The Reasons Behind Refinancing

One of the biggest reasons homeowners refinance their mortgage is save money every month with lower mortgages interest rates and lower monthly payments. By refinancing, you pay off your existing mortgage and replace it with a new one.

When Should You Consider Refinancing?

Refinancing typically occurs when mortgage interest rates drop significantly or if you would like to change your loan program, such as going from a variable rate to a fixed rate. However borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for lower interest rates as well. If you have not checked your credit score in awhile, consider speaking to a loan officer about the possibility of lowering your interest rate.

Types of Refinances

One option is to take the route of the "rate and term" refinance. A rate and term refinance is just what it sounds like. You refinance your existing mortgage to save money every month when new low rates are being offered by lenders or to change your loan program. Frequently this monthly savings may entail the need to change your loan program. Loan programs that offer variable or interest only rates are often available at lower rates or payments than the fixed rates offered with the more traditional mortgage products. Keep in mind however that programs with variable rates can be riskier as your payments can increase significantly.

The other type of refinance loan is the "cash out" refinance. In this case, you would be "cashing in" some of the equity in your home by increasing your mortgage balance. A cash out refinance is commonly used to help pay off credit accounts with high interest rates (called debt consolidation) or to do home improvements.

Re-Investing Your Monthly Savings

Once you refinance your mortgage to lower payment, what should you do with the extra monthly savings? Consider re-investing the money. If refinancing results in a lower monthly payment, you can continue making the same payment you made on your original loan, and the extra money will be applied to the principal balance. Doing so can enable you to pay off your mortgage loan faster and save you money on interest over the term of your loan. On the other hand, you may want to consider investing the extra money in a side-fund that could earn a better rate of return and grow to the amount of the mortgage (and beyond) in even less time. This method provides excellent liquidity, but having more direct access to this money may be too tempting for some homeowners.

Regardless of the reason for the refinance, your loan officer will need to know what your existing loan scenario entails, review your long-term goals, and provide a comprehensive spreadsheet that compares and contrasts the various loan programs and rates available.