Refinancing is the process of replacing your current mortgage loan with a new one. It’s used when current interest rates are lower than the one you originally had, so that you can pay less monthly, get cash out, or shorten the length of your loan. Getting that lower rate depends on a few factors, however. It will depend on your financial situation, your credit score, and a couple of other factors. It’s not exactly a “do over” of your original mortgage loan, but you can think of it that way since the process does involve similar closing costs and processing. There will even be a signing for closing the loan. You’re essentially “cancelling” the current mortgage loan and starting a new one. When you have questions about a refinance, know that you can rely on us to give you helpful answers and since we handle mortgage loans and refinances in Birmingham, AL daily.
As always, if any of the words we use just don’t seem to click with you, check out our glossary for a better, more in depth explanation of that word.
First of all, let’s look at the reasons you might consider a refinance:
Lower rate. When rates drop, many refinance to lock in that lower rate which can significantly lower your monthly payments.
- Example (not working with real numbers): 4.25% interest rate on a $200,000 fixed 30-year loan= $8,500 in interest in year one of the loan. 3.5% interest rate on a $200,000 fixed 30-year loan= $7,000 in interest year one of the loan. This would (hypothetically) decrease your interest over the life of the loan by approximately $31,000 and save you $85 per month. If you’re trying to lower your monthly expenses and rates are low, this is a great way to do it. If rates are historically low, like they have been, a refinance could be a smart move even if you’re not hurting for extra money back in your pocket.
Get money out for a project. Home improvement projects can be expensive, so a common and helpful solution is to refinance for taking cash out for your project. This is done by using the equity in your home. Equity, also known as the buyers’ insurance, is the money that’s in your home. It’s an easy way to get a “loan” without straining your bank account or affecting your monthly mortgage payments too much.
Debt consolidation. Just as you can get cash out for a home improvement project, you can do something similar for getting cash to pay off your non-mortgage debts. Basically, you’ll owe more on your house and your 30 years (or whichever you’ve chosen) will start over, but your other debts will be gone and your mortgage payment will be fixed and have a lower interest rate than a credit card. NerdWallet explains it this way, “you will end up owing the same amount, but you pay off the high interest credit card debt and replace it with lower-interest mortgage debt.” This refinance option is one that you’ll need to be extremely careful with, so that you don’t end up back in debt or with a house payment you can’t afford. It will be crucial to sit down with us and discuss your financial situation in detail.
Pay off your loan faster. You can refinance to a shorter term to pay your loan off faster to save money on interest. Going from a 30 year loan to a 15 year is a big leap, so we can give you other available term options. The great thing about doing this when rates are lower is that choosing a shorter term shouldn’t affect your monthly payment as severely.
As of early August 2020, interest rates are still very low, so now is a great time if you have an interest rate higher than 4%. You could save a significant amount of money over the life of your loan, and have a lower monthly payment! We help people with their home loans in Birmingham, AL every single day, and we’re ready to save you money through a refinance! Use our Refinance Advisor to get started today!