How to Weigh Refinancing Options as a Homeowner

If you've reached a point in your homeownership journey where you're ready to reassess your financial goals, you might be considering how refinancing could benefit you. Refinancing through a new loan can provide new opportunities and big savings – but how do you know if it's the right decision for you? Additionally, how do you decide which type of mortgage refinancing product you need?

Every homeowner has a unique financial situation, and choosing the right refinancing option for you can make all the difference. In this post, we're going to help guide you through the ins and outs of home refinancing, so you can approach your decision with confidence.

The Basics of Home Refinancing

Refinancing is a chance to review your goals and adjust your mortgage to fit your current needs. Interest rates change on a regular basis, and a mortgage refinance allows homeowners to take advantage of these adjustments. If current mortgage rates drop below what you pay now, refinancing can lower your monthly mortgage payment and help you save money over the life of the loan at a lower rate.

Refinancing can also help you lock in more favorable terms. For example, if you shorten the loan term from a 30-year to a 15-year mortgage, you can build equity faster. This could also help you save money on interest payments in the long run.

Evaluating Your Current Mortgage Situation

Before you take steps toward refinancing, look at your current mortgage situation. Start by revisiting important loan documents, like your original mortgage loan agreement and recent mortgage statements. You'll want to have your current interest rate, loan term, and monthly payment information on hand.

Also, think about how long you will stay in your home. If you plan to sell soon, the cost of refinancing might be more than the savings you could get. Though it can be a great move for many, refinancing isn't right for every financial situation.

Refinancing Options to Choose From

Getting familiar with different types of refinancing will also be key in your decision-making process. As a homeowner, you have several refinancing options:

• Rate-and-Term Refinance: The most common choice, this refinance option means changing the interest rate, loan term, or both, without changing the loan balance.
• Cash-Out Refinance: If you settle on a new, bigger home loan, you can tap into home equity and borrow the difference in cash. This is great for large expenses – like home renovations or debt consolidation.
• Cash-In Refinance: By making a large lump sum payment toward the mortgage, you have the option to lower the principal balance. This helps you qualify for a lower interest rate or shorter loan term.
• Streamline Refinance: With less documentation required, this loan option offers a simplified road to refinancing. It's available with a FHA, VA, and USDA loan.
• No-Closing-Cost Refinance: Similar to a typical mortgage, refinance comes with closing costs. With this no-cost option, you avoid these upfront fees by paying them off over the life of a loan. As a result, you take on a new rate that's slightly higher.

As you can see, refinancing should come with a great deal of careful consideration.

Types of Rates

Just like with a traditional mortgage, you can also choose from fixed-rate mortgages, which keep payments steady, or adjustable-rate mortgages, which may save you money with lower interest rates. Your decision between fixed-rate and adjustable-rate mortgages depends on a few things, like how much risk you're comfortable with. Weigh the pros and cons of each loan type, and talk to a mortgage expert to land on the best option for your needs.

What to Consider

As you're looking into offers and current refinance rates from multiple lenders, it's important to think about the big picture. Take a close look at each loan estimate, and consider how each option matches up with your long-term goals. Here are a few factors to keep in mind.

Your Financial Situation

To start, it's crucial to understand where you currently stand. For example, your credit score is very important in deciding the interest rates and loan terms that lenders will give you. If you keep a good credit history before completing a new loan application, it can help you get better loan terms and lower closing costs. A mortgage lender will also consider your debt-to-income (DTI) and loan-to-value (LTV) ratios.

Costs Involved in Refinancing

Just like a traditional mortgage, refinancing your home mortgage also comes with costs. That said, don't only focus on an offer's interest rate – assess the total cost of the loan. Closing costs include things like appraisal fees, title insurance, and lender fees, which are related to your repayment terms. Usually, they range from 2% to 6% of the total loan amount. Some lenders may also charge an origination fee to process your loan application. As a borrower, this knowledge is power.

Loan Terms and Interest Over Time

When you look at refinancing offers, think about using tools, like a mortgage calculator, to analyze the loan term. A shorter term can potentially save you hundreds of thousands of dollars in interest over the life of your loan. However, remember that even though this means lower interest payments, it also means higher monthly payments. It’s important to balance the potential interest savings with what fits well in your budget before you decide.

Refinance Your Home with Leaders Credit Union

Your financial well-being depends on making informed decisions. Whether you opt for a traditional refinance, a no-closing-cost option, or are deciding between fixed-rate and adjustable-rate mortgages, careful planning is essential. Assess your existing mortgage, risk tolerance, future plans, and consult with experts to narrow down your choices.

To better understand if refinancing is the right choice for you, we encourage you to meet with one of the Mortgage Champions at Leaders Credit Union. These qualified professionals can provide guidance based on your needs and situation, which helps make the refinancing process easier. To learn more about home loans, check out our free resource: Step-by-Step Guide to Get Pre-Qualified for Your Mortgage.