Refinance – What Does it Mean?
We hear the word “refinance” often in the real estate world, but what in the world does it mean to refinance your mortgage? Let’s break it down.
When you start the process for purchasing a home, you usually acquire a mortgage, unless you are paying cash. To acquire the mortgage, you contact a mortgage broker or mortgage lenders to find out the amount of the loan you qualify for and the interest rate for that loan. There are multiple types of mortgages (FHA, Conventional, VA, USDA, etc.) there are usually two options: a 15 year loan or a 30 year loan; fixed interest rate and variable interest rate. Whichever option you choose/qualify for, this is partly how your monthly mortgage payment is calculated. Once you’ve chosen your lender and have been approved for your loan, you are ready to purchase a home!
To refinance your mortgage, you go through a similar process. Essentially, when you decide to refinance your mortgage, you replace your existing loan with a new loan that typically has a different interest rate or length.
But, why refinance?
There are many reasons that people decide to refinance their mortgage. Some of the most popular reasons are:
- Get a better interest rate
Maybe you’re credit score has gotten better over the years and now you can qualify for a better interest rate! This can save you thousands of dollars over the life of your loan, depending on your current rate and your credit score. If you have seen a significant improvement in your credit score since you first obtained your mortgage, it might be a good idea to refinance!
- Quicker payoff
It’s no secret that 30 year loans have a smaller monthly payment than a 15 year loan – that’s simple math – but 30 year loans are common because their payment is lower. However, if you choose to go with a 15 year loan, you will pay off the loan…well…in 15 years which is half the time! If your finances can afford it and you like the idea of paying your mortgage off quicker, it might be a good idea to refinance from a 30 year to a 15 year mortgage!
- Home equity
If you refinance with a home equity loan, you have the opportunity to receive funds which can then be used to pay down other debt (credit cards, other loans, etc), home improvements, weddings, schooling, etc. This type of refinance will typically look at the value of your home in comparison to your remaining loan balance.
So, should you refinance? That’s up to you! We are not financial advisors, so we suggest that you speak to one before choosing to refinance. While it might be a good financial decision for some, it might not be a good idea for others. It’s best to speak with a financial advisor before moving forward.