{"id":965,"date":"2018-07-20T09:27:52","date_gmt":"2018-07-20T14:27:52","guid":{"rendered":"http:\/\/www.realtyhop.com\/blog\/?p=965"},"modified":"2023-05-11T16:07:15","modified_gmt":"2023-05-11T20:07:15","slug":"mortgage-refinancing","status":"publish","type":"post","link":"https:\/\/www.realtyhop.com\/blog\/mortgage-refinancing\/","title":{"rendered":"What is Mortgage Refinancing?"},"content":{"rendered":"

Higher interest rates can make buying a home with a mortgage loan more expensive. However, homebuyers can change their interest rates down the line through refinancing<\/a>. When interest rates lower, owners can borrow their outstanding debt at a lower market rate, affecting their monthly payments to quickly achieve their financial goals. Refinancing also allows borrowers to reconfigure their loan terms. <\/p>\n

What Does Refinance Mean?<\/h2>\n

Refinance refers to the process of paying off existing debt using funds from a new type of financing, usually another loan or line of credit. Borrowers receive the funds from their new loan to pay off the primary loan and will then work toward paying off the secondary debt with more appealing terms.<\/p>\n

When you refinance, you\u2019ll have the option to change the terms of the original loan to achieve specific financial objectives, such as lowering your interest rate or monthly payment. You may also want to pay off a portion of the loan’s principal balance to lower the total amount of outstanding debt.<\/p>\n

What is Refinancing a Mortgage Loan?<\/h2>\n

Refinancing a mortgage allows borrowers to pay off and replace their existing home loan with a more favorable borrowing arrangement. Borrowers may use the new loan’s proceeds to pay off their existing mortgage. In addition to securing a lower interest rate, refinancing a loan balance for a new loan with a shorter term can help you pay off your home faster and own the property free and clear.<\/p>\n

Depending on your current mortgage terms and financial goals, you may refinance a loan for various reasons.<\/p>\n

Lower Interest Rate<\/h3>\n

Lower refinance rates benefit borrowers by reducing the total amount they\u2019ll spend on a home. Lower interest rates<\/a> may also translate to lower monthly payments, depending on the new home loan term. This additional room in your budget allows you to save or spend more to achieve your financial goals. <\/p>\n

For example, a borrower who secures a principal mortgage for $250,000 with a 6% interest rate will pay $1,498.88 monthly. <\/p>\n

A decade later, that borrower pays down their principal and has an outstanding balance of $200,708. If that borrower then refinances their mortgage and secures an interest rate of 4.5%, they\u2019ll decrease their monthly payments to $1,016.96. Refinancing helped the buyer cut $481.92 off of their monthly payments. <\/p>\n

Shorter Loan Duration<\/h3>\n

Even if your current loan interest rate competes with the market rate<\/a>, refinancing your mortgage can still provide benefits. Borrowers can secure a new mortgage with a shorter mortgage term. A shorter term may increase their monthly payments but help them pay off the mortgage sooner, resolve their outstanding debt, and free up the budget. <\/p>\n

For example, a borrower with a 30-year term on a $250,000 mortgage at a 6% interest rate pays $1,498.88 monthly. A decade later, they refinance their remaining $200,708 for a 15-year term, increasing their monthly payment to $1,535.40. While they\u2019ll pay more each month for the remainder of their mortgage, they\u2019ll pay off the home five years faster than they would without refinancing. <\/p>\n

Acquiring a more aggressive payment plan may appeal to borroweres who improve their financial situation. Getting a raise or increasing monthly income can help homeowners afford higher monthly payments and a shorter loan term. Additionally, those who acquire a large sum of money, like an inheritance or bonus, may refinance and pay off a significant portion of the outstanding balance at once to bring down the remainder. <\/p>\n

Learn more:<\/b> Choosing Between a 30-Year and 15-Year Mortgage<\/a><\/em><\/p>\n

Change Loan Type<\/h3>\n

Refinancing also offers borrowers the opportunity to change their mortgage type. Mortgages offers various interest rate structures<\/a>, like variable-rate versus fixed-rate. A variable-rate mortgage determines the amount of interest a borrower pays based on the current interest rate. Those who borrow a variable-rate mortgage may therefore pay varying amounts each month. Fixed-rate mortgages maintain the same interest rate for the duration of the loan, so borrowers will not change the amount they pay each month. <\/p>\n

Borrowers may choose to switch their loan type based on current interest rates. For example, those who borrowed a variable-rate mortgage when interest rates were near 3% may not be able to afford their higher monthly payments now that interest rates vary around 6%. Therefore, they may refinance for a fixed-rate mortgage. <\/p>\n

Conversely, when rates decrease, borrowerse may refinance and switch from a higher, fixed rate to a variable rate. Variable-rate mortgages appeal to various homeowners, such as those who anticipate selling their home in the near future before rates rise again.<\/p>\n

Avoid a Large Payoff <\/h3>\n

Some mortgages use a balloon payment close to the end of their term, where borrowers settle the mortgage by paying a large quantity at once. However, this large payment may become unachievable for borrowers, and they instead may opt to refinance and switch to a mortgage that does not have a balloon payment. In this case, a homeowner may need to opt for a longer mortgage term or increase their monthly payment amount to settle the mortgage. <\/p>\n

Debt Consolidation<\/h3>\n

You can also use refinancing to consolidate outstanding debt. Collateralized mortgage debt typically pays down at favorable rates and terms compared to higher-rate, unsecured credit card bills. Debt consolidation may improve your credit score, which may help you qualify for better loans in the future, with lower interest rates and lower payments.<\/p>\n

Access Equity in the Home<\/h3>\n

If you need cash to fund a large home improvement<\/a>, college expenses, or even a second home purchase, refinancing can help you tap into the equity you\u2019ve built over the years. As you pay down your mortgage, and your home increases in value, you\u2019ll gain equity. This equity equals your ownership value of the home. If you purchase your home for $100,000 and borrow $80,000, at some point the property value may rise to $200,000. You can then increase the amount of your loan, according to the lender\u2019s guidelines. You can then choose to direct the funds from the refinanced loan toward other expenses or investments.<\/p>\n

\n Learn more:<\/p>\n