What is Refinancing?
Refinancing is the process of replacing an existing loan with another. Lenders are competing with one another for your interest payments, so if they can buy out your existing loan they will. There are different reasons each person may want to refinance and it all depends on your financial goals. For example, some homeowners refinance to lower their monthly payments while others will increase their monthly payments for access to equity in their property.
A $500,000 loan at 4.5% would result in a monthly payment of $2,533. If we refinanced 4 years later at a lower rate of 3.5% your monthly payment would be about $2,094. That’s a savings of $440/month or $5,280/year.
Using the calculator below you can run different loan scenarios to calculate if refinancing is right for you. Make sure to adjust the year slider to the number of years you plan on staying in your house. The time frame determines the amount of interest paid on the new refinanced loan.
When Should I Refinance?
Your Credit Score Has Improved
Lenders use your credit score to determine what type of loan to offer as well as your interest rate. If your score has improved significantly, like going from 630 to 750, then lenders will want to compete for your business. They do this by offering you lower interest rates that will save you thousands of dollars over the lifetime of your loan. You may also have access to different loan products now that your credit score has improved.
You Want to Change the Term of Your Loan
Home loans come in term lengths between 15 and 40 years with 30-year and 15-year terms being the most common. Longer terms, like 30-year loans, often result in lower monthly payments but come at the cost of higher interest paid when compared to shorter-term loans. If you have the ability to make higher monthly payments than when the loan was initially acquired you may want to refinance to a lower term. On the flip side, if your income is less than it used to be, refinancing to a longer-term loan can help reduce your monthly payments.
You Need a Different Loan Product
Perhaps your existing loan is an Adjustable Rate Mortgage (ARM) and now you are being hit with higher monthly payments. Refinancing can convert your existing ARM to a Fixed Rate Mortgage with lower rates. Many people do not like the possibility of an unstable monthly payment and would prefer to have a fixed rate. Another scenario could be the desire to move from an FHA to a Conventional loan. Often FHA loans require costly private mortgage insurance payments every month.
You Really Need Cash
Cash Out Refinancing differs from other types of refinancing because the new loan will actually be for more than the remaining principal. Essentially, the borrower is getting money immediately by collateralizing equity they have in their home. This can be the right move if you really need money to pay off higher interest debts or to make home renovations.
How Do I Start the Process?
The refinancing process will probably be similar to when you got your existing mortgage since you are applying for a new loan. However, if you recall thinking ‘There has to be an easier way” last time you got a loan you may be in luck. Yes, this is the part where we advertise that we at PC Mortgage have worked to simplify and secure the mortgage process so you never have another stressful experience. You will answer a few questions, submit an application online, and we will send you an estimate with the best loan we can offer you. We work with some of the biggest lenders in the nation so you don’t have to shop around dealing with different sales people at every bank. We can evaluate multiple options for you.