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Bank Notes: Why people refinance their home
U.S. Bank logo, Text, Bank Notes.
When you refinance your mortgage, you replace it with a new one that ideally offers financial benefits.
Why people refinance their home. One, to save money, two, to spend home equity.
Homeowners may refinance for one of two reasons. The first is to save money on their mortgage. The second is to spend some of the equity they've built in their home.
A house with a loan of 5% dropping down. Text, lower interest rate.
Saving money is probably the most common reason. Many people refinance to reduce the interest rate on their loan.
Securing a lower interest rate can reduce monthly payments and save thousands of dollars over time.
A house with a loan changing from a 30-year term to a 15-year term. Text, shorter loan term.
Another way to save money is to refinance for a shorter loan term. Both a lower interest rate and a shorter loan term can help you build home equity faster.
People also refinance to get money to spend. Cash-out refinancing lets you tap into your home equity to access cash.
A house with cash over it, an arrow points from the house to the cash, then back into the house. Text, Cash-out refinancing.
Your mortgage gets replaced with a new one for a higher amount than you owe, and the difference is given to you in cash at closing.
Cash-out refinancing could be a good move if you want money for a high-return investment, such as a home renovation, or if you want to consolidate debt.
Text, Other common reasons to refinance: adjustable-rate to fixed-rate loan and vice versa, eliminate mortgage insurance.
Refinancing also gives you options to change your loan type and eliminate mortgage insurance.
Take note, refinancing will come with closing fees. A mortgage loan officer can help you decide if the benefits of refinancing outweigh the costs.
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Dear Money Mentor is designed to answer common consumer banking questions and offer guidance to improve financial wellbeing. Read on for tips and advice from Garret Carter, U.S. Bank production manager for the consumer direct mortgage call center, and Misty Thorne, U.S. Bank refinance sales manager for the consumer direct mortgage call center.
Whether you’ve owned your home for five months or 25 years, you’ve probably heard the term “refinance” and may have some questions:
● What is refinancing?
● How does refinancing work?
● Does refinancing make sense for your financial situation?
● What is the cost of refinancing your mortgage?
Simply put, refinancing is the process of replacing your existing mortgage with a new mortgage that has more favorable terms. It puts you, the homeowner, in a better financial situation. There are a myriad of reasons why you may want to refinance, but generally, the decision to move forward with a new mortgage comes down to:
Let’s examine each of these reasons to refinance in detail.
Keep an eye out on interest rates. By refinancing when interest rates are lower – even by a quarter of a percentage point – you could reduce your monthly payments and cut interest rate costs by thousands over the life of your loan. But reacting to a lower rate may not always be the right move for your situation. Reach out to your mortgage loan officer to see if refinancing when the rates are lower make sense for you.
Maybe you were set up with a longer term when you first purchased your home. Now, a couple of years later, your financial situation has changed, and you can afford to make higher mortgage payments. By refinancing to a shorter term, you could pay off the loan quicker, decreasing the amount of interest you’re charged over time.
Beyond saving money, refinancing allows you to tap into equity you’ve built to fund other areas of your life. (Think your child’s college tuition or wedding, home improvements, a dream vacation or wiping out credit card debt.) For example, let’s say you owe $180,000 on your $300,000 home, and you refinance with a $220,000 mortgage. Doing so leaves you with $40,000 to cash out and use however you’d like.
All are valid reasons, but you need to evaluate if refinancing makes sense for your personal and financial situation. Start by contacting your bank or mortgage company – or someone you’re ideally already meeting with for an annual mortgage review. They’ll be able to walk through the current interest rate environment and suggest the best products to fit your needs.
A key advantage for consumers: The mortgage lending industry is heavily regulated. Lenders are obligated to be transparent about costs, rates and fees – essentially the information that will affect your monthly payments. This enables you to shop around with confidence. Since interest rates can change daily, you should try to compare the numbers from lenders in a 24-hour period. That way you’re getting the most accurate cost estimates across the board.
Though refinancing may save you money, it’s important to remember that the process isn’t free. As with any mortgage, there are costs associated with the transaction, which can sometimes be wrapped into the new mortgage. Sometimes these costs are paid out-of-pocket at closing. It’s up to you and your personal banker to determine if those costs are balanced by the benefits of refinancing. Let’s say you’re expected to pay $2,000 in closing costs, but your monthly mortgage payment will be lowered by $200. You’ll recoup the closing costs in only 10 months – in that case, refinancing is worth considering.
If you decide to refinance, the steps will probably feel similar to when you originally closed on your home. Using our self-serve Loan Portal, you can fill out much of the application online and upload paystubs, bank statements and W2s. You can also complete the application over the phone or in any bank branch. After an appraisal determines the home’s value, underwriters will review – and hopefully approve – the loan before a closing date is set1.
In all, refinancing is not as intimidating as it seems. And after an average of 30 to 45 days, your money could be working harder and smarter for you. Here’s to lower monthly mortgage payments, a shorter loan term and/or some cash equity for that dream trip.
Learn more about your refinancing options.