Should I Refinance My Home?
What You Should Know Before Choosing to Refinance Your Home
Becoming a homeowner is one of the biggest financial commitments that someone will take on in their lifetime. However, like any loan, the interest rates are likely to change over time. This means that later down the line, there may be a better deal on a similar mortgage that will allow you to pay off your mortgage more quickly.
When you want to replace an existing mortgage with a new one, this is known as refinancing your home. It’s a good option for those borrowers who are always on the lookout to obtain a better rate and interest term over time. Instead of simply taking out a new mortgage, a refinance will pay off the first loan, allowing space for the second loan to be created.
Refinancing can be a good way to convert a variable loan to a fixed rate, therefore obtaining a lower interest rate--but only for those borrowers with the perfect credit history. It is a risk for borrowers who have found themselves in financial difficulty in the past.
No matter the economic climate, it can be a challenge to make the payments on a home mortgage-- possible high interest rates and the unstable economy can make them even tougher than expected.
For those homeowners who find themselves struggling with managing payments, it may be time to consider refinancing.
Going into a refinance with the right knowledge will prevent the cause for harm later down the line. Not doing so might increase your interest rate instead of lowering it.
In this post we will discuss some of the basic things you will need to know before making the decision to refinance and how to get the best deal possible for you.
What Are the Benefits of Refinancing My Home?
One of the biggest advantage points of a refinance, regardless of the equity, is the reduction in an interest rate. As many people progress through life, they may begin to earn more money meaning they are able to use that money to manage their bills and other financial obligations more quickly. Over time, their credit score will increase.
An increase in a credit score will mean lower rates on any loans taken out. This includes mortgages--so therefore many people will choose to refinance their homes for this very reason. There is a potential to save hundreds of dollars per year due to a lower interest rate alone.
Another reason people may opt to refinance their homes in order to get the money together to cover renovation costs, to buy a new car, or to pay off credit card debts that are impacting on their credit scores. Many homeowners will work to improve the quality and condition of their home to suit their needs after they buy. In doing this, while still continuing to make payments on a mortgage, they are able to take out credit in home equity. This will mean that following a home appraisal, they will likely see the value of their home increase, and therefore the balance owed on the property decreased following a significant renovation.
Finding the correct loan for you will highly depend on your financial goals. Many will want to shorten the term of their loan from a 30- year to a 15-year loan, saving a lot of money on interest charges, while others will want to make the switch from a variable loan to a fixed rate mortgage.
Refinancing will also serve as a way to eliminate private mortgage insurance after reaching 20% equity on your home. A lot of homeowners will choose to opt for a straight rate-and-term refinance that will lower their interest rates giving them a more comfortable repayment term in return.
How Will I Know That It’s a Good Time to Refinance?
If it will help you to save money-- helping you to pay off your mortgage faster, refinancing your home is a good idea. When rates are low, even those who have taken out mortgages fairly recently may be able to reap the benefits of refinancing.
Your monthly savings should offset the cost of the refinancing throughout the duration, so it may not be a good idea to do so if you plan on moving to a new house within the next few years. You want to have the time to recoup the cost over time and moving so quickly after refinancing will not give you the benefits you would hope to achieve.
Knowing exactly when to refinance is not always just about the interest rates that could potentially come with a new rate. You will also need to consider your own credit score being good enough to be able to access these more affordable rates- the best rates are most likely to be offered to those with the best credit score.
So, the answer to the question about knowing when the best time to refinance your home will depend on the equity you have in the home, how long you are looking to stay in your present home, your financial condition, and your financial goals. Once you can crunch the numbers on these questions, you will then have a better idea of when to refinance your home.
How Many Types of Refinancing Are There?
There are a number of types of refinancing that homeowners may choose from. These include:
Change Loan Duration:
Shortening the duration of the loan which helps to reduce interest over time, meaning you will own the home outright quicker, or lengthen the loan to reduce monthly payments.
Change Loan Structure:
Those who used an adjustable rate mortgage to help make the initial payments more affordable are able to transfer to a fixed-rate loan when they build up equity and have more income allowing them to do so.
Cash Out Home Equity:
Allowing homeowners to extract equity from their homes. If equity is taken out to improve the quality of the home (paying for repairs or to make home improvements) the interest may be tax deductible.
Lower Rates:
In the event that mortgage rates decline, homeowners can choose to refinance in order to lower their monthly payments.
How Long Will Refinancing a Mortgage Take?
This factor will depend on the lender, as well as how long additional tasks such as the inspections, appraisals, credit checks and any paperwork needed.
Your lender should provide information about the different loans they offer, as well as the interest rates against each loan. They may also allow you to complete the paperwork online and submit the supporting documents.
Thanks to modern technology, the mortgage application process has accelerated and streamlined significantly with the introduction of online applications, document scanning apps on our smartphones, and e-signatures. This means that the application can be filled out without having to print a single sheet of paper or make one trip to your mortgage lender’s office.
With that, many refinances can be completed within a 30-45 day window.
What Are the Risks of Refinancing My Home?
Possible penalties that may be incurred are one of the major risks of refinancing your home. Some mortgage agreements will have a provision that permits the mortgage company to charge a fee for refinancing. Those fees can come to thousands of dollars.
Make sure to read the small print before finalizing the agreement and ensure that the penalty is covered.
There are going to be some further fees to make yourself aware of before completing a refinancing agreement. This will include bank fees, and the cost of paying an attorney who will help to handle the paperwork that can be daunting to fill out, and to ensure you’re getting the best deal possible.
Shop around before making the commitment or wait for a window for potential free or low fee financing that are sometimes offered by mortgage companies. In the long run, you want to make sure you are getting the best deal possible.
What Else Should I Consider Before I Refinance my Home?
Many people will choose to use the money they get from refinancing to make significant improvements to their home, or to wipe out their credit card debts with a lower interest loan.
What people may fail to recognize is that a refinancing loan is still a debt and racking up card balances again can put you right back to where you were financially. A mortgage debt is kept secure by your home. Any missed mortgage repayments could result in losing your home to foreclosure.
To stop this from happening, a homeowner wanting to borrow money through refinancing needs to investigate whether their needs for cash could potentially be handled by using another form of credit.
In order to make sure you make the best decision for you, talk to a professional mortgage lender who can help to guide you through the whole process from which options are best for you, right through to the closing of your mortgage. Contact us today to discuss your best options.
Author Bio
Will Foster | First State Bank Mortgage
Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.