What is Home Refinancing?

Refinancing is the process of paying off your old mortgage and exchanging it for a new mortgage at a new rate. Most homeowners refinance to obtain a lower interest rate. If you plan to stay in your home for at least a year and if your interest rate will drop with a new mortgage, refinancing can offer an ideal situation by lowering your monthly payments and reducing the total cost of financing your home.

There are a couple of refinancing options:

  • Mortgage Refinance: A mortgage refinance, or “refi,” is also known as a rate-and-term refinance. Besides closing costs, your rate-and-term refinance does not involve money changing hands. The funds from the new loan pay off the old loan.
  • Cash-Out Loan: A cash-out loan delivers some of your home’s equity as cash to you. Upon closing, you receive a check for cash, as well as a new loan.

Closing Costs

Because this is a new mortgage, you still pay closing costs, which are usually 2% to 3% of your loan amount. You may also potentially pay taxes on your refinance, depending on where you live. If you plan on living in your home for another year or more, you can recoup your closing costs via your lower interest rate within 18 months.

If you’re planning on moving out of your home within a year, refinancing will not make sense financially. If you still need cash, you can pursue a home equity loan instead.

Test Case Scenario

If you bought your home ten years ago, your interest rate was 5% on a 30-year fixed-rate mortgage. Today, you can find a mortgage with an interest rate of 3.5% at the highest. That one-and-a-half point difference can reduce your monthly mortgage payment by hundreds of dollars. Your new interest rate will also reduce the total cost of financing your home over the term of the loan. In this test case scenario, refinancing can provide a huge benefit to your finances. It’s well worth the closing costs as long as you’re staying in your home for at least another year.

Caveat to Refinancing

Just as it mattered when you applied for the original mortgage, your credit score will matter when you apply for your refinanced mortgage. If your score is lower than it was when you applied for your original mortgage, you may end up increasing your interest rate, in which case refinancing is not the best option for your situation.

New Abode Real Estate: Knowledge. Guidance. Collaboration.

If you’re looking to enter the real estate market, New Abode can help you with the next steps in the buying or selling process. Whether you’re looking to buy or sell a home, New Abode can partner with you to find your perfect home or your perfect buyer.

For sellers, our agents will…

  • Take the time to get to know you and your home
  • Share our knowledge about navigating the home selling process
  • Connect with you to identify potential buyers
  • Coordinate showings to easily accommodate your schedule
  • Discuss with you the pros and cons of your offers to select the best fit for you
  • Negotiate offers to get you favorable price and terms

For buyers, our agents will…

  • Take the time to get to know you and uncover the home features that are essential to you
  • Share our knowledge about navigating the home buying process
  • Connect with you to identify potential home options
  • Coordinate showings to easily accommodate your schedule
  • Discuss with you the pros and cons of your top choices to select the best fit for you
  • Negotiate offers to get you favorable price and terms

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To begin the search for a home or the search for your buyer, contact a New Abode agent today for expert advice for a seamless transaction.

Created 6/7/2021