Happy Home InsiderThinking of refinancing your home? So are millions of other homeowners. It should give you a sense of relief and security to know that so many people are attempting to toggle their equity in order to secure a lower interest rate, but there are a few caveats to refinancing your home that most people are unaware of. It would serve us well to fully understand exactly how refinancing a home works before sitting down at that first appointment with a mortgage broker.
First of all, there are a myriad of reasons why someone would want to refinance their home. Of course, the reason is essential and should be outlined right off the bat. Refinancing refers to the process of acquiring a new mortgage in order to attenuate monthly payments, switch mortgage companies, take money from the cash value of your home in order to make a large purchase, or just to lower an interest rate. Most people would refinance once they already have equity on their home, which means that the worth of the home is more than the amount owned to the mortgage company. Once you’ve identified the reason for the refinance, it’s time to weigh the pros and cons.
The ideal reason and advantage of refinancing is to reduce the interest rate. As we advance in our careers, we typically earn more money, and are thus, able to pay our bills on time; we subsequently increase our credit score and have the ability to access loans with a lower interest rate. You will often see people at this stage in their life looking to refinance their homes, knowing that their favorable financial standing will save them money in the long run. A lower interest rate has numerous advantages, one of which being the effect on month payments, which will decrease and allow you to save potentially hundreds, if not thousands of dollars per year. In order to refinance for the purpose of taking equity or cash out of a home to make a large purchase, the process is a bit more complicated. Initially, the home must be appraised and valued. Then, a lender will decide what percentage of that appraisal or value they are comfortable with loaning. The balance that was left on the original mortgage will ultimately be subtracted. After the original mortgage is paid off, the remaining balance is loaned to the homeowner. If you happened to have done any home improvement, or increased the condition of the house after you purchased it, then the value of the house has effectively gone up. By paying off a mortgage and increasing the value of your house at the same time, you can take out a significant home equity line of credit.
There are also important drawbacks to outline when refinancing a home. One of the biggest risks involved can come from potential penalties that you can incur as the result of paying off an existing mortgage with your new line of home equity credit. Mortgage companies can often charge a steep fee for doing this kind of repayment. It would be wise to do the calculus here before you finalize any agreement and make sure you’re not going to end up losing money. There are other fees to be aware of, such as legal fees and bank fees. You will probably not be able to avoid the significant legal fees, but you might be able to avoid bank fees by waiting until a lender offers a free refinancing period.
After you figured out exactly what your motivations for refinancing are and just how economically viable they will be, you must consider precisely how you will be able to repay your loan. If you’ve chosen a home equity line, for instance, and you plan to do renovations to the house to increase its value, you can consider the increased revenue from the eventual sale of the house as a means of repaying the loan. If this is not the case, it is doubly important that you sit down and outline exactly how you’ll be able to repay the new mortgage before pulling the trigger. At the end of the day, hiring a trustworthy attorney who can help you lay all of this out as well as decipher the complicated financial paperwork is paramount to a successful refinancing.
