“What do I need to know before I refinance my home?”
When you become a homeowner, you take on one of the greatest financial commitments of your life. And, just like any other kind of loan, the mortgage interest rates are liable to vary from month to month and year to year. It’s very likely that you’ll eventually come across a better interest rate for a similar mortgage, which will help you pay off your home loan more quickly.
The process of switching out your existing mortgage for a brand new one is referred to as “refinancing" and it’s a good choice for borrowers who would like to lock in a lower interest rate and loan term. Rather than taking out a second mortgage on your home, you will re-pay your current lender with financing from a secondary lender.
Refinancing can be a good way to convert a variable loan to a fixed rate, consequently obtaining a reduced rate of interest, but it will only benefit those with an exceptional credit report. Refinancing can be dangerous to those who have faced financial trouble in the past.
No matter the financial climate, it can be difficult to stay caught up on payments for a home mortgage, especially when high rates of interest and an unpredictable economy can make them even tougher than anticipated.
For those homeowners who find themselves having problems with handling payments, refinancing your home can potentially provide you relief with a lower monthly payment option.
However, going into the refinance process without an understanding of what it entails can cause you to make uninformed decisions which can leave you in a worse situation than the one you were in. Taking the time to do some research in advance can help you ensure that 1) you’re truly in a good position to refinance; 2) you’re able to lock in a lower interest rate, and 3) you improve your financial position rather than further compromising it.
Throughout this blog, we’ll review some of the key information you need to know prior to determining if refinancing is the best option for you. We’ll also give you some key tips and advice that can help you lock in the best rate and improve your financial situation.
What Are the Benefits of Refinancing My Home?
One of the biggest advantages of refinancing, regardless of the equity you’ve built up, is the reduction in interest rate. As many people progress through life, they begin to earn more money which allows them to better manage their bills and other financial obligations. This increases their credit score over time, which, in turn, will mean lower rates on future loans taken out. This includes mortgages and many individuals choose to refinance their home for this specific reason. They have the potential to save hundreds of dollars per year thanks to a lower interest rate alone.
Another reason homeowners may choose to refinance is to get the money together for renovation costs, a new car, or to pay off credit card debt that is impacting their credit score. If they are putting together money for home improvement projects, then this will allow them to improve the quality and condition of their home while still making monthly mortgage payments. Once this is done, they can ask for a home appraisal and see an increase in their home’s value which will decrease the balanced owed on the property.
Determining the appropriate loan for you will depend on your specific financial goals. You may want to shorten the term of your loan down to a 15-year loan, which will allow you to save money on interest charges, or you might want to switch from a variable loan to a fixed-rate mortgage.
Refinancing can also help you eliminate private mortgage insurance after reaching 20% equity in your home. Many homeowners will choose a straight rate-and-term refinance that will lower their interest rates giving them a far more comfortable repayment term.
When Should I Refinance?
If it will help you to save money and pay off your loan faster, then there’s a good chance that refinancing your home is a good idea. Even if you’ve recently taken out a mortgage, if interest rates have dropped, then you may still be able to benefit from refinancing.
That being said, your monthly savings should offset the cost of refinancing throughout the duration, so if you plan on moving to a new house within the next few years then you should reconsider your options as refinancing may not make financial sense.
Knowing the right time to refinance is not just about the interest rates that could potentially come with a new mortgage. 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 is 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. 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.