For most homeowners, the monthly mortgage bill is often one of the largest expenditures in their budget, and inflation can make managing that on a fixed income even more challenging. While some people may think that downsizing, a minimalistic lifestyle, or moving to an affordable area might be the only way to reduce housing costs, there’s one solution that can help without you having to pack your bags and relocate – mortgage refinance.
When you refinance a home loan, you can reduce your monthly mortgage amount, pay off your mortgage faster, or even free up cash for other financial uses, all without having to leave behind the home you love. Here are the ins and outs of how refinancing works and why it might be a good idea for you.
What is Mortgage Refinancing?
Mortgage refinancing is when homeowners replace their original loan with a new one that offers better terms. The new loan pays off the old loan, and the homeowner continues making payments based on the new loan terms. People usually refinance when the interest rates drop, their financial situation improves, or if they want to change their mortgage period.
There are three main types of refinancing:
- Rate-and-term refinance: Your existing loan is paid off and replaced with a new loan agreement where the rate, term, or both change with the new lender.
- Cash-out refinance: You can access the increase in value of your collateral to get access to more cash (your loan amount increases), which can be used for renovations, debt pay-off, or other expenses.
- Cash-in refinance: This is when homeowners pay part of the loan before the refinancing process to get better terms and repayment amount.
Reducing Your Monthly Payments
The most common reason people choose to refinance their loans is that a lower interest rate allows them to reduce their monthly payments without making major changes, such as relocating. Even a slight reduction could mean thousands of dollars in savings over the life of a loan. It is also possible to reduce monthly payments by extending your mortgage term. You can switch from a 15-year mortgage to a 30-year one to lower monthly payments, which can regulate your monthly cash flow. However, in this scenario, you will end up paying additional interest.
Reduce the Loan Term
If your financial situation has improved since you purchased your home, refinancing into a shorter loan term may help your financial situation in the long run. Moving from a 30-year mortgage loan to a 15-year mortgage will usually result in a higher monthly payment, and you’ll be paying less interest over the course of the loan. Moreover, refinancing into a shorter loan term will help you build equity quickly as you’ll be debt-free sooner.
Using a Cash-Out Refinance to Access Your Home Equity
Your home is not just a place to live, it is also an asset. It grows in value as property values improve. When you do a cash-out refinance, you can access this increased value and receive cash to spend on your home renovation, consolidate debt, and pay tuition expenses. This option can be an affordable way to access cash since mortgage interest rates are generally less than credit card rates and personal loans.
Consider Refinancing Costs
When considering the benefits of refinancing, you also need to consider the costs. Typical closing costs incurred by the borrower include lender fees, appraisal fees, and title insurance. Closing costs can range anywhere from 2% to 5% of the loan amount. The most important thing in deciding if refinancing makes sense is that your long-term savings have to offset your up-front costs. You should calculate your other break-even point, or how long it will be before your monthly savings in interest payments exceed the refinancing costs in the end.
When is the Right Time to Refinance?
Timing is everything when it comes to refinancing. You can do it if:
- Interest rates are lower than when you first purchased your home.
- Your credit score has gone up, which may qualify you for a better deal.
- You’re staying in your home long enough to recognize long-term savings.
- You want to free up cash for home improvement projects or other financial priorities.
Working with a Trusted Lender
Choosing the right lender is of equal importance in refinancing. A lender like SoFi provides simple, straightforward refinance alternatives that offer simple terms and personal support for homeowners so that they can make decisions for themselves without any stress. It doesn’t matter if your goal is to lower monthly payments or get some equity. SoFi provides the technology and resources to make refinancing less complicated and more rewarding for you.
You don’t have to move to lower the cost of housing. A refinancing option can help you save money, create cash flow, and keep you in the home you love, or even allow you to get a new one! A trusted lender like SoFi can help you take the refinancing options that align with your goals and take another step towards achieving your long-term financial goals.
