When you refinance your home, you take out a new mortgage to replace the old one. Your new lender sends the funds required for your mortgage payoff to the previous lender, and the remainder of the balance is applied to the new mortgage as a down payment. If you are completing a cash-out refinance, a portion of these excess funds may also be transferred to your bank account.
Refinancing offers several potential benefits to consumers, including:
- The opportunity for a lower payment. – When you refinance your home, you have the opportunity to obtain a loan with a lower interest rate and/or a longer term. Either of these factors can lower your monthly payment, leaving you more room in your budget for other expenses.
- A chance to eliminate mortgage insurance. – Some mortgage programs, such as FHA, require you to pay mortgage insurance premiums regardless of your loan-to-value ratio. Refinancing the home with a different type of loan, such as a conventional mortgage may allow you to eliminate this requirement.
- Extra cash in hand. – If you complete a cash-out refinance, you can take advantage of the equity in your home and use the proceeds to complete a remodeling project or accomplish some other financial goal.
- A chance to pay off your mortgage faster. – If you are not refinancing for the purpose of lowering your payment, you can also use a refinance to pay off your mortgage faster. For example, if you have enough money available each month, you can convert your 30-year mortgage to a 15-year mortgage and pay the balance off in less time. In many cases, loans with shorter terms will also qualify for a lower interest rate, thus providing you with an additional advantage.
Refinancing also comes with some disadvantages, such as closing costs. Keep in mind that you will need to obtain an accurate mortgage payoff quote from your current lender before you will be able to refinance. If you are interested in learning more about the benefits of refinancing, please contact Starboard Financial today.