Refinancing Your Home
How long has it been since you purchased your home? How much have your needs changed since then? How much has your life changed since then? If you’re like most people, your life has continued to evolve and so have your needs.
Refinancing your largest asset -- your home -- can help you achieve the new goals that you have for your life or simply make your life more comfortable.
What Is Refinancing?
Refinancing means replacing your existing mortgage with a new one, whether you go through the lender you’re already using or seek out a new lender to get a better deal.
Refinancing can allow a homeowner to positively change the terms of their home loan, reducing their monthly costs, or freeing up the equity they’ve built for another use.
Refinancing isn’t always the right decision, however. The more you understand the purpose and process of refinancing, the better equipped you will be to make smart decisions about whether refinancing will work for you.
What Are the Benefits of Refinancing Your Home?
There are several potential benefits that homeowners might seek through a refinancing. They typically include:
- End private mortgage insurance (PMI) payments --
If you didn’t have a 20% down payment when you purchased your home, you have likely been paying private mortgage insurance. If you have paid off enough of the principal of your loan or your property has significantly appreciated, refinancing can possibly remove the private mortgage insurance.
- Lower your monthly interest rate --
Were the interest rates higher when you bought your home than they are now? Is your credit rating better? Either way, you may be eligible for a loan at a significantly lower interest rate than you have now (even if you don’t have a lot of equity) through refinancing. That will, in turn, lower your monthly payment.
- Switch to a fixed-rate loan --
Having an adjustable-rate mortgage means living with constant uncertainty. Your monthly loan payment constantly rises and falls every time interest rates change. Obtaining a fixed-rate loan can give you peace of mind and the economic security of knowing your loan payment will remain the same each month.
- Reduce the loan’s repayment time --
Maybe you were scraping by on a shoestring budget when you first bought your home, but things have changed. If you chose a 30-year loan to reduce your monthly payment and stretch your budget, you may want to refinance into a 15-year loan or less. That will pay off your home faster and eliminate thousands of dollars lost to interest.
- Using the home’s equity --
There are a lot of good reasons to refinance and pull the equity out of your home. Maybe you want to pay for your child’s college education -- or maybe you simply want to invest in home repairs and remodels that will increase your property’s value in the end. Others may want to go on a vacation or pay off their debts.
- Consolidating multiple loans --
Many people take out home equity lines of credit to make necessary repairs to their home or cover an emergency. Paying both of those bills can become inconvenient, however, and put a strain on your finances. Refinancing can often allow you to roll both loans together (under a single interest rate) and create a smaller total monthly payment.
No matter how you reduce the interest that you’re ultimately paying the bank, you save money and build equity faster.
What Are the Risks of Refinancing?
With all of these benefits, it hardly seems like there could be any downside to refinancing. Yet, refinancing has some potential risks that smart homeowners need to understand.
- Failing to make prudent choices about the loan’s length
If you can cut your monthly loan payment in half by taking out another 30-year loan, it might be awfully tempting to take that route. In the end, however, that could cost you a lot of unnecessary interest and force you to make payments well after you had hoped to be free and clear of your loan.
If your fortunes change or you want to retire early, you may be unable to cope with that payment on a pension or otherwise limited funds.
- Trying to refinance your loan with damaged credit
If you’ve experienced some financial hardships in the last few years, it may not be a good time to refinance your loan -- no matter how low the interest rates have gone. Your credit score has a massive impact on the interest rate that you’ll be offered.
Generally speaking, the higher your credit score, the more likely that you’ll qualify for the best possible interest rate or terms that you find favorable. If your credit is damaged due to late or missing payments, you may not be able to obtain a loan that works for you. Even worse, you could go through the considerable expense and effort to put together the documents you need, get your home appraised, and more, before finding out.
- Using the home equity as a temporary financial bandaid
It isn’t unusual for people to pull money out of their home’s equity to pay down high-interest credit cards and other loans. This can be a prudent decision to make -- but only if you’re spending is under control.
If your credit card debt is from an old period of financial instability, using your home’s equity to get that debt under control makes sense. If you’re likely to run your credit cards back up again right away, you could be setting yourself up for a financial disaster.
- Selling the home before the break-even point is reached
If you recall the initial loan process, you remember the closing costs, taxes and fees that were all part of your home-buying adventure. Those same costs are also part of refinancing. Your “break-even point” is the date on which the savings you gain through a lower monthly payment offsets the upfront expenses of refinancing.
It’s important to take into consideration your long-range plans. If you don’t see yourself staying in your home long enough to make refinancing worth the cost, feel like your position at work is unstable or you’re planning a family that won’t fit into your current home, refinancing might not be for you.
Is This a Good Time to Refinance Your Home Loan?
Ultimately, you can’t answer that question without taking a good look at the current terms of your loan, checking into your credit and crunching the numbers. You will also need to have some idea of the kind of interest rate you think you’ll be able to obtain and a fair understanding of your home’s current market value.
If you have questions about the home refinancing process, you don’t have to go at it alone! Our REALTORS have the experience and know-how to help you evaluate your credit, understand your options and crunch the numbers. Used cautiously, refinancing can be a very smart financial decision.
At Tucker Mortgage, all of our loans are processed, underwritten and funded locally. From your home’s appraisal to the final signature on your documents, we will strive to meet your refinancing needs and make the experience as pleasant, inexpensive and easy as possible.