Not unlike the original mortgage, refinancing takes a little bit of work. It requires appraisal, title search, etc., but for most homeowners the benefits greatly outweigh the burdens. Some of these potential benefits are detailed below.
Benefits of a Lower Interest Rate
A lower interest rate benefits the owner two-fold. The obvious impact is that a lower interest rate saves you money over the life of the mortgage and will very likely reduce your monthly payment (depending on term). A second factor to consider is that you build equity in your home at a faster rate with a lower interest rate.
Example: The monthly payment on a $200,000 loan at 8.5% for 30 years would be $1,230.26*. Reducing the interest rate to to 4.25% lowers that payment to $787.10*.
Benefits of Shortening the Term
When the market experiences a significant drop in interest rates, it sometimes allows homeowners to move from a 30-year mortgage to a 15-year mortgage with a reasonably small change in their monthly payment.
Example: Using the example of a $200,000 loan at 8.5% for 30 years again, compare the original $1,230.26* monthly payment to a new payment of $1,265.27 when the term changes to 15 years at 5%.
Benefits of Equity in Home Refinancing
In simple terms, equity is the portion of your home’s value that you “own” when your home’s value is greater than your mortgage’s outstanding balance. If your home is valued (via appraisal) at $200,000, but your mortgage payoff balance is only $150,000, then you have $50,000 equity in your home. In refinancing, it is possible to use that equity as “available cash” for other purposes.
Example: Still using the example of a $200,000 loan at 8.5% for 30 years, suppose that your payoff balance is $150,000. Because the home’s value is greater than the balance owed, you could refinance an amount between what you owe and the home’s full value. This would result in cash in hand that could be applied to things like home improvement projects, college money for kids, paying down high-interest debt like credit cards, and more. Using $25,000 of equity would result in a $175,000 loan, which at 5% would yield a monthly payment of $1,067.57. Notice this is still about $200 less per month than the original loan example, and it allows for improvement in another area of your budget.
*Examples given based on a 20% down payment.
Not all homeowners will benefit from a refinance, but many certainly can. It depends on things like the homeowner’s current rate compared to the current market rate, the homeowner’s credit rating, the home’s current value compared to what is owed on it, and more. Speak with one of the experts at Cornerstone First Financial to find out if a conventional refinance of your home is a good fit for you!
Cornerstone First Financial affirms that when refinancing a consumer’s existing loan, the consumer’s total finance charges may be higher over the life of the loan.
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