So you’ve heard the term “refinance,” but what does it mean? Refinancing, plain and simple, is the process of exchanging your original loan for a new one, with a new rate and term. Depending on your financial situation, you may want to explore your options in refinancing and see if it’s right for you. Homeowners choose to refinance for many financial reasons, but we’ve found these five to be the most common.
1. Lower your interest rate. One of the most popular reasons to refinance is to lower the rate on your mortgage. A lower rate means a lower monthly payment. If mortgage rates in the market are low, it may be the best time to take advantage of the opportunity to refinance.
2. Get cash out. In some cases, a refinancer may be eligible for a cash-out refinance. This type of refinance allows you to tap into your home’s equity and turn it into cash. Refinancers often use this money for remodeling or landscaping projects. How it works: Refinance your existing mortgage into a new one for a larger amount and pocket the difference (minus closing costs). But be advised—lenders usually limit the loan amount of this type of refinance to 80 percent of your home’s equity.
3. Consolidate debt. If you have debt in multiple areas, refinancing your mortgage could help you consolidate your debt. Using this method, you can replace multiple loans with one loan, leaving you with one convenient monthly payment.
4. Gain financial stability. Refinancing can be a great solution for borrowers who are struggling with financial stability. If you started with an adjustable-rate loan, refinancing into a fixed-rate loan can help you make steady payments—especially if you are concerned with inflation and the resulting possibility of higher monthly payments.
5. Pay off your mortgage faster. If you plan on staying in your current home for a long period of time, it may be wise to refinance your mortgage to obtain a shorter term. For example, you may want to refinance your 30-year loan into a 15-year loan. Although your monthly payments will increase, you’ll save money on your overall interest payments and own your home, free of mortgage debt, in half the time.
Mortgage phrases and terminology—like “refinance”—can be confusing, but don’t let that intimidate you. It’s important to be informed about these industry terms so you can make educated decisions for your future.