When It Makes Sense and How It Can Help
Being a homeowner comes with a lot of responsibilities and expenses. At Travis Credit Union, we support our member-homeowners with mortgage refinancing at competitive rates so they can remain focused on their financial goals.
What Is Mortgage Refinancing?
Mortgage refinancing means replacing your current home loan with a new mortgage. This is done to get a lower interest rate, to change the loan term or to convert your home equity into cash for renovations or another major expense. When you refinance, your new home loan pays off your existing mortgage balance in full, leaving you with a new loan with different repayment terms.
What Are the Different Types of Mortgage Refinancing?
People may refinance for a variety of reasons, but there are three ways you can do it. Choose the one that best align with your financial goals.
- Rate-and-term refinance: A rate and term refinance focuses on lowering the monthly payment or changing the existing loan term to save money.
- Shorter-term refinance: A shorter-term refinance reduces the number of years of the loan, allowing you to pay it off faster.
- Cash-out refinance: A cash-out refinance allows you to access your home’s equity. A cash-out refinance combines the balance of your current mortgage with the cash amount you withdraw from your equity. This creates a new, higher mortgage and new payment terms.
When Is The Right Time To Refinance My Mortgage?
There are a few factors that determine when it is right to refinance your current mortgage. According to Bankrate, the general rule to refinance is if you can beat your current loan interest rate by at least 0.75% to 1.00%. Another important factor is staying in your home long enough to break even. Calculating your break-even point is made simple using the free Mortgage Refinance Calculator in TCU’s Knowledge Base.
Refinancing might be right for you if you have more than 15 years remaining on your home loan. It may not make sense for those with less than 15 years because you could end up paying more interest in the latter years of your loan. Because each homeowner’s financial situation is different, you should review all your options and decide what’s the best fit for you.
Why Should I Refinance my Mortgage?
There are many benefits to refinancing your home mortgage when the time is right.
- Reduce payments: When you refinance your mortgage, you can secure a lower loan rate or change the loan term to reduce your monthly payment. This allows you to save on interest over the life of the loan.
- Convert loan types: You can change your loan type when you refinance. You can move from an adjustable-rate mortgage to a fixed-rate mortgage, which gives you predictable monthly payments. Or you can refinance from a fixed-rate mortgage to an adjustable-rate mortgage to take advantage of lower initial interest rates.
- Reduce or remove mortgage insurance: Mortgage insurance is required for loans made with a down payment of less than 20% to protect lenders if a borrower defaults on their loan. When a homeowner builds up at least 20% equity in their home, they can refinance to remove mortgage insurance, which lowers the monthly payments by hundreds of dollars.
- Cash-out refinance: A cash-out refinance is a form of refinancing that is structured to replace your existing home mortgage with a larger mortgage, so you can access equity as cash. This money can then be used for home repairs or upgrades, or for another large expense.
How Travis Credit Union Can Help
TCU offers a variety of home mortgage options designed to meet your needs. With competitive rates, knowledgeable mortgage loan consultants and a focus on your financial wellness, explore refinancing options at our Home Loans Hub. Refinance your home loan today!
Frequently Asked Questions
What is mortgage refinancing?
Mortgage refinancing replaces your current home loan with a new mortgage. The new loan pays off your existing mortgage and establishes new repayment terms.
When does it make sense to refinance a mortgage?
Refinancing may make sense when you can secure a lower interest rate, adjust your loan term or access home equity. It is also important to stay in your home long enough to recover any refinancing costs.
How much lower should my new interest rate be before refinancing?
A common guideline is to refinance when you can lower your interest rate by 0.75% to 1.00%. This may help reduce your monthly payment and overall interest costs.
What is a rate-and-term refinance?
A rate-and-term refinance changes your interest rate, loan term or both. Its goal is usually to lower monthly payments or reduce the total cost of the loan.
What is a shorter-term refinance?
A shorter-term refinance reduces the length of your mortgage. This can help you pay off your home faster and potentially save interest over time.
What is a cash-out refinance?
A cash-out refinance lets you borrow against your home's equity and receive cash at closing. The new mortgage balance will be larger because it includes both your existing loan balance and the cash you withdraw.
How can refinancing lower my monthly mortgage payment?
Refinancing can lower payments by securing a lower interest rate or extending the repayment term. Either option may reduce the amount due each month.
Can refinancing help me change my loan type?
Yes, refinancing can allow you to switch between an adjustable-rate mortgage and a fixed-rate mortgage. This can help you choose a loan structure that better fits your financial goals.
Can refinancing eliminate mortgage insurance?
In some cases, yes. If you have built at least 20% equity in your home, refinancing may allow you to remove mortgage insurance and lower your monthly payment.
Is refinancing a good option if I have less than 15 years left on my mortgage?
It may not always be beneficial. Depending on your situation, refinancing later in the loan term could result in paying more interest over time.