What is a Mortgage Refinance?

If you’re a homeowner, you may have heard of the term “refinance.”

But what exactly is a refinance, and is it something you need?

In this article, the real estate experts here at Sequoia Real Estate are breaking down the basics of refinancing, including:

When a refinance makes sense,
The pros and cons of refinancing, and
How to refinance.

Let’s start with a quick definition of refinancing.

A refinance is the process of replacing an existing loan with a new loan with different terms. This is typically done to get a lower interest rate, a lower monthly payment, or a longer (or shorter) loan repayment term. Refinancing can also be used to tap into your home equity by borrowing against your home’s value. This is called a “cash-out refi.”

When to Consider Refinancing

There are several situations when refinancing may be beneficial, including:

When interest rates are lower. If interest rates have decreased since you took out your original loan, refinancing may be a way to lock in a lower rate and reduce your monthly payments.
When your financial circumstances change. If your income has increased or decreased, or if you’ve experienced any other significant change in your financial situation, refinancing may be a way to adjust your loan payments to better fit your current budget.
When wanting to change the loan term. Refinancing can allow you to switch from a longer loan term to a shorter one, which may reduce the total interest you pay over the life of the loan. It could also allow you to restart a new loan term from the date of the refinance, which could lower your monthly payment by spreading the remaining balance over more months (but it would likely result in more money spent on interest over the term of the loan).
When wanting to cash out some equity. If you have substantial equity in your home, you can convert some of that equity into cash in your pocket with a cash-out refi (although a home equity line of credit or home equity loan may be a simpler means of accessing cash from your equity).

Benefits of Refinancing

Refinancing can have several advantages, including:

Lowering monthly payments. If you’re able to secure a lower interest rate, your monthly mortgage payments may go down, freeing up more money in your budget.
Saving money over the life of the loan. A lower interest rate can also mean paying less in total interest over the life of the loan.
Changing the loan term to suit financial goals. Refinancing can allow you to switch to a shorter or longer loan term to better align with your financial goals.

Potential Drawbacks of Refinancing

While refinancing can be advantageous, there are also some possible drawbacks to consider, including:

Closing costs. Like with any new loan, refinancing comes with closing costs, which can include appraisal fees, title fees, and origination fees. In many cases, these costs can be “rolled into” your loan, meaning that the expense doesn’t come out of your pocket in a lump sum.
Risk of paying more in total interest expense. If you are extending your loan term or cashing out some of your equity, you could end up paying more in total interest over the life of the loan, even if you get a lower interest rate.
Potential for a higher interest rate.
Depending on your credit score and other financial factors, you may not be able to obtain a lower interest rate when refinancing.

How to Refinance

If you’re considering refinancing, here are the steps to take:

Research lenders and loan options. Look for lenders who offer competitive interest rates and loan terms that meet your financial goals. You can also contact any of the well-connected real estate agents here at Sequoia for a referral to a reputable local lender.
Prepare financial documentation. You’ll need to provide documentation such as income statements, tax returns, and proof of insurance.
Apply for the loan. Once you’ve selected a lender, you can fill out an application and provide the necessary documentation (most lenders offer an online application for convenience). The lender will then review your application and determine if you’re eligible for a refinance loan.

Refinancing is not necessary for every homeowner, but it can be beneficial for homeowners looking to save money on interest, lower their monthly payments, or otherwise change their loan terms. if you’re considering a refinance, be sure to research your options and work with a reputable lender to ensure you’re making the best decision for your financial situation.