Tips for Refinancing Mortgage and When To Do It

tips for refinancing mortgage and when to do it

Getting involved with a real estate transaction for the first time can be exciting and confusing. First time home buyers usually have a lot to learn about the process, and can benefit from getting familiar with common aspects of the transaction. One of these is refinancing, and our Tips for Refinancing Mortgage and When To Do It guide can help first time buyers make the best decisions to reduce costs associated with their loan.

In a nutshell, refinancing is the opportunity for the borrower to change the terms of an existing loan. These terms could involve interest rates, payment schedules or other terms. Many borrowers begin to look into refinancing when the terms become more favorable than at the time they originally took the loan. Generally, borrowers look for better interest rates to reduce payments over time.

Interest rates are cyclical, meaning that they are continually changing depending on nationwide economic conditions as well as competition between lenders. These factors can either increase or decrease interest rates.

During the Covid-19 pandemic, competition was lower, causing interest rates to decrease to a level equating to the lowest ever offered in the United States. Some borrowers secured rates below 3% when taking out mortgages during this time. Moving out of the pandemic, rates began to rise again to pre-pandemic levels and overcorrected to go slightly higher to over 6%. Economic recovery as well as restoration of competition between lenders caused this to happen.

With so many factors at play, it can be confusing to know how to play a mortgage refinance. Our Tips for Refinancing Mortgage and When To Do It is the place to begin your research and decision making process.

Tips for Refinancing Mortgage and When To Do It

There are four types of refinancing that borrowers may consider: Rate And Term Refinancing, Cash-out Refinancing, Cash-in Refinancing and Consolidation Refinancing.

4 Types of Refinancing

1. Rate And Term Refinancing

This is the most common version of refinancing, completed when the borrower pays off the original loan with a new loan that has a more favorable terms. An example of this would be someone with a $200,000 30-year fixed mortgage at 6% with completed payments of $1,395 per month for 10 years. The loan is refinanced to a 15-year fixed 3% loan reducing the new payment to a little over $1,000 per month.

This refinance saves the borrower 5 years worth of payments as well as an additional $395 per month. Depending on the lender you may have some upfront costs when doing a rate and term refinance, but the savings in the long run will make it worth it.

2. Cash-Out Refinancing

Cash-out refinancing may be the right choice when the asset that collateralizes the loan has increased in value. This involves pulling equity from the asset for a higher loan amount that generally lands a higher interest rate. The positive to this kind of refinancing is that it opens up cash immediately while not having to sell your asset.

3. Cash-in Refinancing

A cash-in refinance is when a lender allows a borrower to pay off a portion of the loan to acquire a lower loan-to-value ratio that leads to a smaller loan payment.

4. Consolidation Refinancing

Consolidation refinancing might also be the best option for a borrower considering refinancing mortgage and when to do it. Consolidation refinancing is best used when a borrower finds a single loan rate better then their current average interest rates over multiple credit products. This style of refinancing requires the consumer to apply for a new loan at the lower rate, then pay the existing debt with the new loan, leaving the new outstanding principal with the lower interest rate.

Pros and Cons of Refinancing

Just like anything financial, there are pros and cons with refinancing mortgage and when to do it, so it will come down to the borrower to decide when the time is right to pull the trigger. Some people may never refinance their mortgage because timing never leads to a situation where rates are comparable or better.

Some of the pros of refinancing include:

  • Lower mortgage payments and interest rates
  • Stability in payments and possible savings over the loan when changing from an adjustable rate to a fixed rate at more favorable terms
  • Increased access to cash if you are in pressing need
  • Shorter loan term leading to years of savings on interest payments

Some of the cons of refinancing include:

  • Loan terms resetting to original length cancelling out interest savings because you have already been paying interest on original loan. This leads to extra interest paid over time.
  • Missing benefits of interest rate drops if fixed-rate mortgage rate higher, unless you refinance again
  • Potential to lower equity held by your home
  • Potential increased payments on new terms and additional closing costs on the refinance
  • Potential negative effects on your credit score because it will be checked to determine interest rates

When To Refinance

The time to refinance your home is when you can obtain more favorable loan terms. The best time to refinance is when interest rates are much lower original loan or if you are looking to find more monthly payment stability by changing from an adjustable rate to a fixed.

As stated above some borrowers may never refinance their mortgage because it has the most favorable loan terms that are available. This is the case for many loans originated during the COVID-19 pandemic with rates were below 3%.

Some borrowers may look into refinancing to increase access to cash to pay off debts or renovate their home. Whenever rates drop, it is always worth exploring refinancing options to see if it could make sense to help meet other financial goals.

Our experienced forever agents at Berkshire Hathaway HomeServices Adirondack Premier Properties are experts in all things Adirondack real estate. If you need assistance with a real estate transaction or guidance on refinancing mortgage and when to do it, reach out to one of our professionals. Contact our office today for expert advice to reach your Adirondack real estate goals and dreams!

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