Mortgage

Refinancing

Why would I refinance

my mortgage?

Mortgage refinancing involves replacing your current mortgage with a new one, typically with different terms. This process pays off the original loan and creates a new one.

Homeowners may refinance to obtain a lower interest rate, change the loan term, switch from an adjustable-rate to a fixed-rate mortgage, or access home equity.

What are the benefits of a

Mortgage Refinancing?

Benefits:

  • Lower Interest Rates: Refinancing can secure a lower interest rate, reducing monthly payments and overall interest costs.

  • Shorter Loan Term: Homeowners can switch to a shorter loan term, like moving from a 30-year to a 15-year mortgage, which helps build equity faster and saves on interest. You can also lengthen terms to lower the monthly payment.

  • Stable Payments: Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can provide stable and predictable monthly payments.

  • Cash-Out Refinancing: This option allows homeowners to access their home equity for major expenses, such as home improvements, debt consolidation, or education costs.

Who is an ideal candidate for

a mortgage refinance?

  1. Homeowners with High-Interest Rates: Those with high-interest rates on their current mortgage can benefit from refinancing to lower rates, reducing monthly payments.

  2. Improved Credit Scores: Homeowners whose credit scores have improved since their original mortgage may qualify for better terms and lower interest rates.

  3. Long-Term Residents: Individuals planning to stay in their home for an extended period may benefit from refinancing to lower rates and more favorable terms.

  4. Equity Builders: Homeowners looking to access their home equity for significant expenses or investments might consider cash-out refinancing as a viable option.

Here’s an example

Meet John and Emily

  • Background: John and Emily purchased their home 8 years ago with a 30-year mortgage of $290,000 at a 7% interest rate.

  • Current Situation: They have been diligently making payments, and their improved credit scores have positioned them for a better interest rate. They are also interested in paying off their home quicker.

Initial Loan Details:

  • Original Loan Amount: $290,000

  • Interest Rate: 7%

  • Loan Term: 30 years

  • Monthly Payment (Principal and Interest): Approximately $1,930

  • Refinancing Option:

    • New Interest Rate: 4.25%

    • New Loan Term: 15 years

    Benefits of Refinancing:

    1. Lower Interest Rate: By refinancing from 7% to 4.25%, John and Emily can significantly reduce the amount of interest they will pay over the life of the loan.

    2. Shorter Loan Term: Switching to a 15-year mortgage allows them to pay off their home much quicker.

    3. Monthly Payments: Although their monthly payment will increase, more of each payment will go toward the principal, allowing them to build equity faster and save on interest.

Here’s the numbers:

New Monthly Payment Calculation:

  • Loan Amount: $261,000

  • Interest Rate: 4.25%

  • Loan Term: 15 years

  • New Monthly Payment: Approximately $1,958 (*That’s only $28 more a month)

Overall Savings:

  • Total Interest Paid with Original Loan: Over 30 years, they would have paid about $407,000 in interest.

  • Total Interest Paid with Refinanced Loan: Over 15 years at 4.25%, they will pay approximately $91,000 in interest.

  • Total Savings: Refinancing would save them around $316,000 in interest over the life of the loan.

  • Pay off: John and Emily will pay off their home 7 years earlier.

Conclusion: Refinancing their mortgage makes financial sense for John and Emily. Despite a slight increase in their monthly payment, they will save a substantial amount in interest and pay off their home 7 years sooner while saving over $300,000 in interest over the original 30-year term. This refinancing move aligns with their improved financial status and goal to become debt-free faster.