Refinancing your home loan can be very beneficial to you for many different reasons. However, it’s definitely not for everyone. You should understand as much as possible about refinancing before you decide to do it. Here are some of the most common questions people have about refinancing
, along with a brief answer for each:
Why Would I Refinance My Mortgage?
People refinance for a number of different reasons, each with its own benefits and drawbacks. Here are some common reasons to refinance your mortgage:
- To lower your interest rate: If interest rates are deceasing in the housing market, you might be able to refinance to a lower rate.
- To lower your monthly payment: You can lower your monthly payments by refinancing to a longer term. You’ll free up cash flow on a monthly basis but will end up paying more in the long run. Some choose to do this to fund remodels or other immediate expenses.
- To reduce the term of the loan: Reducing the term of your mortgage will increase your monthly payments but allow you to pay off the loan sooner.
- To switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa: For example, if you started out with an ARM, but interest rates are low, you might want to lock into an attractive fixed rate.
- To consolidate debt: You can refinance credit card bills, medical bills, and other debt, along with your mortgage, into one monthly payment.
When Should I Refinance My Mortgage?
You can consider refinancing when:
- You can secure a significantly lower interest rate at a reasonable cost: As stated above, this might involve switching from an ARM to a fixed-rate mortgage.
- You need some extra money: Cash-out refinancing is often better than a personal loan, but shouldn’t be entered into lightly.
- When you have amassed a very high equity in your home: You can be eligible to refinance as soon as you have 10% equity in your home, but it’s better to wait for a much higher level of equity. This high asset level can make your new terms and conditions much better than the old ones.
- You need to consolidate debt: As stated above, you can combine all your debt into one monthly payment. This could mean combining multiple mortgages, credit card debit, car loans, and more.
What are Points?
There are two types of mortgage points. Origination points
are associated with creating the loan. In other words, origination points are used to pay for the costs of getting the loan. Paying origination points doesn’t offer much benefit to the borrower. It’s better to obtain a mortgage that doesn’t require origination points, but instead finances these fees as part of the mortgage.Discount points
are a type of pre-paid interest, each point equaling 1% of the total amount of the loan. So, if you were to purchase 4 points on a $100,000 mortgage, you would pay $4,000 up front in addition to your other closing fees. What you can get out of this is a lower interest rate. In essence, you’re paying for part of the interest up front, giving you a lower interest rate and saving you money in the long run.
What is a Rate Lock?
If you apply for a mortgage while market rates are low, you can request a rate lock from your lender. They will lock you into that interest rate while your application is processed. This protects you from sudden spikes in market rates, but you’ll be stuck with the locked-in rate if market rates drop. Lock-in periods are normally 30-60 days. If the lock-in period expires before your application is approved, you will be subject to rate changes.
How Much Money Can I Get Through Cash-Out Refinancing?
You can get as much as the total equity you have in your home. For example, if you’ve paid off $200,000 of a $500,000 loan, you’d be able tap into up to $200,000 through cash-out refinancing. This would create a new $500,000 loan.
What Can I Use My Cash-Out Money For?
The answer to that is completely up to you. It’s yours to do with as you see fit. However, a smart option is to use it toward improving your home. Home improvement can greatly raise the home’s value, meaning that you are increasing the value of your immovable assets. Plus, if you do this, you can deduct the full interest amount on your taxes.
What Fees Are Associated With a Refinance?
Refinancing fees can rack up very quickly, another reason not to jump into a refinance without much consideration. Here are some common fees: application fee, loan origination fee, appraisal fee, attorney review/closing fee, homeowner’s insurance, title search/title insurance, survey fee, prepayment penalty. For more details about these fees and their approximate costs, check out our refinance guide entitled “Associated Costs.”
For more details about these fees and their approximate costs, check out our refinance guide entitled “Associated Costs