When mortgage rates drop, many homeowners rush to refinance, but that’s not the only time mortgage refinancing can be a smart move. Refinancing replaces your existing mortgage with a new one, and the process is similar to the first time you applied for a home loan.
A mortgage broker can help you evaluate options and determine if refinancing makes sense for your situation. In this article, mortgage brokers share firsthand stories of how refinancing helped their homeowner clients.
“As a mortgage broker, it feels great to help clients refinance into a lower rate, saving them money monthly and easing their money burdens,” said Matt G, a California mortgage broker. “We serve as ‘advisors’ to our clients, and it’s our duty to serve them and help them manage their debt and finances.”
To refinance, lenders typically review your credit score, income, debt, assets, and, most importantly, your equity, which is confirmed through an appraisal. Home equity is the difference between your property’s market value and your remaining mortgage loan balance.
Why you may consider refinancing
Refinancing your mortgage isn’t just about chasing a lower rate. From cutting interest costs to improving monthly cash flow, here are five strategic reasons homeowners may choose to refinance:
1. Save money
Lowering your interest rate or loan balance can reduce your monthly mortgage payment.
“Refinancing isn’t one-size-fits-all — everyone’s goals are different,” said mortgage broker, Skylar W., from Maine. “I recently helped a newly retired client lower her interest rate, pay off all of her high consumer debt (saving her $890 a month), and take out cash to put into a savings account, to give her a fresh start and sense of security during the next chapter of her life.”
2. Improve cash flow
A cash-out refinance can consolidate debt or fund major expenses at a lower interest rate.
Mortgage broker Mahb R. in Michigan used this strategy to help a client with $90,000 in high-interest debt and over $200,000 in home equity. “He wanted a home equity line of credit (HELOC) for debt consolidation, but instead we refinanced his mortgage, raising his interest rate but increasing his monthly cash flow by nearly $1,100 by consolidating his debt into one payment,” Mahb said. “This avoided the variable rate of a HELOC and kept him out of the debt cycle.”
3. Eliminate mortgage insurance
For example, refinancing from an FHA loan to a conventional loan can eliminate monthly mortgage insurance payments. This can save money even if your mortgage rate isn’t substantially lower.
4. Switch loan types
As an example, moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan can lock in predictable payments and long-term stability.
5. Accelerate loan payoff
Shortening your loan term could result in a higher monthly payment, depending on the rate and loan balance. But you can save money on total interest payments and eliminate your mortgage faster.
Cash-out refinancing vs. rate-and-term refinancing
A rate-and-term refinance changes your mortgage rate, term, or both to help you achieve goals such as lowering payments or adjusting the loan length.
A cash-out refinance lets you borrow more than your existing mortgage loan balance, using the difference as cash for debt payoff, home improvements, or other expenses.
Arizona mortgage broker Stacey M. helped one couple with a cash-out refinance to pay off 17 collections and car payments. “Their credit scores improved to the low 700s, and they are now ready to sell and buy a new home with a better financial standing,” she said.
Knowing when to refinance
If you have a conventional loan, you can typically refinance as quickly as you’d like — though cash-out refinances often require six to 12 months of ownership. For an FHA loan, this requires at least seven to 12 months.
Generally, it pays to wait a few years before refinancing so that you can build up equity and pay down your loan balance. But if rates drop significantly or your credit score improves, refinancing sooner could be worthwhile.
Another factor to consider is the “breakeven point,” which is the time it takes for the savings generated by a lower interest rate to offset the refinance’s closing costs.
As these mortgage brokers’ stories show, refinancing looks different for every homeowner. A local independent mortgage broker can help you evaluate your options and determine if refinancing makes sense for your goals. With the right expert and timing, a refinance could be the fresh start you’re looking for.
Find one in your area at MortgageMatchup.com.
This post was created by Insider Studios with Mortgage Matchup.
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