When a home owner chooses to refinance their current home loan, they are replacing the current loan with a new one, or in some cases, combining a second mortgage into one single loan. In order to refinance, the homeowner must have excellent credit and minimal debt. Homeowners may choose to refinance in order to get a better interest rate, change the loan terms with a new loan, consolidate debt, or free up cash from the equity in their home.
The three reasons most homeowners refinance their home:
The best time to refinance a home loan is when interest rates drop in the housing market.
For example, imagine a homeowner has a high equity value in their home. The homeowner can choose to refinance their home in order to pull out the equity and use that money for whatever they choose. The catch to cashing out the equity in the home is that the home owner will essentially accrue a higher balance on the loan. In addition, a cash-out refinance typically will have a higher interest rate attached to the loan where as a straight refinance will not. However, those who decide to go the cash out route should keep in mind that while the interest rates will be lower than a credit card, the payments will be spread out over 15 to 30 years. In turn, the homeowner will most likely pay more interest in the long run. Also, this cash out option will turn an unsecured debt into a secured debt, with the current home as collateral.
The homeowner may want to change the loan type and format of the loan. Let’s say hypothetically that the home owner originally bought the home during a housing spike on a conventional loan. Over the last ten years, the housing market dropped and so did the interest rates. The homeowner would be paying the same interest rate as before when the housing market was booming because of the fixed loan type. The homeowner may now want to change their mind and look into turning their fixed loan into adjustable rate mortgage
Everyone knows that with lower interest rates, the monthly mortgage payments will be lower. The best time to refinance and reduce your interest rate is when the interest rates are at least 1% lower than they originally were before.
There are many good reasons to refinance your home, however, there are a few disadvantages as well. Some lenders can charge a penalty depending on the original terms of the loan. One way to find out is to check on the original loan to see if there is a prepayment penalty clause. If in fact there is a prepayment penalty clause, then your lender can charge a penalty fee. Also keep in mind that when a homeowner refinances, they must pay closing costs once again. On a $200,000 mortgage, a homeowner can expect closing costs of about $3,700. It may not be worth it to refinance if the out of pocket closing costs exceeds the benefit of a lower interest rate.
The refinancing process is going to be the same process as when the homeowner originally applied for the loan. The lender will have to verify employment and income history along with checking the homeowner’s credit. After that process is complete, the lender will be able to check and see which loan option is best suited for the homeowner.
The homeowner does not need to refinance with the same lender as the original loan. The homeowner can turn to a mortgage broker to find the best refinancing terms and conditions. Once the homeowner has completed the application process, an appraiser will come to the property to determine the value of the home. If the home value has dropped, a refinance may not be the best option for the homeowner.