In the world of mortgages, “refinancing” refers to the exchange of your existing mortgage with a new one. This refinance mortgage usually comes with a new rate, preferably reduced, and loan terms. Using the new refinance loan, you pay your existing or older mortgage loan. The outstanding balance of the old one is carried over to the new mortgage.
Rate and Term Mortgage — A Viable Refinancing Option
The most straightforward refinancing option is rate and term refinance loan since you’ll be simply adjusting the loan’s terms and rate, and maybe the loan package, but not the amount of the loan. Experts also call this the no cash refinance.
Usually, homeowners go with rate and term refinance when their existing loan is an ARM or adjustable rate mortgage. This is the case when the fixed loan period is about to end, or when loan rates are falling.
For example, let’s say you have a 3-year adjustable rate mortgage. The first three years of the mortgage loan in Salt Lake City may come with a fixed rate, with succeeding years having an adjustable rate. Prior to the first adjustment, you can consider refinancing to avoid paying for higher rates.
Rising Mortgage Rates and Refinancing
If you don’t choose refinance before your fixed rate term ends, your initial loan rate can climb significantly higher. While there are rate caps capable of limiting the mortgage rate amount, it’s still wise to be in control. Refinancing is an ideal option if you want reduced rates and a longer fixed loan period.
And while you’ll still have closing costs because of the new refinance loan, the reduced interest rate will offset these expenses and benefit you long term. This is called the refinance break-even point. The reduced monthly payments offset the closing costs, ensuring that you save some money in the long run.
Mortgages can be expensive because of high rates, so find ways to get smaller rates as much as possible. Refinancing is just one option — go ahead and explore your choices.