancing as an opportunity to pay off their mortgage faster.
Moving into a shorter loan term can potentially reduce the total number of years you make mortgage payments and may reduce the amount of interest paid over the life of the loan.
The tradeoff is that a shorter term can mean a higher monthly payment.
Before making that change, I look at whether the new payment fits comfortably within the homeowner's budget.
What Costs Should I Consider?
Refinancing comes with costs, so I never recommend looking at the potential savings without considering the expense of getting the new loan.
Depending on the transaction, costs may include lender fees, appraisal costs, title services, recording fees, and other closing expenses.
I also consider how long a homeowner expects to keep the mortgage. The longer you plan to keep the new loan, the more time you may have to benefit from any potential savings.
How Do I Decide if Refinancing Makes Sense?
I start by looking at the homeowner's goal, not just the current mortgage rate.
From there, I compare the existing mortgage with the potential new loan and consider the payment, loan balance, term, costs, and long-term financial impact.
A refinance that looks attractive on paper may not be the right choice for someone who plans to move soon. On the other hand, a homeowner planning to stay for many years may have more time to benefit from a new mortgage structure.
Every situation is different.
What Is the Best Way to Explore My Options?
You do not have to know which refinance strategy you need before starting the conversation.
I can help you review your current mortgage, discuss what you want to accomplish, and determine which options are worth considering.
The RHMC Mortgage Calculator can also help you explore different loan amounts, terms, and estimated payment scenarios.
Take the Next Step
Refinancing can be an opportunity to make your mortgage better fit your financial goals today.
Whether you are looking to change your loan term, access equity, reduce mortgage costs, or explore a different loan program, the right option depends on your individual situation.
You do not have to figure out which refinance strategy is right for you on your own. I can review your current mortgage, listen to what you want to accomplish, and help you understand which options may be worth considering.
If you are thinking about refinancing, let's take a look at what may be possible for you.
Phillip Cresta | NMLS #356108
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