Types of Home Loan Refinance and Benefits to Consider

Refinancing a home loan can be a savvy financial move for many homeowners, as it could provide a range of benefits that improve their financial situation in the short and long term. Let’s explore the benefits of refinancing home loans, how the process works, and what homeowners need to consider before making a decision.

What is Refinancing a Home Loan?

Refinancing a home loan is the process of replacing an existing mortgage with a new one, typically with different terms and interest rates. Homeowners might refinance their mortgage for a variety of reasons, such as to lower their monthly payments, reduce their interest rates, or change the length of their mortgage term.

There are two primary types of refinancing: rate-and-term refinancing and cash-out refinancing. Rate-and-term refinancing involves replacing an existing mortgage with a new one that has different terms, such as a lower interest rate or a shorter repayment period. Cash-out refinancing, on the other hand, involves borrowing against the equity in your home to receive a lump sum of cash. This option is typically used for things like home renovations, paying off high-interest debt, or investing in other properties.

Benefits of Refinancing Home Loans

• Lower monthly payments: One of the most common benefits of refinancing a home loan is the potential to lower your monthly payments. By securing a lower interest rate, you can reduce the amount of money you’re paying in interest each month, which can significantly reduce your overall mortgage payment*. Additionally, if you refinance into a longer loan term, your monthly payments may be lower, even if your interest rate remains the same.

• Shorten the loan term: Another benefit of refinancing is the ability to shorten the length of your mortgage term. For example, if you’re currently paying off a 30-year mortgage and refinance into a 15-year mortgage, you’ll be able to pay off your home faster and save money in interest over time. This option may not lower your monthly payments, but it can save you a significant amount of money in the long run.

• Reduce interest rates: Refinancing can reduce the amount of money you’re paying in interest over the life of your mortgage. If you can secure a lower interest rate on your refinanced loan, you’ll pay less in interest over time, which can save you thousands of dollars in the long run*. This is especially true if you’re currently paying a high-interest rate and can refinance into a lower one.

• Switch from an adjustable-rate to a fixed-rate mortgage: If you currently have an adjustable-rate mortgage (ARM), you may be paying a variable interest rate that fluctuates over time. Refinancing into a fixed-rate mortgage can provide more stability and predictability in your monthly payments. A fixed-rate mortgage means that your interest rate remains the same for the entire life of the loan, which can be beneficial if you’re worried about rising interest rates in the future.

• Consolidate debt: Cash-out refinancing can also be a smart way to consolidate high-interest debt into a lower-interest loan. By borrowing against the equity in your home, you can receive a lump sum of cash that can be used to pay off credit cards, car loans, or other debts with high-interest rates. This can reduce your overall debt load and save you money in interest over time.

How to Refinance a Home Loan

• Determine your goals: Before you start the refinancing process, you’ll need to determine what your goals are. Do you want to lower your monthly payments, reduce your interest rate, or shorten your loan term? Understanding what you’re trying to achieve will help you communicate your needs to your mortgage loan officer and help them find the best refinancing option for you.
• Evaluate your current financial situation: Take a close look at your current mortgage terms, interest rate, and monthly payments. Assess your credit score and overall financial health to determine if you’re eligible for refinancing and what options might be available to you.
• Work with a mortgage broker like LorMet Mortgage Solutions®: Utilizing the services of a mortgage broker for a refinance can help you compare different lenders to find the best refinancing rates and terms. The broker will get quotes and compare offers with their lending partners to help you get a low rate and favorable terms.
• Gather necessary documents: Like the initial mortgage process, refinancing requires documentation. Gather your financial documents, including income verification, bank statements, tax returns, and information about your current mortgage. Having these documents ready will streamline the refinancing process.

Other Factors to Consider Before Refinancing

While refinancing can offer many benefits, it’s important to consider several factors before making a decision:

• Closing costs: Refinancing typically involves closing costs, which can range from 2% to 5% of the loan amount. Be sure to factor in these costs when evaluating the potential savings of refinancing.
• Appraisal value: In most cases, your new lender will require a home appraisal as part of your refinance. Changes in market conditions and your home’s condition could affect your home’s value.
• Break-even point: Calculate the break-even point—the point at which the savings from refinancing outweigh the costs. If you plan to move or sell your home before reaching the break-even point, refinancing may not be the best option for you.
• Creditworthiness: Your credit score plays a significant role in refinancing. A higher credit score will generally help you secure better interest rates. If your credit score has improved since you initially obtained your mortgage, refinancing could be advantageous.
• Long-term plans: Consider your long-term plans and how refinancing fits into them. If you plan to stay in your home for a long time, refinancing to a shorter term or lower interest rate may be beneficial. However, if you anticipate moving in a few years, the savings from refinancing may not outweigh the costs.

Conclusion

Refinancing a home loan can offer numerous benefits, such as lower monthly payments, shorter loan terms, or the opportunity to consolidate debt. However, it’s crucial to carefully evaluate your financial situation, consider the costs involved, and utilize a mortgage broker to shop around for the best rates and terms. Refinancing can be a powerful tool to improve your financial well-being, but it’s essential to make an informed decision that aligns with your specific goals and circumstances.

*All borrowers are subject to credit approval, underwriting approval, and lender terms and conditions. Programs are subject to change without notice. Some restrictions may apply. This is not a commitment to lend. A loan advisor will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.