Every financial decision you make is going to have repercussions, both good and bad. This is no difference with a refinance. In fact, because of the size of home mortgages, refinances and new mortgages are especially impactful. However, as mentioned, those effects you are going to feel can be good. There are many positive effects of refinance mortgages. As a homeowner, it’s always a good idea to know what kind of impact a refinance will have on your finances, and whether or not it is a smart move for you.
Interest Rates and Loan Length
The real estate market is constantly fluctuating, which means that the current rates today may not be the same tomorrow. Many homeowners find themselves locked into a higher rate than they need because of these fluctuations. This is perhaps the most common reason people look into a refinance. They want to reduce the rate to save money on the loan, and in many cases this is exactly what they are able to do. By reducing the rate and locking in the lower rates today, homeowners often find that they save thousands of dollars over the lifespan of the loan.
A second benefit to refinances mortgages is that you can often adjust the length of the loan, which means you can pay the mortgage off faster. If you were locked in at the typical thirty year length but were able to refinance to a twenty year mortgage, you may literally save thousands upon thousands. There are two reasons for this. First, many lenders are willing to give a lower rate for a shorter term. Second, you won’t be paying interest for nearly as long so you often end up paying less. However, there is a catch to this and that is the amortization schedule. Before switching to a shorter term you will want to compare the amortization schedule for both loans to see if you really will save money by shortening the term.
Cash Out and Fixed Rate Refinance Mortgages
Many homeowners pursue refinance mortgages because they have spent enough time building up equity that they have a fairly decent sum wrapped into their house. They want to take that money and use it for other purchases and investments. Cash out refinances are great for these homeowners because they are able to pull out the equity and use it how they choose. They do end up with a higher mortgage, of course, but they are often able to reduce the interest as well, depending on the situation of their credit, and the lower interest rate can counteract the increased mortgage.
Another great benefit to refinance mortgages is that you can change the type of the loan. This is especially beneficial for homeowners who secured the original loan using the ARM (adjustable rate mortgage) option. In the short term the ARM is a great option. You can secure the loan often at a lower rate, but over time it can become a risk. Typically with adjustable rate mortgages the rate is fixed for the first few years, usually around five. After that, the rates begins to adjust. This is risky for homeowners because it fluctuates with the ebb and flow of the real estate market. Some months it will drop, but other months it will jump. It creates a mortgage payment that can’t be relied on and in too many cases drives the cost of the mortgage up by hundreds every month. When refinancing, homeowners are able to switch from the ARM to a fixed thirty year loan, which takes the stress and risk out of the mortgage. On a fixed rate mortgage that rate never changes. You are locked in at the rate you sign on and that is the last time it will be adjusted, unless you choose to refinance at a later date.
There are many ways homeowners can benefit from a decent refinance. However, there are also ways a refinance can be harmful as well. Again, it is a big financial step and it does carry some risk. For many homeowners the benefits of refinancing far outweigh the negative aspects and if you think you are one of these homeowners, you will want to discuss your options with your lender. While you’re at it, contact a few other lenders so you can get many quotes to choose from. And, of course, make sure you get a good loan officer on your side who can help you navigate your way through the process so you end up with a loan that saves you money.