The word refinance gets thrown around quite a bit. The problem for many is the confusion surrounding why. For the sake of providing clear and worthy information, the following is our cheat sheet for the subject of mortgage refinance.
To finance (something) again, typically with a new loan at a lower rate of interest
The key to this definition would be the part about a lower rate of interest. Most people know that’s a good thing, but here’s why:
Lower monthly payments
When mortgage interest rates drop lower than the rate on your current loan, you may want to think about refinancing. Oftentimes a refi can be done with little or no closing costs. If this is the case, the financial benefit from your refi is immediate.
Pay off your home faster
Shorter loan terms carry lower rates. By shortening the term, you will alleviate thousands of dollars in saved interest. Compounded with a lower interest rate and the savings are staggering.
Reduce your interest rate
By lowering your interest rate you create financial options outside of lowering your payment. The money you save on your monthly mortgage payment can now be put towards other investments such as retirement accounts. Or, it can be put toward the principal of your loan, resulting in an even shorter loan term.
Take out cash
When you refinance an existing mortgage, your new loan can be for an amount greater than what is owed. The overage can then be taken out as cash and used for different purposes.
Consolidating high-interest debts such as credit cards or student loans can often save you hundreds of dollars in monthly interest.
Additional savings can also occur due to the tax deductibility of mortgage debt.
Raise your credit score
Consolidating is also a great way to improve your credit score, as it reduces your overall number of creditors and lowers your revolving debt levels.
Cash-out financing can be used for large purchases such as a down payment on an investment property, a new car, or financing a child’s education. Borrowing these funds in other ways could lead to higher, taxable interest rates.
Consider all your options.
Your home is an important part of your total net worth. Make sure to consider all your options carefully before deciding to take cash out of your home’s equity. Tapping the equity of your home has potential risks that should be carefully evaluated prior to moving forward.
Understanding Loan-to-Value Ratio or LTV
Your loan-to-value ratio (LTV) describes what you owe on your mortgage as a percentage of the total current value of your property. It’s important to understand your LTV ratio, because it affects the rate and type of new loan you may qualify for.
Let’s say the current appraised value of your home is $400,000. The remaining mortgage balance is $300,000.
$300,000 is 75% of $400,000—so that’s an 75% loan-to-value ratio.
On the majority of loan programs a lower loan to value will give you lower rates and costs than a higher loan to value.
No matter why you’re interested in refinancing your mortgage it is important to consider all your options, as well as any potential risks. Our team of skilled and knowledgeable professionals at Sammamish Mortgage can help you do just that.