Things You Need to Know Before Refinancing Your Home

Mon, Sep 18, 2017

Featured Post, Financial Advice

Refinancing is a great way for homeowners to secure a lower interest rate on their current loan against their home. Refinancing involves paying off your current mortgage in order to secure a new mortgage with a lower interest rate and the opportunity to shorten the overall term. As part of the process, it is also possible to convert the mortgage type from an adjustable-rate mortgage; in which the interest rate varies over the lifetime of the loan, to one with a fixed interest rate that remains the same throughout.

Why You Should Consider Refinancing

One of the most attractive aspects of refinancing is the potential reductions of the overall interest rate. It is generally the case that if you can afford to secure a reduction of at least 2%, then it is something that you should consider doing. As well as helping you save money, refinancing also speeds up the process of building equity in your home. Usually you should be able to secure lower monthly payments as well, saving you even more money.

Refinancing can also provide an opportunity to shorten the term of the loan. It is possible to continue the same monthly payment plan while shortening the term of the loan and thus reducing the overall amount of money paid.

By converting from an adjustable-rate mortgage to a fixed term one you can, because you know exactly what your monthly payments will be, plan your finances in much greater detail. It is also often the case that while adjustable-rate mortgages start lower than fixed rate mortgages they are dependent upon market forces which can drive rates up over the course of a loan. Conversely, there are some circumstances in which making the switch in the other direction is beneficial; if interest rates more broadly are falling than the periodic adjustments made, interest rates on the loan will drop accordingly.

Before you move forward with refinancing your home, however, there are some things you should know.

It Costs Money

Refinancing your home will cost you money, regardless of the new terms you are seeking. You will usually need to factor in, at the very least, the closing costs charged by the bank. These usually amount to somewhere between 2% and 5% of the loan amount. Sometimes you can defer paying the closing costs, opting instead to have the lender cover the costs. If one chooses this option, however, they will usually find themselves having to pay a higher interest rate.

The Savings Really Add Up

If the interest rate on your current mortgage is more than 100 base points higher than general interest rates then refinancing is a good option. Whether you seek to alter the terms of your current loan or the amount of money you are paying every month, the savings that you do make will quickly add up and will usually cover the costs of the refinancing in a relatively short space of time.

Refinancing also provides a chance to potentially cancel your private mortgage insurance, PMI, if this is something you are currently paying for. In order to do this, your loan balance needs to be 80% or less of the appraised value of your home. If this is the case, your new loan will no longer require you to take out private mortgage insurance.

Resetting the Clock

When you choose to pursue a home refinance, you are, in a sense, resetting the life cycle of your loan. What you end up with is an entirely new loan. At some point during the lifetime of a loan you will reach a stage where the money you pay is going towards paying the loan down rather than paying the interest, by refinancing and securing a new loan, you can change this dynamic so that your money is going to the interest rather than paying down the loan.

Your Equity Could Be Worth Cash

A cash-out refinance is an option that allows the borrower to take out a new mortgage of greater value than the one currently owed and take the difference as cash. This payout is usually up to 80% of the loan-to-value ratio. Whether this is suitable for you will depend entirely on what you intend to do with the cash you receive, if you plan to use it in order to remodel a house or otherwise increase its value then the move makes sense. Otherwise, it’s probably not a good idea.

Whether refinancing is suitable for you will depend on your individual circumstances, you should do as much research as you can beforehand in order to ensure that refinancing is the right option for you and that you seek the right deal.

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