I’m getting on a plane tomorrow and heading to FINCON. So, to help me out, Robert from Total Mortgage Blog provided me with this post on refinancing. Thanks, Robert!
Let’s get one thing straight; refinancing your home does not mean that you’re paying off your debt. A refinance is a restructuring of a current loan, with the primary goal being the adjustment of the interest rate and duration of your loan. Now, there are plenty of possible reasons to refinance, and equally sensible reasons to avoid it. For example, if you are behind on your mortgage payments you should not turn to a refinance as a way out. Lenders will be very hesitant to provide you with a new loan if your credit is in poor standing, so you will have to look to private and government funded programs for support either way.
Here are a few scenarios that may force you to consider a refinance:
- If you intend on living in your current home for the extended future, and are having any difficulty meeting your monthly payments, then you may want to extend your loan term back to 30 years. The benefit would of course be lesser monthly payments.
- Say you have more than one mortgage loan and wish to consolidate them into one, more convenient loan. A refinance will do just that, and instead of dealing with various interest rates, you can create one, fixed-rate loan.
- Depending on the market that you live in, you may want to refinance your mortgage to cater to frequently adjusting interest rates, or vice-versa. An adjustable rate mortgage may save you some money in areas where the interest rate is low, but a fixed rate mortgage will provide you with more stable monthly payments.
In order to time a refinance accordingly, you will want to follow the Rate Trend Index and Mortgage Analysis so that you can do your best to predict future rates. Although nothing is certain, it’s certainly helpful to be informed.
There are two main types of refinances, a cash-out refinance, and a plain vanilla refinance. Each of these serves its own specific purpose, so once you have identified your needs, you can determine which will be the best option for you.
- Cash-Out Refinance-
This type of refinance allows you to take out a new mortgage for the same property that your old mortgage was used for. Your new mortgage loan will be larger than the original, allowing you to take out the difference in cash. This type of refinance is perfect if you are in need of cash, but you must be sure that you can still meet your monthly payments. The payments will be adjusted by higher mortgage rates than the original.
- Plain Vanilla Refinance-
This refinance replaces your existing loan with a newer loan that features a lower interest rate. The Cash-Out is currently more popular, because it allows homeowners to pay off other outstanding debt, but this standard refinance could be beneficial for you if you want to switch from an ARM to a FRM or vice-versa.
The catch to refinancing is the closing cost that comes attached to all new loans. These inevitable fees will be paid in cash, or included in the final assessment of origination points, interest rates, and the overall loan amount. It is helpful for most people to lay out a budget that details how long it will take for the new loan to pay off the closing costs. In addition, if your lender determines that your loan-to-value ratio is above 80% they will require you to purchase Private Mortgage Insurance, which will cost you even more money. So you see, refinancing does come with some consequences, but over a matter of time it will pay off.
Robert Tutolo is an author of the Total Mortgage Blog