November 19th, 2021 1:49 PM by Jackie A. Graves
When you refinance a mortgage what you’re really doing is replacing the mortgage you have now with a new mortgage loan that has new terms that better fit your financial goals. Determining whether to refinance your mortgage is an important decision, but it doesn’t need to be overwhelming.
If you have a high-interest rate mortgage, an adjustable-rate loan, or maybe your payments are becoming unmanageable, refinancing may be able to lower your monthly payments, shorten the term of your loan or move you into a more secure loan.
Reasons to Refinance
Save on your monthly payments
If interest rates have declined since you closed on your current mortgage loan, refinancing at a lower interest rate may help decrease your monthly payments. It can also help you reduce the total amount of interest you pay over the life of the loan. Keep in mind that your interest rate will be based on a number of factors, including your credit score.
Build equity more quickly
Equity is the difference between what your home is worth and how much money you owe on your home loan. The more equity you have the more profit you’ll make when you sell your home and the closer you are to paying off your mortgage entirely. Refinancing to a loan with a shorter term, from 30 years to 15 years for example, can help you build equity faster. Because you’ll be paying your mortgage for a shorter period of time, reducing the length of your mortgage may also result in paying less interest over the life of the loan. Keep in mind, although the total amount you’ll pay in this scenario is likely to decrease, your monthly payments will likely increase.
Find more stability
If your original loan was an adjustable-rate mortgage (ARM), you may consider refinancing to a more stable fixed rate mortgage. This will make your payments more predictable in the future.
Remember, when you’re refinancing a home, you’re replacing your current mortgage with a new one. And just like you saw a number of costs associated with closing on your current mortgage, you’ll potentially see those same or similar costs again when you refinance.
A word of caution: Some lenders may offer an option to refinance without paying these fees up front. When this occurs, the lender is often rolling the cost of the refinance into the balance of the loan. This approach will decrease the equity you have in your home, and you’ll ultimately end up paying interest on those fees as part of your new mortgage.
Deciding to Refinance
Think of refinancing your mortgage as an investment. Like any investment, you will need to understand whether what you’re giving up is worth what you’re getting in return. Some questions you will want to consider include:
You’ll also need to think about the effects refinancing will have on your loan term. If you made payments on a 30-year mortgage for 10 years and you refinance into another 30-year mortgage, your monthly payments will likely go down. However, you’ll grow equity more slowly, and it will take longer to pay off your mortgage loan.
Be sure you understand why you want to refinance so your mortgage lender can help you find the loan product that’s the best fit for your financial goals.
If you are ready to start thinking more seriously about refinancing your home, consider talking to a mortgage lender. You don’t have to go to the lender who originally set up your current mortgage; it’s actually best to speak to a few lenders to make sure you’re getting the best mortgage loan terms.
You have a number of options when making your decision to refinance. Different types of refinance include Traditional Refinance and Cash-Out Refinance. Fannie Mae’s various mortgage products may be able to help you finance a home renovation, allow you to pay for energy efficiency-related improvements, or offer a low-down-payment option. Read more about refinance options »
The refinance calculator is provided to help you with general information regarding the possible benefits of refinancing your first mortgage. More »
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