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Refinancing Your Mortgage

Written by: Haley (she/her)

3 min read | Published: June 25, 2024

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Becoming a homeowner is a huge milestone for many Americans. Over time, you may have realized you want a different type of mortgage loan or wondered if you could get a different interest rate. If you’re a homeowner considering refinancing for any reason, it’s important to think about why you want to refinance and how it will impact you financially.

Refinancing means you’re replacing your current mortgage with a new loan. Some common reasons you may choose to refinance are to lower your monthly payments, to eliminate an adjustable-rate mortgage (ARM) or a balloon loan, to access home equity, or to reduce your loan term. This article contains questions you can ask yourself to determine if refinancing might be a good option for you, as well as the different ways to refinance a home loan.

To start, some questions you should ask yourself if you’re considering refinancing your mortgage:

  1. Why do you want to refinance your home loan? Is it to use the home’s equity?
  2. Is the new interest rate you will receive by refinancing lower than your current interest rate?
  3. Does refinancing lower your monthly payments?
  4. How long do you plan to live in your home?
  5. Do you meet the loan requirements? This would include your credit score and credit history, the amount you have in savings, your income, your employment history, and any other items needed to be approved for a new mortgage.
  6. Is there another way to accomplish your goal?
  7. If you’re hoping to save money by refinancing, when will you begin saving? Will it take a year or two for you to break even? What will the total cost of refinancing be?

Answering the above questions thoughtfully can help you determine if refinancing is the best option for you and your financial goals.

If you decide to refinance, there are many different options available to refinance a mortgage. One option is a home equity loan. A home equity loan is an installment loan that has a set monthly payment. A home equity loan can allow for some tax deductions, but it also has many risks associated with it. For example, if you can’t afford to repay the loan, the home may be foreclosed on. In addition, depending on the amount borrowed, if you sell the home for less than what is owed, all debt on the home will not be covered by the sale. Another risk is taking out a home equity loan with a subprime lender because the interest rates and fees will likely be extremely high.

Another option for refinancing your home loan is a home equity line of credit or HELOC. A HELOC is a revolving loan with a variable monthly payment, like a credit card. A home equity line of credit can allow you to write checks against the line of credit for repairs or renovations as needed. This will likely increase the amount you owe on your home.

In addition to home equity loans and HELOCs, you may qualify for a reverse mortgage. Reverse mortgages are unique, because creditworthiness and income are not considered, and you will not have a monthly payment. The amount available to you for a reverse mortgage typically depends on your age as the homeowner, your current interest rate, the appraised value of your home, and government lending limits. A reverse mortgage may help you to consolidate or restructure debt to make it more manageable. Reverse mortgage funds can be received as a lump sum, as a tenure payment (equal monthly payments if you are the homeowner and live in the home), a term payment (equal monthly payments for a fixed number of years), a line of credit, or any combination of these options. One thing to keep in mind if you think you may qualify for a reverse mortgage is that the upfront costs can be high.

If you decide refinancing is the best option for you after considering the questions at the beginning of this article, you have many options to choose from including a home equity loan, a home equity line of credit (HELOC) or a reverse mortgage. Which one you choose will depend on your personal situation and what you qualify for. Be sure to weigh all your options to find the best fit for you and your financial goals.


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