A rate and term refinance can be a useful way to save money on your home loan.
What Is It?
Basically, a rate and term refinance is a loan improvement. It allows you to exchange your old mortgage for a new one that will hopefully put you in a better financial position. With a rate and term refinance you may be able to accomplish one or more of the following:
- Lowering the monthly minimum payments
- Reducing interest paid in the long term
- Paying the home off more quickly
- Building more equity
- Changing your loan type. For example from FHA to conventional
- Getting rid of mandatory mortgage insurance and the payment for insurance
Should You Consider a Rate and Term Refinance?
There are several reasons someone might consider a rate and term refinance. The biggest reasons people look into it include mortgage rates significantly lowering, and approaching the end of a fixed rate portion on an adjustable-rate mortgage. Some other situations where a rate and term refinance may be worth looking into include:
Your Credit Score has Improved or Your Income Increases
If you currently have a higher credit score or are at a higher income level than when you closed on the loan you are currently paying. If your credit score is higher you could obtain a lower interest rate and if your income is higher you could be able to refinance at a shorter-term (loan life).
The Break-Even Point Makes Sense
It costs money to refinance a loan, essentially you are opening a brand new loan with closing costs etc. The break-even point would be the length of time it takes for your monthly mortgage savings to equal the costs you paid to close the loan. If you plan to live in the home longer than it takes to get to a break-even point then it would make sense to refinance.
If You Have 20% or More in Equity
When you gain enough equity in your home, you no longer have to carry mortgage insurance. This can be significant cost savings. However, the only way to drop it earlier than the terms on your current loan is to refinance.
If You Want Your Loan Paid off by a Certain Time
Many people opt for a rate and term refinance so that they can plan to have their loan paid in full by a certain time in their life. Some borrowers look to do this so that their homes are paid off by the time they enter retirement.
Rate and Term vs. Cash-Out
So how does a rate and term differ from a cash-out refinance? The biggest difference between the two is that a rate and term reduces your current amount of debt while a cash-out allows the borrower to take cash out of the home and increases your debt.
You can take a very limited amount of cash out with a rate and term, it is 2% of the loan value or $2,000 whichever is less.
Is Refinancing to a Lower Interest Rate Worth-It?
To calculate your actual savings if you were to refinance, compare the total cost of all of your monthly payments on your current loan until it is paid off to the total of all of the payments on the new loan. Add in the costs of the new loan as well and compare the two numbers. This will allow you to assess if you are really getting significant savings.
Contact me at any time for more information on available refinance options in Mission Viejo and California right now. I am here to help find the best options for you.
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