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Reasons to Refinance
There are many reasons why refinancing your home is a great move. And most of them have to do with saving money, extracting money from your home or restructuring your loan to gain new flexibility.
The most common type of refinance is a rate-and-term refinance. This is exactly what it sounds like: a refi method in which the chief goal is either to switch to a lower interest rate, change the term of the mortgage (number of years or variable vs. fixed rate) or both. The other common refi is a cash-out refinance, whereby you extract equity from your home in the form of cash for any number of purposes.
Let’s take a deeper look at some of the main reasons homeowners decide to refinance their mortgage:
Reduce monthly payments
Refinancing your home when rates are low is the No. 1 way to reduce interest payments and create financial flexibility. The savings you receive with a refi can differ dramatically depending on a range of factors, but according to Freddie Mac the average household saved $2,800 last year by refinancing.
Reduce overall interest payments
Are you able to tolerate higher monthly payments now that your financial situation has improved? Higher payments may sound counterintuitive, until you realize this may enable you to switch from a 30-year fixed rate to a 15-year fixed rate mortgage, thus reducing the amount of interest payments and accessing real savings. Yes, a 15-year loan agreement will mean higher monthly payments (you’re paying off the principal more quickly, after all), but you will also receive the benefits of reduced interest and a more rapid accumulation of equity.
Change from a variable rate to a fixed rate
Many homebuyers agree to an adjustable rate mortgage (ARM) – rates that begin steady but then could fluctuate with the market after an initial fixed-rate period. Given the lack of control over market conditions and the risk of paying substantially higher interest rates in the future, homeowners often switch to a fully fixed rate option over the entire term of the loan. A refinance enables this. The fixed rate you receive may not be quite as attractive as the introductory rate in your original mortgage, but it insures you against wild fluctuations in interest rates that could cause financial pain.
Take cash out
A cash-out refinance allows the borrower to tap into home equity and turn it into liquidity – often for purposes of debt consolidation, home renovations, college tuition or other purchases where a lump sum is necessary. This type of refinance usually requires the borrower to have established a minimum of 20% equity in the home.
If the amount of cash taken out is more than 80% of the home’s current value, you will likely be required to obtain private mortgage insurance (PMI), incurring additional costs. It’s a trade-off: You’re reducing equity for an opportunity to withdraw cash now to spend on other important matters.
Refinance Loan Highlights
Refinancing your mortgage loan may be the right decision for you if your home's value has significantly increased or current interest rates are considerably lower than they were when you purchased your home. Through a refinance with Fairway, you may be able to:
- Shorten your loan's term to save even more money
- Refinance into a lower interest rate, which might also lower your monthly mortgage payments
- Convert your adjustable-rate mortgage (ARM) to a fixed-rate mortgage, which will keep your payments safe from possible interest rate increases in the future
- Combine a first and second lien to a single loan for simplicity and possible savings
- Consolidate debt from higher interest rate credit cards or subordinate financed loans into one loan, which may result in lower monthly payments
- Turn your home equity into cash
Our numbers speak for themselves.
Use our resource center to learn more about refinancing, like when a good time to refinance is, how you can get cash out of your home, and other intelligent mortgage moves.
- Homeownership Hub Articles
- Cash-out Refinance VA Loan
- How to Get Good Credit for a Mortgage
- Questions To Ask VA Loan Lenders
- Refinance Your Home