Reasons to Refinance
- You want to lower your monthly payments.
Looking to increase your cash flow? One benefit of refinancing is that you can free up some money in your budget by reducing the amount you’re paying for your loan each month. You can lower your payments by refinancing for a longer time frame, like a 30-year fixed loan. Or, if you’re not planning to stay in your home for more than a few more years, you may choose to refinance at a lower interest rate using an adjustable-rate mortgage (ARM).
- You want to reduce the total amount you pay for the home.
If you want to pay off your home sooner and lower the total amount of interest you’re paying for it, you can refinance for a shorter loan term. If interest rates have dropped, you may be able to keep your monthly payment about the same as it is now, and pay off your home a few years earlier. Doing this could potentially save you thousands of dollars in interest over the life of the loan.
- You want to use your home’s equity to take cash out.
Another reason to refinance is to take cash out. Taking cash out means receiving a one-time cash payment during refinancing. To receive cash out, you'll need to get a loan for more than you owe on your principal mortgage balance. Remember that cash-out refinancing also increases your overall level of mortgage debt.
When would you want to take cash out?
You can use your refinance as an opportunity to consolidate debt. This may allow you to lower the amount you're paying on your total monthly bills, because the interest rate on your mortgage is probably going to be lower than the rate you're getting on your credit cards or the other types of bank loans.
Achieve tax benefits.
Another reason to consider taking cash out on your refinance is that your mortgage interest may be tax-deductible, while your credit card interest is not.
Make a big purchase.
You may choose to use cash-out refinancing for nonrecurring expenses, like buying a car, paying for a wedding or financing an education—purchases that might otherwise require you to borrow funds at a higher, non tax-deductible interest rate.
Consider all your options.
If your home is an important part of your total net worth, make sure to consider all your options carefully before deciding to take cash out of your home’s equity. Consolidating debt and then taking on new consumer debt will increase your overall liabilities, while potentially giving you a false sense of financial security. If you are considering cash-out refinancing to pay educational expenses, you may also want to look into state and federal education loan programs that also offer tax-deductible interest.
Understanding Loan-to-Value Ratio
Your loan-to-value ratio (LTV) describes what you owe on your mortgage as a percentage of the total current value of your property. It’s important to understand your LTV ratio, because it affects the rate and type of new loan you may qualify for.
Let's say the current appraised value of your home is $200,000. The remaining mortgage balance is $160,000.
$160,000 is 80% of $200,000—so that’s an 80% loan-to-value ratio.
Generally, a lower LTV ratio is better, although we consider many factors when figuring out your refinance options.
- A lower LTV ratio may get you a better rate and can let us know if you have enough equity to get a cash-out refinance.
- A higher LTV ratio means you have less equity in your home, and your refinancing may require Private Mortgage Insurance (PMI).