Mortgage Refinancing: Is It Your Ticket to Cash and Savings?

For most Americans, access to sources of low-cost credit is a vital part of managing both the large and small costs of living. Credit allows you to do anything, from buy your first car to finance your late-life return to college. And one of the best sources of credit can be from refinancing your home.

Why is refinancing a good way to get the funds you need? And when might it not be the right choice? Here's a short guide to the pros and cons of refinancing. 

What Is Mortgage Refinancing?

Refinancing a home mortgage means taking out a new, replacement mortgage and using it to pay off the original loan. While this may sound like an unusual swap of loans, it has several benefits.

First, homeowners typically refinance to a new mortgage with a better interest rate and, therefore, lower monthly payments and overall costs. This can save significant money over the life of the loan. Second, you can opt to make adjustments like taking out an amount of cash during the refinance or shortening your loan term to pay off the home faster. 

Do You Get Cash From Refinancing?

Refinancing usually has two main goals. The first is to reduce monthly payments and doesn't involve getting any cash in the transaction. People generally accomplish this by taking out a new loan with lower interest and fewer extra costs — and therefore lower payments. Alternatively, you might refinance the remaining amount of your first loan over more years, resulting in lower monthly payments over a longer term. 

The second goal of refinancing may be to access the home equity available in your property. Equity is the difference between what the property is worth and what you owe on it. To tap this equity, a cash-out refinancing would involve borrowing more from the new loan than you actually need to pay off your old one. Your monthly payments may or may not be lower. 

An example of a cash-out refinance would be a home that's worth $500,000 on the market today. If you owe $300,000 on the mortgage, you would take out a new loan for up to 80 or 90 percent of the value: $400,000 to $450,000. You would use the first $300,000 to pay off the old mortgage, and the remainder is yours to do with as you please.

When Should You Avoid Refinancing?

Does refinancing sound like an easy or inexpensive way to save money or access credit at a low rate? It can be exactly that. However, while refinancing generally has many positive elements, it isn't always the right answer for everyone.

First, most homeowners should refinance only when they can save enough money to cover fees related to taking out a new mortgage. You and your mortgage lender can do the math to determine if a particular loan is cost-effective. 

And of course, to access home equity through a cash-out refinance, you must have some equity in the property. If you recently bought the home with a low down payment, for instance, you may not have enough available equity to make refinancing worth the effort. In some cases, a property may also have lost some value in a tough market and, thus, have a lower overall limit to what you can borrow.

Where Can You Learn More?

The right refinance loan and amount depends on your financial goals. And with so many options available to the modern homeowner, your first step should be to consult with an experienced lender. Secure One Capital Corporation can help. Our knowledgeable team can assist you in finding the right mix of money savings and access to the equity in your house. Call today to learn more.