Mortgage refinances typically aim to lower your monthly payment while cash-out refinances are often used to take care of other debts or make improvements to your home.
Your home mortgage interest rate depends on a number of variables that are currently being decided by the Federal National Mortgage Association (FNMA), otherwise known as Fannie Mae. Depending on the housing resale market, your personal and individual qualifications, and the term of the loan, you can find major differences in rates that are available to you.
These variables often change, so it’s advisable to speak with a licensed mortgage banker. Hitting reset on your mortgage rate can often lead to a reduced term and interest rate, and possibly a beneficial use of the equity in your home. Both of these objectives may be met without changing the term (or remaining length) of your current mortgage.
If you are considering a refinance and find yourself wondering “How much can I save by refinancing?” read on for the answer.
Rate-and-Term Refinancing
Rate Refinancing
Rate-and-term refinancing can make sense for a number of reasons. If you have an adjustable rate mortgage that is set to increase and you want to refinance to a fixed rate, you may consider a rate-and-term refinance. If you’ve worked to improve your credit score or if your home has gone up in value, you can also benefit from a lower mortgage rate.
As mortgage rates continue to rise (as widely expected) you may want to consider buying “points” in order to secure a lower rate than is available. A mortgage point is equal to 1% of your mortgage amount, and will equate to about a quarter of a percent being taken off your interest rate. To gauge the worth of buying discount points, use our discount point calculator to find out how many months it would take for discount points to break even and start saving you money.
Rate refinancing is very simple because you only have to compare your monthly savings to refinance costs paid up front, like discount points and refinance closing costs.
Term Refinancing
Another option for those wondering how much you can save by refinancing is a term refinance. The length of your loan is one factor that determines your interest rate. Because shorter loans are less risky for banks, you can receive a significantly lower interest rate. If you have a 30 year mortgage, you can save a lot of money by refinancing to a 15 or 20 year term.
Under the best of circumstances, you may be able to refinance an originally high interest rate to a new rate due to market changes and shorten your term by a few years. Your monthly payment may not even change much.
More realistically, you may lower your term, agree to a slightly increased monthly payment, and end up saving thousands over the course of your loan. Click here to view our mortgage refinance calculators to compare current rates with what you are currently paying
Cash Out Refinance
A cash out refinance replaces your mortgage with a home loan that covers the amount still owed on your home, plus extra cash.
Cash out refinances can only cover up to 90% of your home’s full appraisal value. If your home is worth $200,000 and you have paid $100,000, you can take a cash out refinance loan for $150,000. You will now have a $150,000 loan to pay off, but will receive $50,000 cash in hand when the refinance closes.
Because your new loan size is larger than the $100,000 debt, you may not be getting a better loan, but you would have the ability to take care of credit card debt, student loan debt, or make improvements to your home.
Cash out refinances are done for highly-individualized reasons, so you should consult with a loan officer to decide if one is right for you. In general there are a few benefits and disadvantages to cash-out refis, outlined below.
Cash-out Refinance Benefits:
- Debt consolidation for a higher credit score: One of the most common applications of cash-out refis is to pay off credit card debt. If you struggle with credit card debt, it may make sense to consolidate your debts into your mortgage so that your credit score doesn’t suffer from high-utilization rates and overdue credit card bills.
- Tax Deductions: In comparison to credit card debt, the interest that you pay on a home equity loan is tax deductible.
- Liquid Cash: The last and most obvious benefit is that cash you receive in the loan. This can be used for any reason, whether it is used to make home improvements or send a child to school without using student loans.
Cash-out Refinance Disadvantages:
- Paying higher rates: Cash-out refis almost always result in a slightly higher interest rate. It may be lower than your original mortgage rate, but cash-out refis usually come with a rate about market norms.
- Securing your other debts: While credit card debt punishes you with high interest rates, it is technically unsecured. If you don’t pay your credit card debts you will face collections, but no one will come to take your home. By wrapping your debts into your home loan, you are securing your other debts to your home. If you begin to miss payments, you will face foreclosure because of your mortgage/car/credit card debts.
- Closing costs: as with any refinance, you will have to pay closing costs. These fees can be rolled into your mortgage or paid in cash. Closing costs are usually 1% – 2% of your mortgage value, so these should be used to compare against your potential savings. However, some lenders offer “no cost” refinances and you should ask for your lender to provide you with a comparison between a no cost refinance and one that has cost to see if the lower rate with the closing cost makes more sense for you over time.
Can Refinancing Save You Money?
If you were wondering “How much can I save by refinancing?,” hopefully we were able to point you in the right direction. If you still have any questions, download the guide below or set up a meeting with a lender.
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