Well, it’s not exactly like returning a broken item to a store. Mortgages can get a little testy. In the simplest of terms, refinancing is trading in your loan for a new one. The reasons why people choose to do this, however, will vary as will the factors involved.
With the low-interest rates brought on by an unprecedented year of economic turmoil, there has been a lot of talk about refinancing and when — and if— it is the right decision for you. Of course, as with every other major financial decision, various personal factors come into play, as everyone’s situations and goals are different.
Let us dispel some myths and explore common advice for when to choose mortgage refinancing.
Concept Made Simple: Refinancing as a Way to Start Anew
When you signed an original mortgage, there were terms attached to that loan. Those loan terms or conditions were agreed upon by you and your mortgage lender and, in most cases, were locked in for the entirety of the loan. This includes things like interest rates, 15 or 30 years fixed-rate, or other conditions. That is, of course, unless the borrower seeks to change these terms. And how is this done?
That is where refinancing comes in.
The refining process involves you paying off the original mortgage amount and then replacing it with a new one. So you, as the borrower, will take on another mortgage with new terms that will pay off the old one. You are then left with a “new loan.” The process still requires borrowers to apply, qualify, and be approved for the new mortgage loan. The underwriting process is the same, as is the closing.
Reasons to Consider Refinancing
People refinance for different reasons. Homeowners often cite the following as key factors in their decision:
- Lower interest rates
- Shorten payment term
- Take built equity into cash
Lower interest rates have been a common reason for many refinances during the past year. The pandemic year brought interest rates to historic lows and prompted many homeowners paying above 3% to consider taking advantage of the decreased rates.
Common Refinancing Myths That Give People the Wrong Impression
It is not uncommon for cautionary tales to spread regarding something like refinancing. That is because everyone’s current terms are different and the market is always changing. Here are often cited fears:
#1 You will have to restart your loan terms
Even the potential for lower rates is not enough to sway people who think they will have to start from the beginning. It is not always to restart your term loans—it depends on the lender you choose. You can also adjust it, so if you’ve carried a 30-year loan term for 5 years, you can ask the lender to adjust payments to meet a 25-year loan. That way you’re not extending the time it takes to pay the debt either.
#2 You’ll be risking your equity
Home equity is a central concern for many homeowners. It’s part of the reason people buy homes—to build equity. Your home equity will not be affected unless you opt for a cash-out refinance. Lowering your interest rates or switching lenders will not necessarily impact your accumulated home equity.
#3 Refinancing will affect selling your home
People often mistakenly believe that refinancing will hinder their ability to sell their homes in the near or distant future. Refinancing loans don’t put an additional lien on your home, so your ability to sell will not be affected.
When Is it Time to Look into Refinancing?
Given the unprecedented year for real estate and home sales in 2020 and 2021, experts are carefully watching the markets to see how they react to new changes every day. Rates change daily and that’s why factoring in calculations is a necessary part of the decision-making process.
When looking at refinancing, consider:
- How long you plan to live there: You want to ensure you recuperate closing costs, so if you plan on moving right away, you may not have time to get that back.
- Current interest rates: Check interest rates daily and talk to experts that are watching the markets.
- Closing costs: Refinancing is not free, and closing costs still apply. Weigh your options between the short-term costs of closing and the long-term savings.
- Current home equity: Consider how much home equity you have accumulated by now.
- Your credit score: Requirements for qualifying for low-interest rates factors in your credit score, so ensure your score is up to par in order to snatch the lowest rates.
- Debt-to-Income ratio: If there have been other changes in your financial situation, it may change how lenders look at your qualifications. New debts or outstanding debts (other than your mortgage) can play a role.
Considering Refinancing Your Home Loan? Trust Mortgage Professionals
Refinancing is not always black and white. There are a series of factors and calculations considered to assess whether it is the right time for you. If you’re thinking about trading in your home loan for a new one, talk to a trusted mortgage lender in your area.
Looking into mortgage refinancing? Call Rocky Mountain Mortgage and get the guidance you need.