You have probably seen ads on your local TV station, online, or perhaps you heard them on the radio. No matter where it has been, you know the word “refinancing” has popped into your life more often lately. Have you wondered what all the fuss is about, or how it might affect you?
If so, then we made this blog post for you. Continue reading to learn the basics of refinancing, and why so many people are currently talking about refinance rates. We hope you will gain a better understanding of refinancing by the end of this blog and that you will remember Local Mortgage if you decide to refinance your mortgage in Colorado.
Refinancing: The Basics
Before we cover why people keep talking about refinancing, it will help to get a solid understanding of what exactly it is. You probably know it has something to do with loans and mortgages specifically, but not much past that.
Put simply, refinancing is a way to restructure a current loan. If you refinance a loan, then you get the chance to secure the same loan amount owed for a new term and a new interest rate.
At this point, a straightforward example might help you understand what exactly that means. Suppose you take out a loan for some arbitrary amount of money and time. For the sake of the example, let’s say you take out a loan at $100,000 for ten years and a 10% fixed interest rate (simple examples benefit from simple math).
To pay off this loan in time, you would probably need to pay about $16,000 in the first year, with the majority of those payments going toward the interest on the loan. If you want to pay off more of the principal on the loan, then you would have to make even more payments in the first year.
Suppose that in the second year of the loan, you find out that some lenders offer the same loan term and amount for a lower fixed interest rate of 5% per year. At this point, you might be disappointed you didn’t wait and take advantage of this loan with a lower interest rate.
Instead of settling for disappointment, let’s say you decide to refinance your loan and take advantage of that new, lower interest rate. In that case, a new lender would pay off your current loan (an amount of approximately $94,000 if you paid $16,000 in the first year) and offer you a new loan for the amount leftover from your previous loan. So, you still have to pay off the $94,000 you owed at the end of the first year, but now you get to pay it off at a lower interest rate and over ten years instead of nine years.
Refinancing in this example would not only lower your monthly payment, but it would also allow you to stop paying mostly interest and instead start chipping away at the principal amount owed. This saves you, the borrower, a significant amount of money over the long run. It also helps make your debt more manageable and less daunting.
So, our example shows us that refinancing is a little more than just restructuring a loan at a new interest rate and with a new term. Refinancing is also a way to get ahead of your debt and positively affect your financial picture, especially if you find yourself in a situation similar to the example above. Refinancing can be a true difference-maker for your mortgage, especially if it allows you to make lower payments for that dream house you currently live in.
So Why All the Fuss?
The simple example above should give you a solid understanding of refinancing and how it can be beneficial to someone’s finances. The question still remains though, why all the fuss about refinancing and interest rates lately? To understand, two things need to be explained.
First, a large number of people in the United States take out mortgages to pay for their houses. Mortgages allow people to purchase a house in a more manageable way than buying outright. They are extremely helpful since it is almost impossible for most Americans to pay more than $100,000 on a house at once.
The second thing to understand is that interest rates on mortgages are historically low and seem to keep moving lower. This means that many people find themselves in situations where current interest rates on mortgages are lower than the interest rates they got when they took out their mortgage. Many people find themselves in a situation similar to the example we went over above and could benefit enormously from refinancing.
When to Refinance
Some simple guidelines can help you determine whether you should consider refinancing your current home loan. The example we went over above gives us one of these guidelines: if the average interest rate associated with mortgages similar to your own is lower than the interest you currently pay, then consider refinancing.
Another time to consider refinancing is when your credit improves. Perhaps your credit score kept you from qualifying the low interest rate you wanted when you took out a mortgage, but you made smart financial decisions in the meantime and improved your credit score. If this is the case, then you should consider refinancing and trying to secure a lower interest rate for your mortgage.
One more thing that might make you consider refinancing is unhappiness with your current loan type or term. Maybe you agreed to an adjustable-rate mortgage and are worried that the interest rate might increase in the future. You could talk to a lender about refinancing and getting a new fixed-rate mortgage instead, so you can be locked into a low rate. Or perhaps you simply need more time to pay for the house you love, and would like to talk to a lender about refinancing into a new mortgage term.
These are just a few simple guidelines to help you determine if refinancing might be good for your financial situation. If you have any questions about your specific situation, feel free to contact Local Mortgage. We are here to help.
Refinance With Local Mortgage
If you have read this blog and think refinancing sounds like a smart choice for you, then choose Local Mortgage to help you move the process along! We can assist you by getting you into the perfect loan for your situation. We would love to help you lower your monthly payment and build a stable financial foundation.
Our site also features several helpful calculators, including a refinancing calculator, built to help you get a better understanding of your mortgage. We hope that you will choose Local Mortgage for all your mortgage needs!