Refinancing is the process of replacing an existing loan with a new one that pays off the debt of the previous one. This can be a beneficial financial decision if the new loan offers better terms or features that improve your finances. The specifics of refinancing can vary depending on the type of loan and lender.
How It Works
When looking to refinance, start by searching for a new lender who can offer better terms. Once you’ve found the right lender, apply for a new loan. If approved, the new loan will pay off all your existing debt, and you will continue to make payments on the new loan until it is paid off in full or refinanced again. However, refinancing does come with closing costs, which can impact the financial feasibility of the new mortgage.
Rate and Term Refinance
One of the most common types of refinancing is rate and term refinance, which can save you money on your interest rate and the length of your repayment period. For example, by refinancing your 30-year mortgage into a 15-year mortgage, you may pay more each month, but you will pay less interest over the life of the loan. Determining your break-even threshold before refinancing is crucial because you should “recoup” refinancing costs through the decreased monthly mortgage payment.
Cash-Out Refinance
Another type of refinancing is a cash-out refinance, where you can borrow up to 80% of your home’s current market value. You can receive much-needed cash through this, but it is important to remember that you must repay this money in the future, as it is not free. When you take out a cash-out mortgage, the number of your lien increases, so payouts can be more substantial or last longer.
Considerations for Refinancing
One should not take refinancing lightly as it is a significant financial decision. It is worth considering the costs and benefits and seeking the advice of a financial planner. Refinancing can provide financial benefits, such as lower interest rates and shorter repayment periods, but it can also come with closing costs and increased debt.
At Funding Bay, our network of lenders can provide you with competitive rates and terms to help you achieve your financial goals. Get in touch to learn more and take control of your finances.
