Ever get those pesky letters in the mail, urging you to “refinance today!”? Lenders promise to slash your payment, put cash in your hand, or even help consolidate your debt by refinancing your home. But how do you know what your options are and whether it is a good option for you?

Let’s start from the beginning.

What does it mean to refinance a home loan?

To refinance your home means to get a new mortgage altogether in place of your existing. The new lender (or sometimes just a new loan with the same lender) will lend you money on your same home by paying off your existing loan and creating a new loan with new terms.

What is the point of a refinance?

There are many reasons a person might consider refinancing their home mortgage. In some cases, interest rates drop substantially, lowering the payment enough to justify the expense of a refinance and then some. Others want to refinance their adjustable rate mortgage to a fixed rate prior to an adjustable rate hike. Some people opt to refinance their home and lengthen the term in order to lower their mortgage payments. There are also options to take equity out of your home and use the funds for different uses- whether it’s for consolidating debt, completing a remodel, or paying for some other life event. Lenders will typically only pull out cash up to a certain percentage of loan to value, limiting how much you can take out depending on the equity you have.

What do I need to have to refinance?

Again, different refinance programs have different guidelines and eligibility requirements, but most will have some standard requirements in common. For traditional a refinance, you will need to show income with pay stubs as well as tax returns and bank statements. To protect their interest, the bank will likely order an appraisal as part of the approval process to ensure they are making a good investment in your refinance. Your income and finances will be vetted to make sure you can afford your new payments.

Can I pay my mortgage off faster with a refi?

Well, that depends on the program and your current mortgage. As with any finance related decisions or changes, you will want to evaluate your goals ahead of time to know if you are getting closer (or further) by taking action. If you have 10 years left on your current mortgage and decide to refinance to a new 30-year loan, you just severely elongated your loan terms. While you may lower your payment due to the lower principle (compared to when you first borrowed) and the longer amount of time to pay, depending on your terms, you could end up paying way more interest in the end. However, if you shorten the length of your loan, you could end up saving a significant amount of money in interest. For example, if you have 27 years left on your 200k loan at 4.5% and you refinance at a 15-year loan for 3.75, you can save over 90k in interest alone!

A refinance is only as helpful as the terms you set up. While a lower payment now is appealing, spreading payments out over a longer term only sets you up to pay more in the long run and slow down the pace to achieving pay off. If rates are not good enough to justify the cost of a refinance, consider making extra payments on your existing loan to speed up payoff still. Whatever you choose, make sure you get aligned with your goals and follow the actions to get you there.

Suffering from bad credit? Refinancing your home is still possible. Find out more here!