Maybe you got an offer in your mailbox or inbox, telling you the amazing rates available to refinance your home. But if you are new to the home-owning game, you might not even understand what refinancing is. Before you decide if you should refinance your mortgage, let’s understand more about what it entails.
What does refinancing mean?
In the simplest of terms, refinancing is when you take your existing home mortgage and transfer the balance into a new loan. The primary goal is usually to get more favorable, more stable, interest rates. Refinancing is especially helpful for those who take out adjustable-rate mortgages or ARMs. ARMs tend to have very low interest rates for the first three to five years. But after those 3–5 years, the interest rate skyrockets, often leaving homeowners with a loan they can’t afford. (This is a piece of what caused the financial crisis in 2008.)
Individuals can choose to refinance into different home loan options, including 15- or 30-year loans. These loans offer fixed rates. That means homeowners pay the same amount every month for 15 or 30 years until their home is paid off. Refinance mortgage rates are often more favorable to borrowers than the initial mortgage rate.
Other reasons for refinancing a home
Some other reasons people refi is to borrow from the equity in their home to fix or make upgrades on their house. This is often called a cash-out refinance. If you use a cash-out refi for home improvement, it can help with the long-term value of the home. You effectively increase the resale value of your biggest asset.
You can also use that money to pay off high-interest rate credit cards or other personal loans that could be costing you. Some people use the funds from the mortgage for other purposes, such as paying for college and making investments.