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Tuesday, February 7, 2023

What Are My Home Loan Refinance Options?

Photo by Towfiqu barbhuiya on Unsplash

Your home loan was a signed deal, and it may feel like you’re committed no matter what life brings your way, but you aren’t without options for changing the terms. While you are responsible to pay back your loan, there is a way that you can transfer the balance and switch up the terms. Through the process of refinancing, you can attach yourself to a new home loan with new terms and even a new financial lender. With a home loan refinance, the new loan is used to pay off the remainder of your current loan, and all future monthly payments go toward repaying the new loan.

Many people choose to refinance their home loans to better match their current financial situation. With a variety of options available, refinancing can allow you to change the terms to be more in your favor. It can also allow you to take out cash from your home equity to use for repairs, home improvements, or other expenses. If you’ve been considering ways to lower your interest rate, get rid of private mortgage insurance costs, tap into your home’s equity, or change the length of your repayment schedule, a home loan refinance may be a good choice for you. 

Here are some home loan refinance options you can consider.

Access Your Home Equity

As you pay off your initial home loan, you build up equity in your home. This equity is the value of your home that you own outright—that is, the value of your home minus what you owe your lender. Your new refinanced home loan could be a dollar-for-dollar match to your current balance, but it could also be larger if you choose to access your home equity.

A cash-out refinance is a popular option for people who have a substantial amount of equity in their homes. Equity builds as you pay back your loan, as we’ve mentioned, but it can also build if your home increases in value during the time you own it. Opting for a cash-out refinance through a credit union allows homeowners to refinance their mortgages for more than they currently owe on the home and receive some of their equity in cash.

With this cash, many homeowners choose to make upgrades and increase home value. Others use the money to pay off or consolidate other debt. Consolidating other debt, such as credit card debt or student loans, allows you to keep all of your debt in one place and also avoid the high interest rates associated with other types of loans. A cash-out refinance is a great home loan refinance option that can open a lot of opportunities for homeowners low on liquidity or holding on to debt in other places.

Lower Your Interest Rate

With a home loan refinance, you have the opportunity to change many things about your home loan, one being your interest rate. If your current interest rate is higher than you’d like it to be, refinancing can be a great opportunity to see if you can change that. Maybe your credit has improved since you took out your original loan. Or maybe interest rates in your area have dropped. Most experts agree that if you can lower your interest rate by 0.75 percent, refinancing may be worth it.

A lower interest rate can really benefit your finances. It has the possibility of lowering your monthly payments and saving you thousands of dollars in interest over the life of your home loan.

Change Your Loan Term

One of the many things you’ll have the ability to change with a home loan refinance is your current loan term. The term of your loan is the number of years you agree to spend paying your loan back. The length of your loan repayment makes a big impact on how much interest you pay over the life of the loan. When you’re considering refinancing your home loan, think about how long you want your loan term to be and how much you can afford to repay each month.

Long- and short-term loans each have their benefits. Consider the two most popular home loan term terms: 30 years and 15 years. A 30-year loan gives you the most time to pay back your loan and provides you with the lowest monthly payment option, sometimes significantly lower than your current payment. If you’re interested in lower monthly payments and aren’t in a hurry to pay the loan back, then opting for this term could be in your best interest. Note that with this option, you’ll pay more interest in the long run unless you plan to move in the next several years.

On the other hand, a 15-year term can save you money overall. Paying back your loan in 15 instead of 30 years will save you 15 years’ worth of interest. And if you’re able to negotiate a better interest rate during your refinance, you may find that opting for the 15-year loan only slightly increases your monthly payment. Even if the monthly payment is quite a bit more, the long-term benefit could make the shorter loan term worthwhile.

A Note About Closing Costs

Not everything is different when you refinance your home. Just as you would with a traditional loan, a home loan refinance comes with closing costs. You might have to cover costs such as inspection fees, origination fees, taxes, title searches, and appraisal fees. While some refinance lenders allow you to bundle the closing costs into the overall loan balance, many don’t, so it’s a good idea to be financially prepared just in case.

You also need to consider your closing costs in determining whether a refinance will pay off. If your lower interest rate is only slightly lower, you may not see the benefits of the switch for a few years. It’ll take time to make up what you spend on the closing costs required to do a refinance and reach your break-even point. Talk to your lender and crunch the numbers before you make a commitment.

Does a refinance sound like the right fit for you? The home loan refinance experts at Solarity Credit Union can walk you through your options so you can determine which is right for you and get started today.

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