Factors to Consider When Thinking About a Refi

Over the course of the average mortgage loan, the interest rate landscape may change and your financial situation may change as well. As you build equity in your home or interest rates lower, many home owners are interested in refi options, either to lower their monthly payment, shorten the length of the term of their mortgage loan or to pull out cash from the equity they’ve built in order to renovate or remodel their home, to pay off other debt, or to purchase large-ticket items like new vehicles or a second property.

What types of refinancing options are there?

There are three main types of refinancing options available to home owners:

  • Refi to change your interest rate
  • Refi to change the length of the term of your loan
  • Cash-out refi

People also refinance mortgages to move from an adjustable-rate-mortgage (or, ARM) into a fixed interest loan or when they divorce and need to remove one person’s name off the mortgage loan and house title.

In interest rate and loan term length refi’s, typically the remaining balance on the mortgage loan is refinanced either at a lower interest rate than the terms of the initial loan, or for a differing repayment period, such as from 30 years to 15 years. As a cash-out refi suggests, you receive a lump-sum of cash following your loan refinance, which you can use however you wish. In a cash-out refi, you can take the cash from existing equity so that your total balance remains the same or similar, or you can refinance your loan at a higher total balance and take the difference out in cash.

Things to take into consideration before refinancing

Before you refinance your loan, there are a few things you’ll want to take into consideration first. There are often mortgage closing costs associated with refinances, which can total in the thousands of dollars. Some lenders offer discounts off of closing costs, so that’s one thing you may want to look into before deciding on a lender. You’ll also want to think about your long term plans: how long are you likely to stay in your home? If you plan to sell in the near future, then it may not make sense to refinance your loan now. Another factor to consider is how much you’ll save by refinancing, whether you are taking out cash or not. If you are taking cash out of your home to pay off credit card debt, you’ll want to have a strategy in place to ensure that you don’t end up with more credit card debt a year or two after you refinance; otherwise, taking on that additional mortgaged amount may not make sense for you long term.

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