Generally, when you do a mortgage refinance, you extend the time that you would be paying the mortgage to reduce the monthly payment or the interest rate.
According to the website of the United States government (USA.gov): “refinancing has the purpose of meeting a debt through another loan under new terms. This type of financing is the most common among homeowners. Generally, it implies paying the existing mortgage and acquiring a new debt ”.
Therefore, when you carry out a mortgage refinance, you pay off the mortgage you have and get a new one. You may consider refinancing your mortgage when: you find it difficult to make monthly payments, you are looking to lower your interest or reduce the term of the loan, etc. Since by refinancing you could get a new interest rate, a shorter term or a more comfortable monthly payment.
Is it convenient to refinance?
Must be carefull! Since by refinancing your mortgage for a longer term (more years) you can borrow more, since in the end you would be paying more for interest.
For example, if you have a $ 200,000 mortgage with 4.5% interest, your 30-year monthly payment would be $ 1,013. You will finish paying the loan in 2049, but you will pay more than $ 164,000 in interest during those years.
On the other hand, if you have a 20-year mortgage for the same amount ($ 200,000), the monthly payment will be $ 1,265, but you will end up paying much less in interest, $ 103,672. Therefore, if you reduce the time in which you would be paying the mortgage, to 20 years, you would save $ 60,328 and if you lower it to 15 years you would save approximately $ 88,603.
However, I must emphasize that by decreasing the number of years that you would be paying the mortgage, the monthly payment would go up a lot. Because of this, you have to weigh the benefits and disadvantages and decide what is best for you: pay more money monthly to pay off the debt faster and save on interest or pay less monthly and ultimately pay more in interest.
Some benefits you can get from refinancing:
Lower your monthly payment or interest rate
By refinancing you could lower your monthly mortgage payment, since the time in which you would be paying the loan could increase, thus lowering the monthly payment.
For example, if you currently pay $ 2,800 for your house each month for a 15-year term, refinancing and increasing the term to 30 years could lower your monthly payment.
Reduce or increase the duration of the mortgage.
You can reduce or increase the term in which you would be paying the mortgage at your convenience. For example, if you want to lower your monthly payment, you could increase the term for a few more years. On the other hand, if you want to pay off your mortgage faster and lower interest, you can reduce the years.
Obtain cash from accumulated capital
When you refinance, you can receive a cash payment, if you do so for an amount greater than what you owe. For example, if you owe $ 100,000 on the mortgage and you finance $ 120,000, you could receive the difference, $ 20,000 in cash. This option is convenient if you need money to pay off debts or to remodel your home.
Cost to refinance
Refinancing is not free, to do so you could pay for: application, set-up fees, home inspection fees, home appraisal fees, etc.