If you’re a homeowner, your mortgage needs may change over time. Interest rates can change, your financial situation may evolve or you may build equity in your home. In some circumstances, refinancing your mortgage could help you better align your home loan with your current needs and goals.
But what does it mean to refinance a mortgage, and when should you consider it?
Here’s what to know about how mortgage refinancing works, some common reasons homeowners refinance and the difference between a standard refinance and a cash-out refinance.
What is Mortgage Refinancing?
Mortgage refinancing is the process of replacing your existing home loan with a new mortgage. The new loan pays off your current mortgage and may have a different interest rate, loan term, monthly payment or loan type.
The goal of refinancing depends on your individual circumstances. You might want to lower your monthly mortgage payment, change your loan term, move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or access some of the equity you’ve built in your home.
Because refinancing involves taking out a new mortgage, you’ll typically go through an application and approval process similar to the one you completed when purchasing your home. Factors such as your income, credit history and credit score may be considered as part of the lending decision.
Reasons to Refinance Your Mortgage
There isn’t one right reason to refinance a mortgage. Whether refinancing makes sense depends on your existing loan, your goals and your individual circumstances.
Depending on your situation, you may consider refinancing to:
- Lower your monthly mortgage payment. A new mortgage with a lower interest rate or a longer loan term could reduce your monthly principal and interest payment. However, extending the term of your mortgage can mean paying interest for a longer period and potentially paying more interest over the life of the loan.
- Pay off your mortgage sooner. Some homeowners refinance to change how long they have to repay their mortgage. Moving from a longer term to a shorter term, for example, may help you pay off your mortgage sooner, although it could result in a higher monthly payment.
- Move from an adjustable-rate to a fixed-rate mortgage. An adjustable-rate mortgage has an interest rate that can change over time. A fixed-rate mortgage, by comparison, provides greater predictability for future principal and interest payments. Refinancing from an ARM to a fixed-rate mortgage may therefore be worth considering if having more predictable payments is important to you.
- Access available home equity. As you pay down your mortgage and your home’s value changes, you may build equity in your home. A cash-out refinance may allow you to access a portion of available equity by replacing your existing mortgage with a larger loan and receiving the difference in cash.
- Respond to a significant life change. Sometimes the reason for considering a refinance isn’t interest rates. Changes such as marriage, divorce, children going to college or unexpected expenses could change what you need from your mortgage. Depending on your circumstances, refinancing could provide an opportunity to restructure your home loan around your current needs.
Standard Refinance vs. Cash-Out Refinance: What’s the Difference?
While both involve replacing your current mortgage with a new one, a standard refinance and a cash-out refinance serve different purposes.
Standard mortgage refinance
With a standard refinance, you replace your current mortgage with a new loan, generally with the goal of changing your interest rate, monthly payment, loan term or mortgage type. For example, you might refinance from a 30-year mortgage to a shorter term or from an adjustable-rate mortgage to a fixed-rate mortgage.
The primary purpose is to restructure your mortgage rather than access your home’s equity as cash.
Cash-out refinance
A cash-out refinance also replaces your existing mortgage, but the new mortgage is for more than the amount you currently owe. You receive a portion of the difference in cash, subject to applicable requirements and available equity.
For example, homeowners may consider a cash-out refinance when they want to access available home equity for home repairs or other expenses.
Because a cash-out refinance increases the amount you borrow against your home, it’s important to consider how the new loan amount, interest rate, monthly payment, closing costs and repayment term fit your needs.
When Should You Consider Refinancing Your Mortgage?
There is no universal "best time" to refinance. The right time depends on your existing mortgage and what you want to accomplish.
You may want to explore mortgage refinancing when:
- Mortgage rates have changed since you took out your original home loan.
- Your credit profile has improved, which may affect the loan terms for which you qualify.
- You want a different monthly payment that better fits your current circumstances.
- You want to shorten or change your loan term.
- You want the predictability of a fixed-rate mortgage instead of an adjustable-rate mortgage.
- You have available equity you want to access through a cash-out refinance.
- Your financial needs have changed because of a significant life event.
The important question isn’t simply whether you can refinance. It’s whether the costs and terms of a new mortgage make sense for your goals.
One way to evaluate the potential cost is to calculate your mortgage refinance break-even point. This can help you estimate how long it could take for potential monthly savings to offset the upfront costs of refinancing.
Is Refinancing Your Mortgage Right for You?
Refinancing can be a useful way to adjust your mortgage as your needs change, but the potential benefits and costs will be different for every homeowner.
Before making a decision, consider what you want to accomplish, compare your existing mortgage with the potential terms of a new loan and evaluate both the short- and long-term costs.
Ready to explore your mortgage refinance options? If you’re considering refinancing your home, an experienced Atlantic Union Bank Mortgage Loan Officer can help you explore available mortgage options based on your needs.