When you refinance your mortgage, all you are doing is replacing your old home loan with a new one. The new loan pays off the old one, in full, at the time of closing. There are many reasons a homeowner would want to do this.
A homeowner can refinance to exploit a change in market conditions, such as a change in mortgage rates or a rise in local home values. The new mortgage can give a borrower access to lower mortgage rates, give the appearance of more home equity, or can remove private mortgage insurance payments. Oftentimes a borrower will refinance to lower their mortgage payments through one of these avenues.
Other times, a homeowner will refinance to take cash out of their homes. This could be done for myriad reasons, such as home improvement projects, financing education, or paying off higher-interest debt.
There are many reasons to replace an old loan with a new one. But when is the best time to do so? When does it become worth it? These questions are common, and hard to answer as each situation is so specialized.
To answer the questions: “Am I ready to Refinance?” you have to ask yourself a couple other questions first. First of all, why do you want to refinance in the first place? Are you trying to lower your monthly payments, get rid of PMI, or take cash out at closing? Depending on your goals, you may use a streamline refinance program or you may not. Make sure to ask your loan officer about this option.
The case where it almost always makes sense to refinance is the zero-cost loan. A zero-cost mortgage is one for which the lender pays all of the borrower’s closing costs. They do this usually in exchange for a slightly higher mortgage rate. But, you won’t suffer any loss from this slight increase when you’ll be lowering your rate anyway.
When would a zero-cost not be a good idea? Only when the idea of extending your mortgage term makes you uncomfortable. However, remember that you reserve the right to pay as much to your mortgage each month as you want to.