Refinancing your home can get confusing depending on your purpose for refinancing. We help you qualify for the best loan program to fit your needs. There are some general considerations you need to have in mind in advance.
Are you refinancing primarily to lower your interest rate and monthly payments? Then your best option might be a low fixed-rate loan. Maybe you have a fixed-rate mortgage now with a higher rate, or maybe you have an ARM -- adjustable rate mortgage -- where the interest rate varies. Even if it's low now, unlike your ARM, when you qualify for a fixed-rate mortgage you lock that low rate in for the life of your loan. This is especially a good idea if you don't think you'll be moving within the next five years or so. On the other hand, if you do see yourself moving within the next few years, an ARM with a low initial rate might be the best way to lower your monthly payment.
Are you refinancing primarily to cash out some home equity? Maybe you want to pay for home improvements, pay your child's college tuition bill, take your dream vacation, whatever. Then you'll want to qualify for a loan for more than the balance remaining on your current mortgage. If you've had your current mortgage for a number of years and/or have a mortgage whose interest rate is higher, you may be able to do this without increasing your monthly payment.
You want to cash out some equity to consolidate other debt? Good idea! If you have the equity in your home to make it work, paying off other debt with higher interest rates than the interest rate on your mortgage -- for example, credit cards, home equity loans, car loans, some student loans -- means you can save possibly hundreds of dollars a month.
Do you want to build up home equity more quickly, and pay off your mortgage sooner? Consider refinancing with a shorter-term loan, such as a 15-year mortgage. Your payments will be higher than with a longer-term loan, but in exchange, you will pay substantially less interest and will build up equity more quickly. If you have had your current 30-year mortgage for a number of years and the loan balance is relatively low, you may be able to do this without increasing your monthly payment -- you may even be able to save!
For example, let's say years ago you took out a $150,000 30-year mortgage at eight percent. Your payment is about $1,100, exclusive of taxes, insurance and so on. If your balance today is down to $130,000, you might take out a 15-year mortgage at six percent and have an almost identical monthly payment. This is a great option for people whose main goal is not to save money on their monthly payment but rather want to build up equity and pay off their home more quickly.
Years of experience: 25
Position: President & CEO
Johnny Shunnarah, is a well known mortgage broker here in Birmingham, Alabama. He has been the Senior Loan Officer for Premier Living Mortgage, Inc. since it's inception in 2002. Because he has established himself as a trusted source for home buyers, a great deal of his business comes from repeat borrowers and their referrals to family and friends. He has earned the respect of his clients as well as lenders, appraisers, and closing attorneys throughout Alabama.
Ever heard the old rule of thumb, you should only refinance if your new interest rate is at least two points lower? That may have been true years ago, but with refinancing dropping in cost over the last few years, it's never the wrong time to think about a new loan!
When you refinance, you could be able to lower your interest rate and monthly payment significantly. You might also be able to "cash out" some of the built-up equity in your home, which you can use to consolidate debt, improve your home, take a vacation -- whatever! With lower rates and balances, you might also be able to build up home equity faster with a shorter-term new mortgage.
You may have a penalty if you refinance your previous mortgage too quickly. That depends on the terms of your existing mortgage. These penalties are illegal in some places, and more often than not when they're there its only for the first year or two. If you are unsure we'll help you figure it out.
You can pay points to get a more favorable interest rate. If you pay (on average) three percent of the loan amount up front, your savings for the life of the new mortgage can be significant.
If you lower your interest rate, naturally you will be lowering the amount of mortgage interest payments you can deduct from your federal income taxes. This is another cost that some borrowers consider. We can help you do the math!
Ultimately, for most people the amount of closing costs to refinance are made up very quickly in monthly savings or can even come out of your "cashed out" equity. We'll work with you to determine what program is best for you.