Refinancing: Does it Make Sense to Refinance My Current Mortgage Loan?


2 Minute Read

Key Article Takeaways

  • Refinancing definition
  • Should I refinance my mortgage?
  • Rate and term refinance v. cash-out refinance

You took out a mortgage loan on a home a few years ago but now your financial situation has changed. At this point, you may be wondering, “is refinancing my mortgage the right decision?”

Here at LendingMan we broke down what refinancing is, when it makes sense and when it doesn’t and which option may be best for you.

What is refinancing?

Refinancing is the term used to describe changes to an original credit agreement. When it comes to mortgage refinancing, homeowners may revisit their original mortgage loan agreement to better the duration of their loan, monthly payments or interest rates.

Moreover, refinancing may also benefit homeowners who wish to use their home’s increasing value to make further home improvements or pay down credit debts.

Should I refinance my mortgage?

Before you decide to refinance your mortgage, it’s important to weigh out the pros and cons to determine if refinancing is the best decision for your budget.

Refinancing is a good choice for homeowners who have increased their credit scores since first purchasing their home. Better credit scores often mean better loan options so refinancing under new terms can reduce monthly mortgage payments.

Homeowners who experience a bump in monthly income may also find refinancing an attractive option. With a higher monthly income, refinancing allows you to take on higher monthly payments for a shorter mortgage, meaning you pay off your house faster and with less interest. In this case, a homeowner may go from a 30-year fixed rate to a 15-year fixed rate.

However, refinancing also comes with some cons to be aware of. Refinancing takes you back to the first steps of buying your home. Closing costs are once again factored into your new mortgage loan so the refinancing process isn’t free even though you’re already in the house.

In addition, going from one 30-year mortgage to another 30-year mortgage actually increases the total years it will take to pay off your house. If you’re already 10 years into your payments, an extra 30 years may not be the best choice with all the added interest it will bring.

Rate and term refinance v. cash-out refinance

When refinancing, you have the option to change the terms of your mortgage or to engage in a cash-out refinance to access your home equity in cash.

Rate and term refinance

A rate and term refinance is the type described above that can change the duration of your loan, monthly payments or interest rate by drafting a new mortgage loan. Refinancing can also shift an adjustable rate loan to a fixed-rate option.

The money associated with this type of refinance involves the bank paying off the original mortgage in favor of the new mortgage agreement and the homeowner paying the new closing costs associated with the updated appraisal of their home.

Cash-out refinance

Under a cash-out refinance, another factor comes into play: home equity. This type of refinance is often used for homeowners looking to make home improvements or lessen existing debts.

Under a cash-out refinance, the homeowner will receive a check from the lender for the cash difference between the remaining amount on their mortgage and the home’s increased value upon appraisal. Essentially, the homeowner is benefiting from their home going up in value during their existing mortgage and what the home would currently sell at.

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