Is Refinancing Your Mortgage a Good Idea?

Your in-box is probably filled with offers from mortgage lenders to refinance your loan. With mortgage interest rates at historic lows, you maybe be wondering if refinancing is a good idea. One of the main reasons to refinance is to lower your monthly payment but there are other reasons why refinancing might be beneficial. But, first, let's understand what a refinance is.

What is a Refinance?

When you refinance your mortgage, your current loan is paid off and replaced by a new one. You usually go through the same loan qualification process as you did when you obtained your original mortgage. If you are refinancing with your current lender, however, the process might be streamlined requiring only an updated credit report and proof of income.

Reasons to Refinance

1. Lower monthly payment
   If your goal is to lower your monthly payment, refinancing with a lower interest rate may be a good idea. Obtaining a loan with a longer term may also help you reach your goal of a lower payment. You will want to consider how long you plan to live in your home. If you plan on moving in a couple of years, the costs of a refinance may not be cost effective.


2. Take advantage of equity
   You may have a home improvement project in mind and wish to use some of the equity in your home to pay for it. You can get a ‘cash-out' refinance which is refinancing for more than your current loan balance and receiving the difference between your old loan balance and your new loan balance in cash. An alternative to refinancing to access your equity is to take out a home equity line of credit (HELOC). A HELOC is like a credit card using your home as collateral.
   


3. Save interest
   The shorter the term of a loan, the less interest you pay. Refinancing a 30-year mortgage into a 15-year loan will save you a considerable amount of interest. BUT rates on 15-year mortgages are typically higher than on a 30-year, which might cause your monthly payment to increase. An alternative to refinancing is to pay an additional payment each year and earmark it for interest. Instead of making 12 payments, make 13 with the 13^th payment going to interest. This also allows for flexibility. If you have an unexpected expense one year, you are not committed to the extra payment.
   


4. Change from adjustable to fixed-rate
   Rates on an adjustable rate mortgage can go up over time, which can be risky. Rates on fixed-rate mortgages never change, so converting from an adjustable to a fixed-rate loan can provide much stability and peace of mind.

When weighing the pros and cons of refinancing, compare rates and programs with a number of lenders before making your decision. As they say knowledge is power.

If you are looking to buy or sell a home in the Huntsville area, let professional Realtor Mike Manosky help you with all your real estate needs! Give him a call today at 256-508-0211!

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