Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What Does it Mean to Refinance a House?
When you trade your old mortgage for a new mortgage it is called Refinancing. This term refinancing appears when the bank or lender pays off your existing mortgage for the new one.
A borrower chooses to refinance a house when they can lower their interest and shorten their payment term, or cash some of the equity they have earned on their home.
What are the Types of Refinancing?
Rate and term and cash-out refinance are the two main types of refinancing.
In a rate and term refinance – When you get a new mortgage with a smaller interest rate, and also a shorter payment term like 30 years changed to 15 years term it is rate and term refinance.
Because of the recent historical low-interest rates refinancing your 30 years mortgage into a 15 years mortgage might get you similar monthly payments as your original loan.
Be sure to check your break-even point before deciding to refinance your current mortgage rates this is very important.
In a cash-out refinance – Up to 80 percent of the current value of your home for cash can be refinanced by you in a cash-out refinance.
That is why it is called a cash-out refinance. You are not always saving money by refinancing here, but also instead of getting a lower-interest loan on some needed cash.
However, it could mean larger and/or longer-term payments are what you need to understand.
The Reasons Why Homeowners Refinance a House:
- To procure a lower interest rate.
- To reduce their mortgage term and pay significantly less in interest payments.
- To change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa depending on the rates and the duration you plan to remain in your current home.
- To tap into home equity, and to raise funds to deal with other financial emergencies, for financing a big purchase, or to consolidate debt.
- To get rid of mortgage insurance requirements, which they must have been paying because of their loan program. As some Federal backed loan programs like FHA and USDA loans requiring ongoing mortgage insurance premium payments even after building up substantial equity by the homeowner, whereas a conventional loan does not require PMI if the owner has at least 20% equity in the home. So borrowers who improve their credit profiles & income gradually shift into a conventional loan to save on the substantial monthly mortgage insurance payments.
What Should you Know Before Refinancing a House?
For a borrower with a perfect credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and seek a lower interest rate.
Meanwhile, refinancing can be risky for borrowers with less than perfect, or even bad credit score, or too much debt.
Advantages of Refinancing a House
Regardless of equity, one of the main advantages of refinancing is reducing the interest rate.
You are able to procure loans at lower rates, ones you pay all your bills on time and increase your credit score, and thereby able to refinance.
A lower interest rate can have a huge effect on monthly payments, thereby saving you hundreds of dollars a year.
Is Refinancing a Good Idea?
From your current interest rate, if you can reduce your interest rate by at least 2% then it is worthwhile, however, many lenders say 1% savings is a good enough reason to refinance.
And it is a good idea to refinance if the refinancing costs are affordable.
Why is Refinancing a Bad Idea?
Depending on your motivation and goals refinancing your mortgage can be either a good or a bad idea, also consider the financial terms of the refi.
Many consumers who refinance end up growing new credit card balances that may be hard to repay because they did it to consolidate debt as if you are digging another hole to close an existing one!
Because of fees and closing costs, you can wind up paying more over a period of time and land up with a longer loan term, or a higher interest rate.
Effect of Refinance
When you compare the amortization schedule of your current mortgage with the amortization schedule of your new mortgage, it will show the effect a refinance will have on your net worth in the future.
When Should you Refinance your House?
Some of the smarter financial moves are –
- To up retirement contributions or shore-up, your budget is a sure-shot way of using refinance savings on your mortgage payment.
- To renovate your kitchen and bathrooms to increase the value of your home is another smarter way of cashing out.
- If you do not plan to leave the house you are staying in, for another 5 years.
When Should you Not Refinance Your House?
- If there is a long break-even period that means, the number of months to reach the point when you start saving then it is no point refinancing.
- It is ideal to refinance, to lower your monthly payment provided you are not spending more money in the long run.
- If your existing interest rates already record low to the new one then moving to refinance does not make sense.
- Do not refinance if the closing costs are beyond your budget.
Conclusion
It is very important to think about why you are refinancing before you begin the process of gathering pay stubs and bank statements.
It is definitely a valuable tool for bringing debt under control if used properly. If it reduces your mortgage payment, shrinks the term of your loan, or helps you build equity faster then, it is a great financial decision to refinancing a house.
