How to Make a Refi Work for You

Let’s start at the beginning, by quickly explaining refinancing: this is when you take a step back, assess the loan you currently have for your home, and take out a new one. The new loan pays off the old one and you start fresh, with different terms. On the surface that may seem like pedaling backwards – why take out a new loan when you already have one, right? Well, the truth is, if you have had your mortgage for two or more years, you could benefit from refinancing!

Over the lifetime of a loan, many things can change. For example, if you have an adjustable-rate mortgage, your interest rate may have increased. Or, the market’s rates may have changed considerably since you took out your mortgage. In short, there are a number of ways that you can make refinancing work to your benefit, putting yourself on more solid financial footing for the future. Let’s look five of the most popular ways to make refinancing work for you!

1.  Lower your monthly payments: We are still in the midst of seeing incredibly low interest rates. The 30-year fixed-rate is currently 4.25%, while the 15-year fixed-rate is just 3.625%. If you have had your mortgage for a few years, the chances are pretty good that you are currently tied to a higher interest rate. By refinancing with a new, lower interest rate – or extending your loan period – you could lock yourself into lower monthly payments.
2. Cashing-out: “Cash-out” refinancing is more or self-explanatory; you can take out money – equity – in cash. Depending on where you live, you can take out any amount of equity you’ve built up (based on money you’ve paid on your mortgage, or increases in the market value of your home) up to 80% of your home’s value. Many people will use a cash-out refinancing in order to complete home improvement projects, with the hopes that it will further add to their home’s value (building more equity). Another powerful and popular reason to take out money is to pay off outstanding bills that have higher interest that your mortgage. Whatever the ultimate use, just ensure that you make the most of the cash!
3. Pay less interest: Throughout our financial lives, we will all pay interest. Whether it’s student loan or credit card debt, a mortgage, or a car note, interest is hard to avoid. That said, you should always be looking for opportunities to reduce the percentage of interest you are paying on a principal balance. Paying less interest means retaining money and purchasing power to be put towards the things you value most highly. Obtaining a lower interest rate during refinancing is common, and certainly something that should be looked into.
4. Go from an ARM to a fixed-rate: Adjustable-rate mortgages have their advantages: make lower payments from the outset, and interest rates that fall with the market. However, they can be also certainly be nerve-wracking. With lower payments initially come bigger payments down the road, and interest rates can also increase with the market, just as they decrease. If you started of with an adjustable-rate mortgage, but now find you want the stability of a fixed-rate loan, you might consider refinancing your way into terms that make more sense to you financially.