Why Refinancing Your Home Could Be a Great Holiday Gift

Still thinking about what to get yourself for the holidays? A gift that has the potential to keep on giving can be a smart investment. And that includes your home.

If you’ve been considering refinancing your home loan, the holidays could be a great excuse to do so. Whether you need a little extra cash to pay for a home improvement project or want to save some money on your monthly mortgage bill by changing the terms, refinancing may provide benefits that can help with your goals.

How Does Refinancing Work?

In simple language, a refinance replaces your current mortgage with a new one. The new loan would pay off the balance on the original loan, and you’d pay the new lender back based on the terms of the new loan.  

Much like the original purchase process, you would need to apply for a refinance and then, if you’re approved, go through the loan transaction and close on the loan.

Reasons to Refinance 

There are many reasons you may want to refinance your mortgage. Here are some of the most common ones for borrowers:

Change Your Monthly Payment

If current interest rates are lower than when you first obtained your mortgage, you may want to consider refinancing to potentially reduce your monthly mortgage bill. Depending on how much you can reduce your interest rate, this could make a significant change to your payments and could help you save money throughout the life of your loan.

Tap Into Your Home Equity

In some cases, you may be able to tap into some of the equity you’ve built up in your home, depending on how much you have. This can be done by taking out a larger loan than you did originally, paying off the original mortgage with the new one and receiving the difference in cash. You can use this money for whatever you may need, but many borrowers invest it back into their home with remodels and improvements.

Convert Your Loan

Depending on your financial situation, you may want to convert your adjustable-rate mortgage into a fixed-rate mortgage or vice versa. A fixed interest rate would help provide you with more stable payments, allowing you to better budget for other monthly necessities.

Pay Off Your Loan Faster

Getting rid of debt quickly is a priority for many people, and if you’re the same way, you might want to consider refinancing to shorten your loan term. While this would help you pay off your mortgage faster, keep in mind that your monthly mortgage payments could be higher.

Extend the Loan Term

Inversely, extending your loan term could decrease your monthly payments. However, it would take even longer for you to pay off your mortgage, and you’d likely pay more in interest in the long run. And if interest rates are higher than when you first received your mortgage, it could be even more costly.

Types of Refinance Loans

While there are many types of refinance loans, each lender is different, and your lender may not offer them all. Make sure to double check with them about the options they may offer.

Rate and Term Refinance

If you want to refinance for a new interest rate or loan term, you’d likely apply for a rate and term refinance which would allow you to change these details. Typically, you’d want a rate and term refinance if current interest rates are lower than when you received your original mortgage. While the size of the loan would stay roughly the same as the current balance at the time of the refinance, you may be able to save more money with a lower monthly payment or pay off the debt faster.

Cash-Out Refinance

Depending on how much equity you’ve built up in your home, a cash-out refinance would help you tap into that equity. As mentioned earlier, you’d replace your current mortgage with a bigger one and receive the difference in cash at closing. With a cash-out refinance, you will more than likely be paying more than your original monthly payment so make sure you fully understand your loan terms and have budgeted accordingly.

Streamline Refinance

Streamline refinances are available for eligible borrowers who have a Federal Housing Administration (FHA) loan, a Department of Veterans Affairs (VA) loan or a U.S. Department of Agriculture (USDA) loan. A streamline refinance would potentially allow you to bypass some paperwork and underwriting, which could help you get to closing quicker.

Would Refinancing Work for You?

Like any other mortgage, knowing if a refinance could work for you depends on your own personal situation and goals. As you’re looking at your options, make sure to consider things like your existing mortgage, your current financial standing and how long you’re planning to stay in your home.  

In addition, you must keep in mind that there are still closing costs for a refinance. If you do some calculating and discover the costs outweigh the benefits you’d potentially get from a refinance, you may not want to move forward with a refinance option.

‘Tis the Season to Consider Refinancing

While there are both positives and negatives to refinancing a mortgage, only you can determine whether or not it would make sense for your specific situation. With the holidays underway, it could be a great time to gift yourself some potential savings, funds for home improvement projects or anything you need or the ability to pay off your debt sooner. Speak to a lending professional to discuss your options. 

Additional disclaimer: The United States Department of Agriculture Rural Development (USDA-RD) Single Family Housing Guaranteed Loan Program assists approved lenders in providing low to moderate income households purchase or build homes in rural areas subject to eligibility requirements. The maximum loan amount an applicant may qualify for will depend on the applicant’s repayment ability. The applicant’s ability to repay a loan considers various factors such as income, debts, and assets. Regardless of repayment ability, applicants may never borrower more than the area’s loan limit (plus certain costs allowed to be financed) for the county in which the property is located. Eligible borrowers can receive 100% financing without private mortgage insurance.