The Top 4 Reasons People Refinance Their Mortgage
Refinancing your home mortgage is a big decision but there are a number of reasons to consider it. Read on to learn the 4 most common reasons people refinance their mortgage.
1. Lower Your Monthly Payment
This is the most common reason we hear from customers who are inquiring about refinancing. You bought a home 5 years ago and your interest rate on a 30-year fixed mortgage is 5.00%. You hear that 30-year fixed rates are much lower now and want to know how much you can save.
This is a common reason, but we want you to be careful when refinancing to lower your rate if you are extending the term of your existing loan. Always verify the total interest paid over the life of your loan. You may be lowering your rate but if you extend your term back out, you can end up paying more interest in the long run.
– If you want to see how much you’re actually saving monthly, ask your lender to give you the total principle & interest payment you would need to make monthly after you refinance to pay your mortgage off in the same amount of payments as your current mortgage. This will give you an “apples to apples” comparison on your principle & interest savings.
2. Shortening Your Mortgage Term & Reducing the Total Interest Owed on a Mortgage
While this is not the most common reason, we hear someone ask to refinance, it is the one that financially savvy customers understand and take advantage of. Here is an example:
You purchased your home 3 years ago and took a 30-year fixed mortgage for $300,000 with a rate of 4.75%. The current monthly principle & interest payment is $1,564.94.
After 3 years, you have 27 years remaining. If you continue to pay this loan monthly for the next 27 years you would end up paying $214,861 in interest over the remaining life of the loan.
Today, lenders are offering a 30-year fixed rate of 3.75%.
If you refinance to a 30-year fixed rate, you would have a monthly payment of $1,389.35 (Saving $175 per month). You would end up paying $200,164 (saving $14,697) in interest over the life of the loan.
Today, lenders are offering a 20-year rate of 3.25% if you refinance to a 20-year fixed rate, you would have a monthly payment of $1,701.59. This would be $137 more per month. You would end up paying $108,380 in interest and the loan would be paid off 7 years earlier (or 10 years earlier than refinancing to a 30 year). You would end up saving $106,481 in interest over your existing mortgage.
Thinking short term, saving $175 per month sounds better than paying $137 more per month. Yes, it would require more discipline to find another $137 per month to spend. However, spending $137 a month is actually investing $137 per month for the next 20 years and will save you $106,481 in interest paid AND you now have 10 less years of mortgage payments.
3. Cashing Out to Access Equity in the Home
Cash-Out refinances give borrowers a lump sum of money when they close on the refinance of their home. The loan proceeds first go to pay off the existing mortgage loan and then the closing costs and prepaid items involved with the mortgage. All of the remaining funds go to the customer to use as they wish.
There are dozens of reasons that you may want to access the equity in your home. Maybe there is a major repair, or you are looking at a renovation. Sometimes people use equity for paying for their children’s weddings or college tuition. There may be pros & cons to all of these reasons.
The important part to understand is that you are using your home as collateral for a cash-out refinance. Do not make these decisions flippantly. Work with your mortgage loan officer and financial advisor to understand the best circumstances for you.
4. Removing Someone From the Obligation on the Mortgage Note
While this is not the easiest situation to address, it is a very common one, especially when it comes to divorces & separations. The important thing to know is that whoever signed the mortgage note is responsible for the payment. The divorce/separation process does not remove the obligation from either party. The process may give one of the parties a legal right to refinance the other party off of the mortgage loan, but until the refinance is finalized, that mortgage note still appears on both parties’ credit reports as an obligation.
Also, under this category are co-signors of mortgages. A parent or family member may have helped you purchase a home. While you may be the person living in the home, that person who co-signed the mortgage continues to carry that liability on their credit report until you remove that party through refinancing (or selling) the home.
If you’re ready to learn more or get the home mortgage refinance process started, get in touch with United Bank’s team of mortgage refinance experts.