If you’re a homeowner, your mortgage payment is probably your largest monthly expense. So it’s wise to stay alert for opportunities to refinance to a lower rate and cut your payment. Laura covers what a mortgage refinance is, common reasons for doing one (in addition to saving money), and five ways to know if it’s a good idea for your situation.
My friend Teah, who lives in beautiful Washington state, says, “I’m considering refinancing our mortgage. We built our home 3 years ago and have no intention of moving or selling it for at least 15 to 20 years. Would you create an updated podcast episode about refinancing your mortgage?”
Thanks for this suggestion, Teah. It’s a great time to talk about refinancing because mortgage rates have been slowly creeping up.
If you’re a homeowner, your mortgage payment is probably your largest monthly expense. So it’s wise to stay alert for opportunities to refinance to a lower rate and cut your payment. Plus, your financial circumstances and needs today may be very different than they were when you originally got your mortgage.
In this post, I’ll cover what a mortgage refinance is, common reasons for doing one (in addition to saving money), and 5 ways to know if it’s a good idea for your situation.
Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!
What Is a Mortgage Refinance?
Refinancing a mortgage is the process of taking out a new loan that pays off and replaces your existing one. The new loan can be with your same institution or with a different lender.
There are a variety of different refinance loans you can use to accomplish different financial goals. Here are 3 basic types to be familiar with:
1. Rate-and-term refinance – allows you to get a loan with a lower interest rate, a different term (length of the loan), or both. For example, if you have a 30-year, fixed-rate mortgage at 6%, you could refinance with a 30-year mortgage at 4.5%. That would reduce your monthly payments and the amount of interest you pay over the life of the loan.
2. Cash-out refinance – allows you to get a loan that’s larger than your existing mortgage so you walk away from the closing with cash. Let’s say your home’s market value is $200,000 and your mortgage balance is $100,000. If you need $25,000 to pay for college or to start a business, you could do a cash-out refinance for $125,000. After paying off the original mortgage of $100,000, you’d have $25,000 left over to spend any way you like.
3. Cash-in refinance – requires you to pay cash at the closing in order to pay off your existing mortgage balance. This is necessary when you don’t have enough equity to qualify for a refinance (more about equity requirements in just a moment), or you owe more than your home is worth. You also might want to do a cash-in refinance when having a lower loan-to-value ratio qualifies you for a lower mortgage rate or allows you to get rid of mortgage insurance premium (MIP) payments.
There are also government refinance programs, such as the federal Home Affordable Refinance Program (HARP), which gives you the ability to refinance to current mortgage rates, regardless of your loan-to-value ratio. It’s available until September 2017 for mortgages taken out before June 2009 that are backed by Fannie Mae or Freddie Mac. To find out if you’re eligible, click here.
If you have an existing FHA or VA mortgage, you may qualify for a “streamlined” refinance program that requires less paperwork than a typical loan. Check out the FHA Streamline Refinance and VA Streamline Refinance programs to learn more.
If you experience a financial hardship, there may be special government refinance programs designed to help you avoid foreclosure, depending on where you live. So be sure to do your homework and ask potential lenders about all the national and local refinance options you may be eligible for.
You may also need to refinance a mortgage if you want to remove a co-borrower, such as an ex-spouse, from your loan. But if one spouse doesn’t have sufficient income and credit to qualify for a refinance on his or her own, you best option may be to sell the property instead of refinancing.