There is an epidemic of refinancing that has been taking over households in the past year. Basically, the story goes the same way: you find your dream home, you make payments, but you still have other expenses that you need to pay off and you eventually drown yourself in debt. What do you do? Actually, the question becomes: what can you do? Most homeowners in the past 10 years have decided that they can refinance their home and make use of their home as a collateral asset.
What does it mean to refinance your home? In this article, we will find out exactly what that means.
What does refinancing mean?
Refinancing simply means replacing your mortgage and taking out a new one with better terms. The term ‘better’ depends on a case to case basis and primarily means a handful of things, to wit:
- You are getting a better interest rate at terms that you can actually afford month to month. You may be in a better credit standing now than when you took out the first loan on your home so you are entitled to better rates. The market may be hot enough for you to take a dip and refinance your precious asset. Either way, refinancing your home could mean that you are getting a better deal than what you originally got.
- You are getting more value for your home. The market price is higher and you want to know if you have already made money out of your home investment - this is what could affect your decision to refinance.
- You are paying off the last mortgage but before that ends you are taking in a new one. You have monetary needs and taking out a second mortgage is the better option than any others that you can think of.
Basically, refinancing is not a last resort. Most homeowners decide to do it for a couple of reasons. In the next paragraph, we will discuss some of the top reasons why people decide to refinance.
How do I decide if it is time to refinance?
It is time to refinance when any of the following things occur:
- You are cashing in some equity. Real Estate 101 dictates that once an asset appreciates in value, the owner should take advantage of it. Refinancing your home allows you to cash in the value of the appreciation of your property. It is like the interest that your house is paying you. What do you do with the money? The answer to that depends entirely on you.
- You want to drop your interest rate. Earlier, we have said that most homeowners refinance because they want to get better terms such as lower interest rates. You know that it is time to refinance when you are in a better credit standing and you want to pay off the first mortgage at a better rate.
- You want to pay for your house fast. If you are in a better financial standing than when you originally took out the loan, you should refinance. This allows you to not worry about where you are getting your amortization in the next 30 years and you eventually get better terms, this cannot be stressed enough.
- You want to remove yourself from ARM. Adjustable Rate Mortgages (ARM) were popular before the big Lehman brothers scandal in 2008. With ARM, homeowners payoff low interest rates when the market allows it BUT they also end up paying higher interest rates when the market drops. What does this led to? The house owner cannot control the volatile market so he is overwhelmed by the situation.
- You want to drop paying off mortgage insurance. This part of the loan is what gets most homeowners because you are paying off the mortgage and you are also paying for mortgage insurance. It seems like double whammy for the homeowner. Hence, you refinance because you want to dramatically drop and reduce payments.
What are the kinds of refinancing?
There are different kinds of refinancing and they are discussed in brief in the selection below:
- Conventional Refinancing is the kind of voluntary refinancing where only private parties are involved. The rates and terms are better with this kind of refinancing.
- FHA Refinancing is a kind of refinancing backed by the government. This is tricky because while it does not require any kind of minimum FICO credit or background check, the rates are usually higher.
- Interest Rate Reduction Refinance Loan or the IRRRL is just like FHA refinancing.
- The USDA refinance loan is also available for low and middle income earners. It involves no cash out.
What advantages can refinancing do to my financial situation?
Refinancing comes with a handful of advantages and they are the following:
- You get a better deal at interest rates.
- You help your cash flow reach proper equilibrium because you are getting more cash every month by paying less.
- You pay off your loan faster. Refinancing allows you to adjust your payments from an original 30 year loan to 15 years if the bank allows it so you pay off your debt quicker.
What disadvantages should I expect when I refinance?
Any move you make comes with disadvantages. When it comes to refinancing your home there is only one disadvantage that you should think of and that is the reality that when you refinance, you are still in debt, just in better terms.
What costs should I expect when I refinance?
Refinancing comes with some costs and they are the following:
- Closing costs - when you are closing your old loan and opening a new one, this is usually charged.
- Application fee - the fee you pay for the reassessment of your loan.
- Loan origination fee - this is for administrative and processing of your loan and usually costs around 1 percent of the loan.
In a nutshell, refinancing means that you are taking out your home as a collateral asset to pay off debts or for other payments that you need to get done. It comes with advantages and disadvantage and the rates always come on a case to case basis. However, the bottomline is that with refinancing, as long as you take into account your long term goals and financial situation, you would come out of the situation with better terms.
Looking for more info?
If you'd like more info on the refinancing process, reach out and we will get in touch with much more valuable insight.